Emerging markets bonds declined in the second quarter, with locally denominated debt prices falling more than dollar-denominated bonds. Early in the quarter, Petrobras, Brazil's state-owned oil company, filed audited financial statements that showed almost $17 billion of charges and write-offs related to a corruption investigation, allowing it to avoid a potential technical default. Petrobras subsequently issued new bonds for the first time since the scandal, $2.5 billion of debt maturing in 100 years. China's central bank lowered interest rates by 0.25 percentage points in May and again in June due to concerns about its slowing economy and sharply lower stock prices.
The Emerging Markets Bond Fund returned 0.23% in the quarter compared with −0.29% for the J.P. Morgan Emerging Markets Bond Index Global and 0.36% for the Lipper Emerging Market Hard Currency Debt Funds Average. For the 12 months ended June 30, 2015, the fund returned −3.83% versus −1.57% for the J.P. Morgan Emerging Markets Bond Index Global and −4.19% for the Lipper Emerging Market Hard Currency Debt Funds Average. The fund's average annual total returns were −3.83%, 5.41%, and 6.79% for the 1-, 5-, and 10-year periods, respectively, as of June 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 later this year. In general, we maintain selective overweight positions in bonds from higher-yielding markets such as Venezuela and Ukraine and underweight lower-yielding markets that are more sensitive to changes in U.S. Treasury yields. Our exposure to both Venezuela and Ukraine benefited our relative performance as investor sentiment toward risk improved and oil prices steadied at higher levels than at the beginning of 2015. The portfolio is also overweight in emerging markets corporate bonds, particularly those issued by companies that are likely to benefit from the rising purchasing power of middle-class consumers.
The fundamental condition of many developing markets remains solid, with strong balance sheets and higher rates of economic growth than developed countries. In the near term, the impending start of a Fed tightening cycle may trigger elevated volatility but that could provide an attractive entry point for emerging markets debt investors given our expectation for a gradual pace of Fed rate increases. We expect economic and structural reforms to 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.