For the majority of the third quarter, the fixed income market featured rising yields and an aversion to securities with significant interest rate risk as investors widely anticipated that the Federal Reserve would begin to "taper" its asset purchases in September. However, on September 18, the Fed announced that it would maintain its current monthly pace of buying $45 billion in Treasuries and $40 billion in agency mortgage-backed securities (MBS). The delay in Fed tapering boosted sentiment in general and particularly benefited fixed income asset classes with more risk, such as emerging market debt.
The New Income Fund returned 0.38% in the quarter compared with 0.57% for the Barclays U.S. Aggregate Bond Index and 0.44% for the Lipper Corporate Debt Funds A-Rated Average. For the 12 months ended September 30, 2013, the fund returned −2.04% versus −1.68% for the Barclays U.S. Aggregate Bond Index and −1.79% for the Lipper Corporate Debt Funds A-Rated Average. The fund's average annual total returns were −2.04%, 6.04%, and 4.84% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.62% as of its fiscal year ended May 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.
In an effort to boost returns where our analysts see good relative values, the portfolio maintains positions in some sectors not included in the benchmark. Our modest allocation to high yield debt and leveraged loans helped returns in the quarter, as investors regained their appetite for higher-risk securities. The largest boost to our relative performance came from our security selection among investment-grade bonds, however. In particular, our financial holdings boosted results as restrained issuance, stricter banking system regulation, and rising merger and acquisition activity have all benefited the sector. Conversely, our small position in municipal bonds, which are also not included in the benchmark, weighed a bit on returns as investors worried about credit problems in Detroit and Puerto Rico. In terms of our overall interest rate positioning, our underweight in short-term issues also detracted from returns.
Investment-grade corporate debt appears fairly valued in general, but there is a risk that more merger and acquisition activity could increase issuance to fund those deals, causing the supply of corporate debt on the market to outstrip demand. On the positive side, merger and acquisition deals could also create opportunities for managers willing to thoroughly analyze credit to find compelling relative value in corporate bonds. Our analysts are positive on high yield debt, which seems positioned to keep performing well as a result of low default rates and inflows from investors seeking yield. Dollar-denominated emerging market debt also appears poised to post solid returns as a result of attractive valuations; however, the asset class could experience more outflows if rates rise further.