Emerging markets debt denominated in local currencies posted negative returns in U.S. dollar terms in the second quarter of 2015 and underperformed dollar-denominated emerging markets bonds. Yields on locally denominated emerging markets debt tracked high-quality government bond yields higher. As the Federal Reserve moved closer to raising interest rates for the first time since 2006, the currencies of developing countries perceived as most sensitive to changes in U.S. monetary policy, such as Mexico, experienced selling pressure. Higher-risk emerging markets currencies also tended to underperform amid the uptick in market volatility.
The Emerging Markets Local Currency Bond Fund returned −0.54% in the quarter compared with −0.96% for the J.P. Morgan GBI - EM Global Diversified. For the 12 months ended June 30, 2015, the fund returned −15.57% versus −15.39% 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 −15.57% and −3.36%, respectively, as of June 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.
We increased the portfolio's duration, which measures sensitivity to interest rate changes, as global yields rose. We tend to favor bonds issued by Asian emerging markets, including China, India, and South Korea, where disinflation could provide opportunities for price appreciation. The portfolio remained overweight in Mexican debt, where we anticipate that the country's reforms in the energy and telecommunications sectors will slowly bear fruit. In terms of currency positioning, we have adopted a more defensive view on emerging markets currencies as the Fed prepares to tighten monetary policy. We added to the fund's exposure to the U.S. dollar and dollar proxies such as the Chinese yuan. We also increased exposure to currencies that are not in the benchmark, including the Indian rupee, for diversification.
The fundamentals of emerging markets debt issuers remain generally sound, with solid sovereign balance sheets and higher growth rates than most developed markets. Also, emerging markets bonds are generally less sensitive to changes in yields on high-quality sovereign debt, so the asset class offers attractive diversification for fixed income investors in an environment where rates are poised to increase. However, the prospect of the Fed raising U.S. interest rates later this year has the potential to further increase volatility in emerging markets bonds and currencies in the short term. That could provide an attractive entry point for emerging markets debt investors given our expectation for a gradual pace of Fed rate increases.