Comments from European Central Bank (ECB) officials made it appear increasingly likely that the central bank will expand its asset purchase program to include eurozone sovereign bonds, which helped to drive long-term eurozone government bond yields to record lows. However, the strength of the U.S. dollar against the euro (and most other currencies) resulted in negative returns in dollar terms. The Bank of Japan expanded its monetary easing measures, causing the yield on the Japanese 10-year government bond to fall to only 0.31% in December. The greenback also gained against the yen, offsetting the price appreciation on Japanese bonds in terms of U.S. dollars. Emerging market debt and currencies lost ground during the quarter amid considerable country-specific volatility.
The International Bond Fund returned −3.79% in the quarter compared with −2.99% for the Barclays Global Aggregate ex USD Bond Index and −1.42% for the Lipper International Income Funds Average. For the 12 months ended December 31, 2014, the fund returned −3.77% versus −3.08% for the Barclays Global Aggregate ex USD Bond Index and 0.89% for the Lipper International Income Funds Average. The fund's average annual total returns were −3.77%, 1.17%, and 2.42% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.83% as of its fiscal year ended December 31, 2013.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
The International Bond Fund charges a 2%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
The divergence in central bank monetary policies continues to drive the portfolio's positioning in terms of country selection. We anticipate that the Bank of Japan's aggressive expansion of its monetary stimulus program will succeed in creating some inflation, so the portfolio's underweight noninflation-linked Japanese bonds and overweight inflation-linked debt relative to the benchmark. The portfolio is underweight short-maturity bonds in the core eurozone, where rates are near record lows. In emerging markets, the portfolio is overweight locally denominated Brazilian, Indonesian, and Indian debt. In terms of currency positioning, we are striving to minimize the negative impact of the strong dollar by keeping the portfolio underweight the euro, the British pound, and the yen, and we added to a modest out-of-benchmark allocation to the U.S. dollar.
Because of the divergence in interest rate policy paths in developed markets, with the ECB and the Bank of Japan continuing to ease while the Federal Reserve prepares to tighten, there will likely be opportunities for relative value trading between markets at different points in their interest rate cycles. Uncertainty about the timing of the rate moves has already started to introduce some volatility into debt and currency markets, creating attractive trading opportunities. While some emerging market bonds and currencies are now cheap compared with their long-term valuations and offer good risk-adjusted yields, country-by-country analysis and selection remains critical.