As discussed, the emerging markets asset class generated strong results during the fourth quarter. While US dollar-denominated emerging markets debt, as measured by the JP Morgan Emerging Markets Bond Index Global (EMBI Global), posted a 3.33% return over the period, local currency emerging markets debt, as measured by the J.P. Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM Global Diversified), posted an even stronger return of 4.13%.. The high yield bond market, as measured by the Bank of America Merrill Lynch US Cash Pay High Yield Constrained Index, returned 3.15% during the fourth quarter. High yield bond prices were supported by generally robust demand, solid corporate fundamentals and continued low defaults. From a ratings perspective, better-quality rating categories broadly underperformed lower-quality bonds, with the BB and B-rated segments lagging the CCC and below-rated segment.
During the fourth quarter of 2012, the Fund posted a net asset value total return of 2.42% and a market price total return of 0.39%. On a net asset value basis, the Fund outperformed its benchmark, the Strategic Global Benchmark (the “Index”), 1 which declined 0.06% for the quarter.
The Fund's spread sector exposures drove its outperformance during the fourth quarter. 2 In particular, the Fund's overweight allocation to corporate credit (both investment grade and high yield bonds) was the largest contributor to results. Overweights to CMBS and mortgage-backed securities (MBS) were also additive for results, albeit to lesser extents. Security selection, too, was positive for performance during the quarter. Within investment grade credit, the Fund's holdings in the financial subsector were the most beneficial to performance. We also experienced positive security selection in CMBS, MBS and emerging markets debt.Overall, duration positioning contributed to results, when the Fund was rewarded for having a shorter duration than its benchmark as US rates moved higher during the quarter. Elsewhere, the Fund’s currency positioning added to results. In particular, having a short to the Japanese yen was beneficial, as newly elected Prime Minister Shinzo Abe vowed to take "truly meaningful measures" to weaken the yen in order to help boost Japan’s faltering economy. In addition, the Fund's overweight to local currency emerging markets debt was a positive contributor.