Emerging markets bonds declined in the fourth quarter amid considerable country-specific volatility and broad selling pressure early in December. Brazilian bonds were particularly volatile as incumbent Dilma Rousseff won the country's presidential election in October. The general malaise in global economic growth contributed to the selling pressure in emerging markets, and the rapid decline in oil prices triggered deep concerns about the health of major commodities exporters such as Russia and Venezuela. Many emerging markets currencies continued to drop sharply against the U.S. dollar. Russia's central bank hiked its benchmark lending rate by a staggering 7.5 percentage points in December in an effort to stabilize the plunging ruble.
The Emerging Markets Bond Fund returned −2.55% in the quarter compared with −1.65% for the J.P. Morgan Emerging Markets Bond Index Global and −3.45% for the Lipper Emerging Market Hard Currency Debt Funds Average. For the 12 months ended December 31, 2014, the fund returned 3.21% versus 5.53% for the J.P. Morgan Emerging Markets Bond Index Global and 1.36% for the Lipper Emerging Market Hard Currency Debt Funds Average. The fund's average annual total returns were 3.21%, 6.08%, and 7.50% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.94% as of its fiscal year ended December 31, 2013.
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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 increased the portfolio's allocations to specific countries that we think will benefit from economic and structural reforms, such as Mexico, where sovereign bonds and the Mexican peso contributed to returns. On the other hand, exposure to higher-volatility countries such as Venezuela and Ukraine detracted. While the plunge in oil prices has undoubtedly squeezed Venezuela's fiscal condition and the country suffers from some imprudent government policies, we think that a default within the next year is unlikely unless oil prices fall considerably further. We reduced exposure to Russia over the course of the quarter and the portfolio is underweight its bonds relative to the benchmark. Russia's economy has begun to contract and will likely enter a pronounced recession this year.
With growing middle classes in many emerging markets, fading political risk from last year's busy election cycle in developing countries, and support from attractive valuations following the recent selling pressure on emerging markets bonds, we have a positive long-term outlook for the asset class. The fundamental condition of many developing markets remains solid, and many have strong balance sheets and higher rates of economic growth than developed countries. However, over the short to medium term, we've taken a guarded stance and will be monitoring oil prices for signs of stabilization. In addition, we closely analyze liquidity conditions for bonds and currencies that we are considering for purchase or sale in the portfolio.