Fixed income markets delivered positive returns during the fourth quarter of 2014. Long-term Treasury bonds performed best, as long-term interest rates and inflation expectations tumbled with oil prices. U.S. government bond yields looked appealing versus yields of their eurozone and Japanese counterparts. Investment-grade corporate, mortgage-backed, and municipal securities also produced solid gains, but asset-backed securities trailed. High yield bonds fell as credit spreads, the yield difference between high- and low-quality bonds with comparable maturities, widened, which indicated growing concerns about borrowers' ability to service their debt.
The U.S. Bond Enhanced Index Fund returned 1.70% in the quarter compared with 1.79% for the Barclays U.S. Aggregate Bond Index and 1.23% for the Lipper Core Bond Funds Average. For the 12 months ended December 31, 2014, the fund returned 6.12% versus 5.97% for the Barclays U.S. Aggregate Bond Index and 5.33% for the Lipper Core Bond Funds Average. The fund's average annual total returns were 6.12%, 4.36%, and 4.66% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.30% as of its fiscal year ended October 31, 2013.
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. To a lesser extent, typically, we also employ what is referred to as duration management, adjustments in the mix of maturities of holdings based on our view of interest rates. During the past three months, the portfolio was overweight in mortgage-backed securities, which added value to performance. In addition, while the energy sector was generally hurt by lower oil prices, exploration and production companies were some of the portfolio's top contributors in the corporate sector. Exposure to lower-grade bonds trimmed results.
The Federal Reserve kept short-term interest rates low but ended its monthly asset purchases in October. In mid-December, the central bank indicated its intention to be "patient" with regard to raising short-term interest rates. We expect rate hikes to commence in mid- or late-2015. Regulators have expressed fears that rising rates and falling bond prices in the coming months could trigger outflows from bond funds, putting a strain on the market. Stricter regulations stemming from the 2008 financial crisis have altered the landscape for fixed income funds, resulting in a change of strategy in some cases. On the positive side of the equation, declining liquidity creates opportunities for fixed income investors. Less liquid bonds become attractive when issuers are fundamentally sound and investors are adequately compensated with attractive yields.