As a result of the strength in the U.S. dollar against most other currencies, non-U.S. developed market bonds lost considerable ground in dollar terms. Bonds denominated in euros, for example, generated steep losses in terms of the greenback despite posting solid gains for eurozone investors. In fact, yields on safe-haven European government bonds fell to record lows in August as investors snapped them up amid stalled eurozone growth and heightened geopolitical risks. Emerging markets debt prices also fell, with local currency bonds experiencing the steepest losses in dollar terms. There was a significant divergence in the monetary policies of central banks across both developing and emerging markets.
The International Bond Fund returned −5.13% in the quarter compared with −5.38% for the Barclays Global Aggregate ex USD Bond Index and −2.60% for the Lipper International Income Funds Average. For the 12 months ended September 30, 2014, the fund returned −0.45% versus −0.81% for the Barclays Global Aggregate ex USD Bond Index and 2.68% for the Lipper International Income Funds Average. The fund's average annual total returns were −0.45%, 1.69%, and 3.83% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 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.
In developed markets, we have maintained a significant underweight position in Japanese government bonds relative to the benchmark as a result of the elevated valuations in that market. On the other hand, the portfolio is overweight UK sovereign debt, which many view as a safe-haven asset. We also continued to overweight investment-grade corporate debt, focusing on the financials sector, and kept a small out-of-benchmark allocation to high yield bonds. In emerging markets, we still like Mexican bonds as a result of the country's relatively aggressive economic and structural reforms. The portfolio remains underweight developed market currencies such as the euro and the yen and overweight selected emerging markets currencies including the Mexican peso, the Indian rupee, and the Polish zloty.
Because of the divergence in interest rate policy paths in developed markets, with the European Central Bank 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, however, already seems to be introducing some volatility into short-maturity debt markets and creating attractive trading opportunities. While many emerging markets currencies are now cheap compared with their long-term valuations and offer good risk-adjusted yields, country-by-country currency analysis and selection remains critical.