The Federal Reserve made its first interest rate hike since 2006 in December. Investors widely expected the rate increase and had begun selling shorter-term Treasuries in advance of the Fed's move. Yields on longer-term Treasuries climbed more moderately, resulting in a flatter Treasury yield curve. Investment-grade corporate bonds produced modest losses, with investors exhibiting a clear preference for debt with higher credit ratings. Mortgage-backed securities (MBS) finished the quarter down slightly. The Fed's statement following its December policy meeting reassured MBS investors by saying that the central bank will continue to reinvest principal payments from its holdings of MBS until interest rate normalization "is well under way."
The U.S. Bond Enhanced Index Fund returned −0.62% in the quarter compared with −0.57% for the Barclays U.S. Aggregate Bond Index and −0.59% for the Lipper Core Bond Funds Average. For the 12 months ended December 31, 2015, the fund returned 0.30% versus 0.55% for the Barclays U.S. Aggregate Bond Index and −0.07% for the Lipper Core Bond Funds Average. The fund's average annual total returns were 0.30%, 3.15%, and 4.47% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 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. To a lesser extent, typically, we also employ what is referred to as duration management, or adjustments in the mix of maturities of holdings based on our view on the direction of interest rates.
We expect the elevated volatility that characterized the U.S. fixed income markets in the second half of 2015 to continue into 2016 as the markets adapt to the start of the Fed's rate hikes. However, we think that the pace of rate increases will be measured relative to historical cycles of monetary policy tightening. With the Fed likely to act cautiously, the transition to higher rates may not be as painful as some fear. In this volatile, changing fixed income environment, we will continue to prudently apply some active management techniques to try to generate incremental gains relative to the passive benchmark index.