Emerging market bonds produced negative returns in the third quarter as adverse sentiment, poor liquidity, and idiosyncratic developments weighed on the asset class. Commodity-producing countries, especially those in Latin America and Africa, led the declines. Only bonds from emerging Europe produced positive results. 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. China's central bank unexpectedly let its currency devalue, triggering worries about the country's ability to manage a slowdown in growth. Standard & Poor's downgraded its rating on Brazil's sovereign bonds to noninvestment-grade status as the country struggled to implement needed fiscal reforms.
The Emerging Markets Bond Fund returned −2.58% in the quarter compared with −2.04% for the J.P. Morgan Emerging Markets Bond Index Global and −4.75% for the Lipper Emerging Market Hard Currency Debt Funds Average. For the 12 months ended September 30, 2015, the fund returned −3.58% versus −1.96% for the J.P. Morgan Emerging Markets Bond Index Global and −6.77% for the Lipper Emerging Market Hard Currency Debt Funds Average. The fund's average annual total returns were −3.58%, 3.20%, and 6.01% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.93% 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 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 favor bonds issued by countries with strong recovery or reform themes that provide attractive valuations and low sensitivity to changes in U.S. interest rates, which are poised to rise as the Federal Reserve likely begins to tighten monetary policy. In general, we maintain overweight positions in bonds from select higher-yielding markets such as Ukraine and underweight lower-yielding markets that are more sensitive to changes in U.S. Treasury yields, including the Philippines and Poland. The portfolio has a small allocation to emerging market corporate bonds, focusing on issuers that would benefit from increasing consumer spending. The portfolio has a minor position in locally denominated emerging markets bonds and hedge most of the local currency exposure.
The recent sell-off in emerging market bonds has improved the sector's relative value in relation to other fixed income assets, and we believe that market sentiment has likely become overly negative. In the near term, the impending start of a Fed tightening cycle may keep volatility elevated, but that could provide attractive entry points for emerging markets debt investors given our expectation for a gradual pace of Fed rate increases. We expect economic and structural reforms will continue to progress in a number of developing countries, improving the credit quality of their sovereign bonds. In addition, we closely analyze liquidity conditions for bonds that we are considering for purchase or sale in the portfolio.