Emerging markets corporate bonds were modestly positive in the first quarter of 2013. After a strong close to 2012, returns moderated as investors grew somewhat apprehensive at the prospect of rising U.S. Treasury yields amid the release of solid U.S. economic data and more hawkish commentary out of the Federal Reserve. Additionally, eurozone risks reemerged as Cyprus requested assistance from the European Union to bail out its struggling financial system. Lower- quality bonds outperformed investment-grade debt amid solid corporate fundamentals and the high yield segment's reduced sensitivity changes in Treasury yields. In terms of sector performance, industrial- and consumer-focused bonds were strongest, while the real estate sector declined.
The Emerging Markets Corporate Bond Fund returned 1.03% in the quarter compared with 0.93% for the J.P. Morgan Corporate Emerging Market Bond Index Broad Diversified. The Since Inception (05/24/2012) total return was 13.35% as of March 31, 2013. The fund's expense ratio was 1.26% as estimated on the fund's inception date, May 24, 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.
We increased the portfolio's allocation to high yield bonds, as global tail risks have diminished and accommodative stances from developed countries should support future capital inflows, especially following the aggressive easing announcements from the Bank of Japan. Additionally, issuance in the high yield segment of EM corporates has been very strong and very well received, with most deals being oversubscribed. Companies that are positioned to serve rising domestic consumption and growing middle class populations, such as real estate and consumer firms, continued to be an area of emphasis. Within the real estate sector, we continued to hold select Chinese and Hong Kong property developers with strong balance sheets, which tend to be less volatile during periods of changing market sentiment. Our large underweight to the banking sector is predicated on expensive relative valuations and heightened implementation risk as lending activity is poised to increase in emerging markets.
We expect that a resumption in growth and healthy domestic demand will continue to favor emerging market corporate bonds. Risk appetite should be supported given accommodative liquidity, especially on the heels of the recent announcement from the Bank of Japan. The monetary stimulus plan initiated to end deflation should serve as a liquidity buffer to the market, and support demand for emerging market corporate debt, particularly in the high yield segments. Additionally, ongoing growth in the EM corporate market from new supply will continue to gain depth and diversification across the asset class. Although we maintain a generally positive outlook, company-specific stories will continue to be important, reinforcing the need for bottom- up research to identify compelling investment opportunities.