For the majority of the third quarter, the fixed income market featured rising yields and an aversion to securities with significant interest rate risk as investors widely anticipated that the Federal Reserve would begin to "taper" its asset purchases in September. However, on September 18, the Fed announced that it would maintain its current monthly pace of buying $45 billion in Treasuries and $40 billion in agency mortgage-backed securities (MBS). The delay in Fed tapering boosted fixed income market sentiment and benefited fixed income asset classes with more risk, such as emerging market debt.
The U.S. Bond Enhanced Index Fund returned 0.40% in the quarter compared with 0.57% for the Barclays U.S. Aggregate Bond Index and 0.55% for the Lipper Intermediate Investment Grade Debt Funds Average. For the 12 months ended September 30, 2013, the fund returned −1.98% versus −1.68% for the Barclays U.S. Aggregate Bond Index and −1.47% for the Lipper Intermediate Investment Grade Debt Funds Average. The fund's average annual total returns were −1.98%, 5.43%, and 4.49% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.30% as of its fiscal year ended October 31, 2012.
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 employs modest deviations from the benchmark in an attempt to boost returns and compensate for expenses. Our selection within investment-grade corporate bonds detracted from results, due largely to conservative positioning within credit-sensitive sectors. Similarly, selection within commercial mortgage-backed securities also modestly detracted as our preference for higher-quality issues did not match investors' preference for lower quality and higher yields. Conversely, an underweight to Treasuries, which are highly sensitive to changes in interest rates, boosted results. While this is balanced by an overweight to credit-sensitive issues, we have sought to reduce risk by choosing conservatively positioned holdings. During the quarter, we modestly reduced exposure to agency MBS by not reinvesting proceeds from paydowns. A strong technical backdrop has made valuations richer and less attractive.
Given the possibility of continued interest rate volatility, investors might not be well served by turning to Treasuries-especially those with longer maturities-in a reflexive attempt to avoid risk. Indeed, the past months have highlighted the importance of an allocation to credit-sensitive issues, which can offer a yield cushion if interest rates rise. Our broadly focused portfolio offers such diversification, and we will continue to use our extensive in-house research capabilities in taking measured steps to boost returns relative to the benchmark.