Emerging markets (EM) corporate bonds rose in the third quarter of 2013, regaining a portion of their second-quarter losses. Investor sentiment was negative for much of the period due to concerns about slowing growth in many emerging economies and worries that less accommodative U.S. monetary policy would reduce global liquidity. Markets rallied in mid-September following the Federal Reserve's decision to delay tapering its asset purchases. Following the Fed's announcement, investors showed renewed interest in EM debt and capital flows turned positive for the first time in 17 weeks. New bond issuance, which had been subdued in July and August, picked up considerably in September. Investment-grade bonds outpaced below investment-grade debt, with telecommunications companies performing well. The metals and mining sector lagged on concerns over sluggish global growth and slack commodity demand.
The Emerging Markets Corporate Bond Fund returned 0.86% in the quarter compared with 1.04% for the J.P. Morgan Corporate Emerging Market Bond Index Broad Diversified. For the 12 months ended September 30, 2013, the fund returned −0.28% versus 0.26% 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 −0.28% and 6.02%, respectively, as of September 30, 2013. The fund's expense ratio was 2.34% as of its fiscal year ended December 31, 2012.
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An overweight allocation to the real estate sector benefited performance, due in part to a focus on property developers in China. The firms rallied due to China's improved economic prospects, which included better manufacturing data and efforts by policymakers to prioritize more stable, long-term economic growth. Although more recent data have pointed toward slower growth, the urbanization trend remains intact, and the real estate sector should continue to benefit from a long-term increase in demand. The technology, media, and telecommunications sectors also aided performance, and we prefer companies in this sector that have solid credit fundamentals. Positive credit selection in the metals and mining sector was driven by our focus on higher-quality securities, which outperformed lower-rated credits in Indonesia and Mongolia. Security selection in the consumer sector weighed on results.
The U.S. Federal Reserve's decision to delay the tapering of its asset purchase program contributed greatly to the rally in emerging markets debt at the end of the quarter. However, the Fed will eventually begin to wind down its asset purchase program, and we are wary that volatility will reemerge once the reduction begins. Corporate fundamentals have weakened slightly but remain sound. Over the long term, we expect the asset class will continue to expand and attract investors through its favorable yields, attractive growth potential, and diversification benefits. Higher-yielding companies still offer investment opportunities, but given the growth in issuance, somewhat weaker sovereign fundamentals, and idiosyncratic risks, prudent security selection remains an important factor in limiting downside risk in client portfolios.