International bonds rose in the third quarter of 2013. For much of the period, yields rose, prices fell, and investors avoided interest rate-sensitive sectors due to expectations that the Federal Reserve would soon begin tapering its asset purchase program. In anticipation of reduced global liquidity, bond yields in some emerging markets, especially Mexico, Brazil, and Indonesia, rose as investors withdrew funds. The period's defining moment came in mid-September when the Fed unexpectedly announced a delay in tapering, which boosted investor sentiment and lifted bond prices, particularly among higher-risk asset classes such as emerging markets debt. Most developed market currencies strengthened against the U.S. dollar, but emerging markets currencies were mixed, as those in countries with large current account deficits struggled versus the greenback.
The International Bond Fund returned 3.57% in the quarter compared with 4.38% for the Barclays Global Aggregate ex USD Bond Index and 2.12% for the Lipper International Income Funds Average. For the 12 months ended September 30, 2013, the fund returned −3.38% versus −3.39% for the Barclays Global Aggregate ex USD Bond Index and −3.13% for the Lipper International Income Funds Average. The fund's average annual total returns were −3.38%, 4.64%, and 4.61% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.84% as of its fiscal year ended December 31, 2012.
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.
Within developed markets, the portfolio is underweight Canada and Japan, where yields remain expensive. We are overweighting German government bonds, as they remain the premium risk-free asset in international markets, and are underweighting France, the Netherlands, and Spain. We have maintained underweight allocations to key developed markets currencies, such as the yen, euro, British pound, Canadian dollar, Australian dollar, and Swiss franc, in the recent strong-dollar environment. Following improved valuations in several emerging markets currencies, we reinstated a number of overweight positions, such as the Polish zloty and the Russian ruble, while modestly increasing the overweight allocation to the Mexican peso. We kept the portfolio's allocation to European investment-grade corporate bonds relatively stable and trimmed the allocation to investment-grade emerging markets sovereign and quasi-sovereign bonds.
The Fed's tapering delay has contributed to a rally for government bonds, but it is likely to be short lived. Although Europe is emerging from recession, challenges remain in fiscal rebalancing, banking reform, and competitive labor reforms. Uncertainty will likely bubble to the surface while these measures are debated, which highlights the importance of high-quality defensive assets, such as German bonds. Europe is expected to enjoy modestly positive economic growth next year, which should help to support riskier assets such as investment-grade and high yield corporate bonds through the next 12 months. Japan has also made strides with stimulative monetary and fiscal policies providing a boost to consumer spending and economic output and a large bond-buying program that should continue to support Japanese bonds. Amid ongoing adjustments in global fiscal and monetary policies, idiosyncratic risks persist, and well-calculated security selection remains an important factor in limiting our downside risk.