After a bout of selling pressure at the beginning of the year, emerging markets bonds continued their rebound in the second quarter amid strong investor demand for higher-yielding assets. The European Central Bank's accommodative actions near the end of the quarter boosted investors' appetite for riskier debt, further benefiting emerging markets bonds. The rally overcame geopolitical tensions between Ukraine and Russia, a military takeover of Thailand's government, a flare-up of sectarian violence in Iraq, and a potential default on Argentina's sovereign debt. Most emerging markets corporate bonds are denominated in U.S. dollars, so the weakness in the currencies of some developing countries did not directly affect them.
The Emerging Markets Corporate Bond Fund returned 4.57% in the quarter compared with 3.46% for the J.P. Morgan Corporate Emerging Market Bond Index Broad Diversified. For the 12 months ended June 30, 2014, the fund returned 10.21% versus 9.55% for the J.P. Morgan Corporate Emerging Market Bond Index Broad Diversified. The fund's 1-year and Since Inception (05/24/2012) average annual total returns were 10.21% and 8.31%, respectively, as of June 30, 2014. The fund's expense ratio was 1.45% as of its fiscal year ended December 31, 2013.
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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 Emerging Markets Corporate 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 fund's holdings focus on the beneficiaries of domestic demand, particularly in the consumer, industrial, and real estate sectors. In contrast, we are underweight the financial services sector given the relatively high valuations of emerging markets corporates there, as well as the metals and mining sector as a result of our longer-term expectations for lower commodity prices. In terms of regional allocations, the fund is underweight Asia because of elevated valuations and the Middle East due to the lack of transparency of corporate bond issuers there. We tend to find more attractively priced bonds with BBB, BB, and B credit ratings because of the lower market efficiency in those credit quality categories relative to higher-rated bonds.
Based on improving economic growth rates in developing countries, fading investor worries about election cycles, and supportive valuations, our outlook for emerging markets debt overall remains favorable. Emerging markets corporate bonds should continue to receive support from global investors building their allocations to the asset class given the attractive valuations in the sector relative to developed markets corporates. Emerging markets corporate bond issuers in general have ample resources to service their debt, and we anticipate that domestic consumption trends resulting from the rising middle class in developing countries will help support corporate fundamentals.