We are overweight countries pursuing reform agendas that target long-term growth.

Brazil

Brazil remains the fund's largest overweight position. We maintained our overweight throughout the quarter, focused primarily in bonds from quasi-sovereign oil company Petrobras. The Brazilian government submitted its ambitious plan for reforming the pension system, signaling it remains committed to fiscal reforms. In addition to quasi-sovereign debt, the fund holds sovereign bonds, both dollar-denominated and hedged local-currency sovereign bonds. We also invest in debt from several corporate issuers in the export sector that benefit from currency weakness.

Venezuela

Another notable overweight, Venezuela offers a substantial yield advantage over other sovereigns. While the country remains challenged by economic and political difficulties, a recent uptick in oil prices has increased optimism about Venezuela's ability to service its near-term debt. Rebounding from very low levels, Venezuela produced the highest returns of any emerging market country in 2016. The portfolio's holdings are focused on bonds issued by PdVSA that hold attractive prices but carry shorter maturities with less downside risk

Serbia

Serbia is one of the more attractive frontier markets. Policymakers have enacted a number of difficult fiscal reforms in recent years as part of its IMF financing program and growth is gradually improving. Serbia is in the process of negotiating its accession into the European Union and is less impacted by Brexit considerations than other emerging European countries such as Poland and Hungary.

We remain underweight countries that offer limited relative value.

China

China is the fund's largest underweight allocation. The country's external debt consists largely of quasi-sovereign issuers with relatively high credit ratings and limited relative value. While we anticipate a soft economic landing and for some stability ahead of the country's 19th party congress in late 2017, bond valuations do not appropriately reflect underlying risks associated with capital flow volatility and weakening effectiveness of government stimulus.

Philippines

The Philippines was also a notable underweight, primarily due to the unattractive relative value of its external sovereign debt. Strong domestic demand for dollar-denominated sovereign debt results in tighter credit spreads relative to similarly rated peers, while political risks associated with President Duterte's administration have increased.

Hungary

We have a zero-weight allocation to Hungary as the country is more vulnerable to potential increases in eurozone interest rates and offers limited relative value when compared with similarly rated peers.