Bonds recorded modest overall losses in the quarter. The Treasury market largely shrugged off the threat of default early in the quarter, as only the yields on Treasury bills maturing in late October and early November temporarily moved significantly higher. The government shutdown likely slowed U.S. economic growth to some degree and probably contributed to the Fed's decision not to announce the tapering of long-term asset purchases until December. Investors were once again rewarded for accepting risk, as Treasuries lost ground and lagged credit-sensitive issues.
The U.S. Bond Enhanced Index Fund returned −0.15% in the quarter compared with −0.14% for the Barclays U.S. Aggregate Bond Index and 0.22% for the Lipper Core Bond Funds Average. For the 12 months ended December 31, 2013, the fund returned −2.18% versus −2.02% for the Barclays U.S. Aggregate Bond Index and −1.87% for the Lipper Core Bond Funds Average. The fund's average annual total returns were −2.18%, 4.46%, and 4.44% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.30% as of its fiscal year ended October 31, 2012.
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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 makes small deviations from the sector weightings in the index in an attempt to boost returns and compensate for expenses. An overweight to investment-grade corporate bonds was the largest contributor to relative returns in the quarter. Demand for yield has benefited the sector, and credit fundamentals, including leverage and profit margins, remain solid even after some deterioration. Our bias toward higher-quality corporate bonds offset some of this benefit, however, as easing investors proved more willing to accept risk and favored lower-rated issues.
Fixed income markets appear to have reached an inflection point early last year, and it appears unlikely that bond investors will enjoy a broad pattern of falling yields and rising bond prices again soon. Nevertheless, we still believe that bonds deserve a place in most investors' portfolios. The recent upward adjustment to longer-term bond yields has been substantial, and valuations are much more reasonable in light of the persistence of low inflation.