Emerging markets debt denominated in U.S. dollars produced positive returns in the fourth quarter, largely due to strong performance in October. However, bonds from Brazil and South Africa declined. Ongoing political gridlock in Brazil prevented the country from implementing needed fiscal reforms, hurting investor confidence. Fitch Ratings downgraded Brazil's sovereign credit to noninvestment-grade status, joining Standard & Poor's in classifying the country's credit as junk. In South Africa, President Jacob Zuma twice dismissed the country's finance minister in December. Although the Federal Reserve made its first interest rate hike since 2006, the market for emerging markets bonds did not experience the downward pressure that some had predicted.
The Emerging Markets Bond Fund returned 1.70% in the quarter compared with 1.55% for the J.P. Morgan Emerging Markets Bond Index Global and 0.68% for the Lipper Emerging Market Hard Currency Debt Funds Average. For the 12 months ended December 31, 2015, the fund returned 0.62% versus 1.23% for the J.P. Morgan Emerging Markets Bond Index Global and −2.98% for the Lipper Emerging Market Hard Currency Debt Funds Average. The fund's average annual total returns were 0.62%, 3.59%, and 5.87% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 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 Fed tightens monetary policy. In general, we maintain overweight positions in bonds from select higher-yielding markets such as Argentina and underweight positions in lower-yielding markets that are more sensitive to changes in U.S. Treasury yields, including the Philippines. We opportunistically increased the portfolio's allocation to emerging markets corporate bonds as their valuations improved later in the quarter, focusing on issuers that would benefit from increasing consumer spending. The portfolio has a minor position in locally denominated emerging markets bonds with most of the local currency exposure hedged.
The long-term fundamental drivers of emerging markets, including stronger balance sheets and faster growth than developed countries, remain intact. However, individual developing nations could continue to face headwinds from weakness in commodity prices, political dysfunction, and slow economic growth. In the near term, the Fed tightening cycle may keep volatility elevated and reduce liquidity, but that could provide attractive entry points for emerging markets debt investors given our expectation for a gradual pace of Fed rate increases. We closely analyze liquidity conditions for bonds that we are considering for purchase or sale in the portfolio.