The European Central Bank (ECB) expanded its asset purchase program to include sovereign bonds, driving yields on high-quality eurozone sovereign debt to extremely low levels. By the end of March, the yield on the 10-year German government "bund" was only 0.18%. The U.S. dollar's remarkable strength against many other currencies continued in the first quarter, dragging returns on most nondollar-denominated debt into negative territory for U.S.-based investors. One notable exception to the dollar's gains was the Japanese yen, which finished the quarter nearly unchanged versus the greenback. Dollar-denominated emerging market bonds generated solid returns, while locally denominated emerging market debt lost ground.
The International Bond Fund returned −3.38% in the quarter compared with −4.63% for the Barclays Global Aggregate ex USD Bond Index and −1.60% for the Lipper International Income Funds Average. For the 12 months ended March 31, 2015, the fund returned −9.46% versus −10.08% for the Barclays Global Aggregate ex USD Bond Index and −3.03% for the Lipper International Income Funds Average. The fund's average annual total returns were −9.46%, 0.75%, and 2.41% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2015. The fund's expense ratio was 0.83% 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 International 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.
The divergence in central bank monetary policies continued to drive our country selection. We shortened the duration of the portfolio's UK and eurozone exposure over the course of the quarter. Duration measures sensitivity to changes in interest rates. The duration of the portfolio's developed market holdings is shorter than that of the benchmark. We maintained an allocation to European high yield bonds, which are not included in the benchmark, and added to the portfolio's holdings of emerging markets debt. We have been striving to minimize the negative impact of the strong U.S. dollar by being underweight the euro and the Australian and New Zealand dollars, which benefited the portfolio's relative performance. The portfolio is overweight the Mexican peso and has non-benchmark allocations to the Indian rupee and the Indonesian rupiah.
As interest rate policy paths in developed markets continue to diverge, with the ECB and the Bank of Japan continuing to ease while the Federal Reserve prepares to tighten, there will likely be increased volatility as well as opportunities for relative value trading between markets at different points in their interest rate cycles. We anticipate that the U.S. dollar's strength against developed market currencies will moderate near current levels. The outlook for the eurozone economy has improved, and we expect the weak euro, which helps boost exports, to support the tentative recovery. In emerging markets, we are cautious about potential outflows resulting from Fed tightening, and we anticipate that country-specific factors will be the main performance drivers in the medium term.