Emerging market debt denominated in local currencies lost more than 10% in U.S. dollar terms in the third quarter of 2015 and underperformed dollar-denominated emerging market bonds. Adverse sentiment and idiosyncratic developments in Brazil and China weighed on the asset class. Standard & Poor's downgraded its rating on Brazil's sovereign bonds to noninvestment-grade status as the country struggled to implement needed fiscal reforms. China's central bank unexpectedly let its currency devalue, dragging many other emerging market currencies lower against the dollar. In addition, oil and commodity prices declined roughly 25% before stabilizing near the end of the quarter, further pressuring emerging markets that are dependent on exporting commodities.
The Emerging Markets Local Currency Bond Fund returned −11.36% in the quarter compared with −10.54% for the J.P. Morgan GBI - EM Global Diversified. For the 12 months ended September 30, 2015, the fund returned −20.71% versus −19.77% for the J.P. Morgan GBI - EM Global Diversified. The fund's 1-year and Since Inception (05/26/2011) average annual total returns were −20.71% and −5.82%, respectively, as of September 30, 2015. The fund's expense ratio was 1.35% as of its fiscal year ended December 31, 2014.
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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 Local Currency 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 duration, which measures sensitivity to interest rate changes, was modestly longer than that of the benchmark index. Our favored bond positions include India, which features attractive yields and solid economic growth, and Mexico, which has stable politics and has made progress on structural reforms. In terms of currency positioning, we emphasize countries that are undertaking economic and structural reforms, including Mexico, Indonesia, and India. We added to our allocation to Russian bonds and the ruble as oil prices stabilized. We also increased exposure to dollar-denominated emerging market debt near the end of the quarter as valuations become more attractive.
In the near term, the impending start of a Federal Reserve tightening cycle may keep volatility elevated, but that could provide attractive entry points for locally denominated emerging market debt investors given our expectation for a gradual pace of rate increases. The relatively high yields of emerging market bonds denominated in local currencies, paired with investment-grade credit ratings for many issuers, make the asset class attractive relative to others in the fixed income universe. We expect economic and structural reforms will continue to progress in a number of developing countries, improving the credit quality of their sovereign bonds.