The UK's late-June vote to leave the European Union took financial markets by surprise and extended a rally in safe-haven government bonds from developed markets, driving their already-low (or negative) yields even lower. (Bond prices and yields move in opposite directions.) In the days following the Brexit vote, the yield on 10-year UK sovereign notes fell below 1.0% for the first time ever. The German 10-year government note's yield also decreased into uncharted terrain after the UK referendum, joining 10-year Japanese sovereign debt in negative territory. The British pound lost nearly 7% against the U.S. dollar in the quarter, while the Japanese yen gained over 9%; the euro fell about 2.5% versus the dollar.
The International Bond Fund returned 3.10% in the quarter compared with 3.40% for the Barclays Global Aggregate ex USD Bond Index and 1.91% for the Lipper International Income Funds Average. For the 12 months ended June 30, 2016, the fund returned 9.88% versus 11.24% for the Barclays Global Aggregate ex USD Bond Index and 5.11% for the Lipper International Income Funds Average. The fund's average annual total returns were 9.88%, 0.09%, and 3.46% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2016. The fund's expense ratio was 0.83% as of its fiscal year ended December 31, 2015.
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.
At the end of the quarter, the portfolio's overall duration was slightly longer than that of the benchmark as we generally preferred longer-term bonds in the environment of sluggish growth and low inflation. (Duration is a measure of sensitivity to changes in interest rates.) While the very low yields of high-quality government bonds from developed markets offered little value, we added to positions in some countries where central banks are likely to cut rates or those where longer-term bonds offer significant yield advantages over shorter-maturity debt, including Australia, Sweden, and Malaysia. Our foreign exchange positioning primarily involved intra-region currency pairs, such as a position in the Indian rupee versus the Singapore dollar.
We think that Brexit will have a negative impact on global growth, although the effects are likely to be concentrated in northwestern Europe. The economic drag from the UK's referendum should be less significant elsewhere, and major global central banks will probably ease monetary policy even further to try to combat a downturn. However, several potential longer-term risks remain, including instability in the Chinese economy as the country struggles to manage its slowdown, another drop in commodity prices, and a negative market reaction to further Federal Reserve interest rate increases. On the positive side, these events could also present opportunities to buy mispriced assets in market dislocations.