Non-U.S. developed market government bonds produced good returns. Fears that weakening growth in China would weigh on developed-market economies led to solid demand for their sovereign bonds. A stronger yen and euro against the U.S. dollar boosted the returns of yen- and euro-denominated bonds. Emerging markets debt declined in January before retracing those losses and finishing up more than 3.5%. While several emerging markets currencies sold off sharply at the beginning of the year, countries including Turkey, India, and Brazil aggressively raised interest rates. This gave investors the confidence to add exposure to emerging markets bonds.
The International Bond Fund returned 2.70% in the quarter compared with 2.79% for the Barclays Global Aggregate ex USD Bond Index and 2.32% for the Lipper International Income Funds Average. For the 12 months ended March 31, 2014, the fund returned 2.19% versus 3.24% for the Barclays Global Aggregate ex USD Bond Index and 0.66% for the Lipper International Income Funds Average. The fund's average annual total returns were 2.19%, 5.33%, and 4.07% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2014. The fund's expense ratio was 0.84% as of its fiscal year ended December 31, 2012.
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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.
Within developed markets, the portfolio is underweight in Canada and Japan because the valuations of their bonds appeared high. It is also underweight in Spain and France, which face slow or stagnant economic growth. The portfolio has overweight positions in German government bonds, which enjoy demand for their low-risk characteristics. We also favored Irish and Italian bonds because prospects for economic recovery in those countries are relatively bright. The portfolio is overweight emerging markets government debt. In corporate bonds, we maintained a modest overweight to European investment-grade corporates to capture their attractive yields, and had allocations to European high yield debt and dollar-denominated emerging market corporates. In terms of currency exposure, the portfolio remained underweight to the yen and the euro because we anticipate continued strengthening in the dollar. The portfolio was overweight Mexico's peso as a result of its ongoing reform initiatives.
The persistently low inflation levels in Europe are likely to drive solid returns for high-quality eurozone government bonds. The sovereign debt of the peripheral eurozone nations should also continue to benefit from improving economic conditions. We expect Japanese government bond yields to undergo modest increases over the next year or two. We like the prospects for European corporate bonds, with both investment-grade and high yield European corporates continuing to enjoy vigorous demand. In emerging markets, investment success is increasingly dependent on country-specific factors.