U.S. bond returns were mostly negative during the quarter as long-term interest rates rose, as the economy strengthened, and amid concerns that the Federal Reserve would begin raising interest rates sometime in 2015. Longer-term Treasury interest rates increased but finished June below their highest levels of the quarter as fears that Greece would exit the eurozone prompted investors to favor the safety of U.S. government bonds. In the investment-grade universe, Treasuries fared the worst, especially longer-term securities. Corporate bonds declined amid heavy new issuance. High yield bonds were flat but outperformed their investment-grade counterparts, helped by solid fundamental underpinnings and less interest rate sensitivity.
The U.S. Bond Enhanced Index Fund returned −1.69% in the quarter compared with −1.68% for the Barclays U.S. Aggregate Bond Index and −1.64% for the Lipper Core Bond Funds Average. For the 12 months ended June 30, 2015, the fund returned 1.78% versus 1.86% for the Barclays U.S. Aggregate Bond Index and 1.12% for the Lipper Core Bond Funds Average. The fund's average annual total returns were 1.78%, 3.27%, and 4.41% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2015. The fund's expense ratio was 0.30% as of its fiscal year ended October 31, 2014.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
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 U.S. Bond Enhanced Index Fund charges a 0.5%
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 portfolio is designed for investors who want to benefit from broad exposure to investment-grade bonds. Its objective is to closely track the performance of the Barclays U.S. Aggregate Bond Index after fees, but we attempt to compensate for portfolio expenses by seeking modest additional returns through small variations in sector weightings. We also employ what is referred to as duration management, or adjustments in the mix of maturities of holdings based on our view of interest rates. Security selection within investment-grade corporates and mortgage-backed securities helped performance. From an allocation perspective, our overweight of corporates detracted.
The most significant risk facing the financial markets is that the Fed's move to normalize monetary policy by raising rates after six years with the federal funds rate at essentially 0% will trigger a systemic reduction in liquidity. The markets seem to be focusing on the timing of the first rate hike, but we believe that the path of subsequent increases and the ending level of benchmark rates are more important. If an inflation surprise prompts the Fed to tighten more rapidly than the U.S. Treasury market is currently expecting, volatility and yields could suddenly increase.