Investment-grade bonds recorded a modest overall gain in the first quarter. Treasury yields across most maturities fell during the quarter due in part to risk aversion resulting from Russia's annexation of Crimea and concerns about the economic health of some emerging markets. Longer-maturity Treasury bonds experienced the most significant price increases and yield declines. Investment-grade corporate bonds posted strong performance as a result of the decline in Treasury yields and narrowing credit spreads, which measure the additional yield that investors demand as compensation for holding a bond with credit risk versus a similar-maturity Treasury security. Mortgage-backed securities (MBS) lagged as the Federal Reserve began winding down its long-term asset purchases. By March, the central bank was buying only $30 billion of agency MBS per month, $10 billion less than when its tapering program began.
The U.S. Bond Enhanced Index Fund returned 2.04% in the quarter compared with 1.84% for the Barclays U.S. Aggregate Bond Index and 1.97% for the Lipper Core Bond Funds Average. For the 12 months ended March 31, 2014, the fund returned −0.21% versus −0.10% for the Barclays U.S. Aggregate Bond Index and 0.01% for the Lipper Core Bond Funds Average. The fund's average annual total returns were −0.21%, 4.77%, and 4.40% for the 1-, 5-, and 10-year periods, respectively, as of March 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 seeking 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's 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 "curve positioning" or "duration management"-adjustments in the mix of maturities of our holdings based on the portfolio's view of interest rates.
Long-term interest rates declined during the quarter, but they are likely to resume rising as the economy improves and Fed tapering progresses. Although long-term bond prices will be vulnerable to rising rates, other segments, such as mortgage-backed securities and more credit-sensitive issues, should fare better. In general, we believe that bonds still deserve a place in most investors' portfolios, both for the current income they can provide and as well as a source of diversification.