Emerging markets debt prices fell during the quarter. Argentina defaulted on its sovereign debt for the second time in 13 years after a U.S. judge blocked the country from making coupon payments to some of its bondholders. However, investors had expected the default and it had little impact on other emerging markets. The European Union and the U.S. tightened their sanctions against Russia for its role in the Ukraine conflict, with the U.S. barring American companies from providing technology or services for Russian oil exploration. Most emerging markets corporate bonds are denominated in U.S. dollars, so the weakness in the currencies of most developing countries relative to the dollar did not directly affect them.
The Emerging Markets Corporate Bond Fund returned −1.62% in the quarter compared with −0.09% for the J.P. Morgan Corporate Emerging Market Bond Index Broad Diversified. For the 12 months ended September 30, 2014, the fund returned 7.50% versus 8.33% 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 7.50% and 6.65%, respectively, as of September 30, 2014. The fund's expense ratio was 1.45% 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 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 portfolio'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 relative to the benchmark given the relatively high valuations in that area. In terms of regional allocations, the portfolio is overweight China because we expect the Chinese government to manage a successful deceleration of the country's economy. We have reduced our exposure to Russia given our expectation that longer-term sanctions are likely to cause a contraction in the Russian economy. 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.
The outcomes of most major elections in developing countries have been relatively benign for investors, and going forward the focus will be on reforms designed to boost slowing growth in emerging markets. We believe that some country-specific developments, such as the tensions between Russia and the West over Ukraine and Argentina's standoff with its holdout creditors, will continue, although they are likely to remain isolated with limited risk of contagion. Emerging markets corporate bonds should 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.