Emerging markets corporate bonds generated strong returns in the first quarter, recovering from losses in January amid heightened risk aversion. A reversal in sentiment toward riskier asset classes in February, likely stemming from a rebound in oil prices and an increasingly dovish perception of the Federal Reserve, helped boost emerging markets debt prices in the second half of the quarter. In Brazil, which is home to many issuers of emerging markets corporate bonds, millions of people took to the streets to support the movement to impeach President Dilma Rousseff. Emerging markets corporate debt from the metals and mining sector performed particularly well as commodity prices increased, while the real estate sector lagged.
The Emerging Markets Corporate Bond Fund returned 4.71% in the quarter compared with 3.89% for the J.P. Morgan Corporate Emerging Market Bond Index Broad Diversified. For the 12 months ended March 31, 2016, the fund returned 2.86% versus 2.81% for the J.P. Morgan Corporate Emerging Market Bond Index Broad Diversified. The fund's 1-year and Since Inception (05/24/2012) average annual total returns were 2.86% and 4.45%, respectively, as of March 31, 2016. The fund's expense ratio was 1.19% as of its fiscal year ended December 31, 2015.
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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 Corporate 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 focus on bonds issued by companies in nations with positive momentum toward making structural reforms, including Indonesia, Mexico, and Argentina, that support long-term growth. In terms of sector allocations, the fund's holdings concentrate on areas driven by domestic demand, particularly the consumer and real estate sectors. Conversely, many financials sector bonds appear expensive, and the fund is underweight to the sector relative to the benchmark. From a credit quality perspective, we prefer bonds rated BBB and BB as a result of the opportunities to take advantage of pricing inefficiencies in those segments. We are relatively defensive within the portfolio's high yield allocation, emphasizing the highest-rated issuers in the noninvestment-grade universe.
In the near term, the Fed tightening cycle will likely keep volatility elevated, but that could provide attractive entry points for emerging markets corporate debt investors given our expectation for a gradual pace of rate increases. Our long-term outlook for emerging markets corporate debt remains positive, and the asset class should continue to receive support from global investors building their allocations. A key variable for emerging markets corporate bonds going forward is the economic slowdown in China, where recent supportive policymaker actions have helped improve investor sentiment. We expect China's government to be able to control the country's deceleration in economic activity.