U.S. bonds produced positive returns amid weak inflation readings and decelerating economic growth. Long-term Treasuries climbed as long-term interest rates declined from year-end levels but closed above their lowest levels of the quarter. Strong foreign demand for U.S. government bonds, whose yields are higher than sovereign debt yields in Europe and Japan, was a contributing factor. Investment-grade corporate bonds also did well, but mortgage- and asset-backed securities trailed. High yield bonds outperformed high-quality issues since investors once again favored their attractive yields as energy firms , important issuers in the segment, benefited from stabilizing oil prices.
The U.S. Bond Enhanced Index Fund returned 1.55% in the quarter compared with 1.61% for the Barclays U.S. Aggregate Bond Index and 1.63% for the Lipper Core Bond Funds Average. For the 12 months ended March 31, 2015, the fund returned 5.62% versus 5.72% for the Barclays U.S. Aggregate Bond Index and 4.89% for the Lipper Core Bond Funds Average. The fund's average annual total returns were 5.62%, 4.33%, and 4.88% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2015. The fund's expense ratio was 0.30% as of its fiscal year ended October 31, 2014.
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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 of interest rates. Outperformance was primarily due to security selection within mortgage-backed securities and investment-grade corporates. Sector allocation decisions also contributed. Within mortgage-backed securities, our barbell structure, consisting of overweights both to lower and higher coupons, helped returns as lower coupons benefited from speedier prepayments and higher coupons benefited from the higher income stream.
Growth in the U.S. economy slowed sharply in the first quarter though harsh winter weather appears to have played a substantial role. Monthly jobs growth has remained favorable, interest rates are still very low, and last year's plunge in oil prices is keeping inflation well contained and should support increased consumption. The Federal Reserve is poised to begin raising short-term interest rates later this year, though the timing, magnitude, and frequency of rate increases are uncertain and will depend on economic data. Against this backdrop of uncertainty, investors may be well served by the highly diversified approach of an index bond portfolio.