Relatively upbeat news about the global economy and a growing appetite for riskier assets led to a modest overall loss for investment-grade bonds in the first quarter. Longer-term Treasury bond prices fell and yields rose as favorable economic data lessened their appeal as a perceived safe haven. Investment-grade bonds, with very low nominal yields, performed in line with the overall market. Mortgage-backed securities (MBS) recorded a modest loss but performed a bit better than the overall investment-grade market. Higher MBS yields appear to be starting to lure some private buyers back into the market alongside the Federal Reserve. Municipals enjoyed modest gains as investors sought tax-sheltered income amid higher tax rates, and supply was constrained early in the period due to seasonal factors.
The U.S. Bond Enhanced Index Fund returned 0.03% in the quarter compared with −0.12% for the Barclays U.S. Aggregate Bond Index and 0.19% for the Lipper Intermediate Investment Grade Debt Funds Average. For the 12 months ended March 31, 2013, the fund returned 3.94% versus 3.77% for the Barclays U.S. Aggregate Bond Index and 5.47% for the Lipper Intermediate Investment Grade Debt Funds Average. The fund's average annual total returns were 3.94%, 5.55%, and 4.95% for the 1-, 5-, and 10-year periods, respectively, as of March 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.
We make small adjustments relative to the benchmark in an attempt to boost returns and compensate for portfolio expenses. Yields across fixed income sectors remain near all-time lows, and spreads (the extra yield offered for accepting greater risks in lower-quality securities) continued to grind tighter throughout the first quarter. As such, valuations remain somewhat stretched, leaving us hesitant to add to risk. The portfolio remains overweight in higher-risk, higher-yielding bonds in order to build a yield cushion versus the benchmark, but is somewhat conservatively positioned within these sectors. For example, while the portfolio is overweight in investment-grade corporate bonds, holdings are somewhat less sensitive to interest rate changes than those in the benchmark. Likewise, the portfolio is overweight in commercial mortgage-backed securities, but tends to hold higher-quality issues within the segment.
We believe Treasury yields will gradually move higher over the course of the year as the U.S. economy continues to improve, the eurozone crisis abates, and the Fed is likely to reduce its asset purchases. Even as an increase in U.S. interest rates appears to be getting closer, however, we are finding good investment opportunities in pockets of the fixed income universe. Careful research into individual securities and a global search for value will remain keystones of our investment approach.