The ongoing delay in Fed tapering early in the quarter boosted demand for emerging markets debt, as the higher yields offered by the asset class helped it rebound to some degree from its summer sell-off and post a positive quarterly return. With liquidity fears moderating, investors turned their attention to the fact that many emerging economies are in better fiscal condition and carry less debt than most developed countries. Emerging markets corporate bonds produced stronger returns than emerging markets sovereign debt denominated in either hard currencies (U.S. dollars or euros) or local currencies. However, Turkey's debt in particular came under selling pressure near the end of the quarter amid a political corruption scandal in the country.
The Emerging Markets Bond Fund returned 0.35% in the quarter compared with 0.91% for the J.P. Morgan Emerging Markets Bond Index Global and 0.77% for the Lipper Emerging Market Hard Currency Debt Funds Average. For the 12 months ended December 31, 2013, the fund returned −7.19% versus −6.58% for the J.P. Morgan Emerging Markets Bond Index Global and −5.83% for the Lipper Emerging Market Hard Currency Debt Funds Average. The fund's average annual total returns were −7.19%, 11.92%, and 8.66% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.94% as of its fiscal year ended December 31, 2012.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
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.
An overweight allocation to Ukraine was beneficial as the country's debt produced positive returns after Ukraine signed an agreement with Russia to receive $15 billion in aid and to reduce the price of Ukrainian natural gas imports. Holdings of Chinese corporate bonds, particularly in the consumer and real estate sectors, also contributed positively to the portfolio's relative performance. On the other hand, an underweight to Argentina weighed on performance as the country's sovereign debt rallied amid an improvement in investor risk tolerance and signs that the current Argentine government, which is generally not friendly to investors, may not fare well in upcoming elections. However, we continue to believe that the country's debt has meaningful default risk.
Yields on many emerging markets bonds have adjusted to reflect the Fed's tapering announcement and now present better relative value, particularly given the solid fiscal condition of many emerging economies. However, volatility may persist over the near term as the Fed's tapering process is implemented and possibly adjusted on a monthly basis. Emerging markets debt maintains many of its attractive features, including solid credit quality, relatively attractive yields, and diversification potential. However, over the medium to long term, we believe idiosyncratic factors will be a large driver of performance and that more supportive investor flows will reemerge as uncertainties about elections and economic growth fade.