The Federal Reserve's September decision to delay tapering boosted demand for emerging markets debt, as the higher yields offered by the asset class helped it rebound to some degree from its summer sell-off. Emerging markets corporate bonds produced stronger returns than emerging markets sovereign debt. The small amount of new emerging markets corporates reaching the market in December contributed to significantly narrower credit spreads in secondary market trading. Credit spreads measure the additional yield that investors demand as compensation for holding a bond with credit risk versus a similar-maturity Treasury security or other type of low-risk bond
The Emerging Markets Corporate Bond Fund returned 1.88% in the quarter compared with 1.96% for the J.P. Morgan Corporate Emerging Market Bond Index Broad Diversified. For the 12 months ended December 31, 2013, the fund returned −1.72% versus −0.60% 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 −1.72% and 6.27%, respectively, as of December 31, 2013. The fund's expense ratio was 2.34% as of its fiscal year ended December 31, 2012.
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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.
Security selection in the technology, media, and telecommunications sector was the largest contributor to the fund's relative performance. In addition, strong security selection in the oil and gas industry benefited our relative returns. We believe that bonds issued by Mexican oil and gas companies are attractive as a result of Mexican legislation approving measures to open the country's oil and electricity industries to private investment. The reforms in Mexico should increase productivity in the energy sector and boost the country's economy. On the other hand, our underweight to the top-performing metals and mining sector weighed on relative performance. We anticipate maintaining this sector underweight as a result of our expectations for slowing global growth and sluggish commodity demand. In terms of broad positioning, we plan to continue to try to hold bonds that can benefit from the strong middle class growth in many emerging markets.
We believe some caution over the near term is warranted given that volatility may reemerge as the Fed reduces its monetary accommodation. However, over the medium to long term, we believe that the favorable yields, enticing growth potential, and diversification benefits of emerging markets corporate debt will support investor inflows. Accordingly, near-term volatility may provide opportunities to build positions in attractive companies. Emerging markets corporate fundamentals remain at solid levels despite some recent weakening. We are particularly optimistic about the prospects for high yield emerging markets bonds, but given the growth in issuance, somewhat weaker sovereign fundamentals, and select issuer-specific risks, prudent security selection remains an important factor in limiting downside risk.