Emerging markets corporate bonds generated modest gains in the fourth quarter despite declining commodity prices, geopolitical tensions, and concerns about slowing global growth. Although the Federal Reserve made its first interest rate hike since 2006, the market for emerging markets debt did not experience the downward pressure that some had predicted. Oil prices were relatively steady at the beginning of the quarter before dropping about 20% by the end of December to multi year lows. Emerging markets corporate debt from the real estate and financials sectors performed best, while the metals and mining, infrastructure, and transportation sectors lagged.
The Emerging Markets Corporate Bond Fund returned 0.90% in the quarter compared with 0.45% for the J.P. Morgan Corporate Emerging Market Bond Index Broad Diversified. For the 12 months ended December 31, 2015, the fund returned −0.67% versus 1.30% 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 −0.67% and 3.44%, respectively, as of December 31, 2015. The fund's expense ratio was 1.21% as of its fiscal year ended December 31, 2014.
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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.
The fund's holdings focus on areas driven by domestic demand, particularly in the consumer, industrials, and real estate sectors. Conversely, many financials sector bonds appear expensive, and the fund is underweight the sector relative to the benchmark. We are also underweight the oil and gas sector. The oil and gas bonds that we own tend to be from companies with low production costs and strong corporate governance. From a credit quality perspective, bonds rated BBB and BB appear to offer the most attractive relative value as well as more opportunities to take advantage of pricing inefficiencies. We are relatively defensive within the portfolio's high yield allocation, emphasizing BB rated issuers.
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. In addition, the recent volatility has caused a slowdown in new issuance and the more limited supply should support the prices of existing bonds. A key variable for emerging markets corporate bonds going forward is the slowdown in China, where we expect the government to be able to control the deceleration in economic activity.