U.S. high yield bonds posted fourth-quarter losses and underperformed the broad investment-grade bond universe amid volatile market conditions. Oil and commodity prices continued to fall, hurting the performance of bonds in the energy and metals and mining industries, which represent a significant portion of the high yield market. While the U.S. economy continued to improve, concern about a slowdown in China and its impact on the global macroeconomic landscape soured investor sentiment and further intensified the pressure on commodity prices.
The Credit Opportunities Fund returned −3.65% in the quarter compared with −2.06% for the Barclays U.S. High-Yield 2% Issuer Capped Bond Index. For the 12 months ended December 31, 2015, the fund returned −6.70% versus −4.43% for the Barclays U.S. High-Yield 2% Issuer Capped Bond Index. The fund's 1-year and Since Inception (04/29/2014) average annual total returns were −6.70% and −7.90%, respectively, as of December 31, 2015. The fund's expense ratio was 1.89% as of its fiscal year ended May 31, 2015.
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if it did, the performance would be lower.
Over the quarter, the fund rotated into higher-quality bonds, decreasing its allocation to CCC rated bonds and increasing exposure to bank loans. Our loan exposure provides yields that are about the same as BB rated high yield bonds and dampens portfolio volatility. Several factors benefit bank loans, including their seniority in the capital structure, their low sensitivity to rising interest rates, and the composition of the asset class (less commodities exposure). We have reduced our exposure to commodity-related industries and now hold about half of the benchmark's allocation, which is our most significant underweight relative to the benchmark. We favor and have overweight allocations in the services, utilities, and cable industries. We have also increased our short-term holdings for liquidity management.
The U.S. economy is showing signs of improving economic growth, which should help to support the domestic high yield market. However, heightened concern about global growth has created considerable volatility in equities and the high yield market. Our underweight to the energy and metals and mining segments should be beneficial as commodity-related sectors have been a major factor in the high yield market's declines. Most of the bankruptcies in the high yield market over the past 12 months were metals and mining and energy issuers, and we expect defaults in these segments to accelerate in 2016. Increased credit-specific risk and liquidity challenges in our asset class have amplified the weakness. As always, our focus in managing the fund is on delivering high current income while seeking to contain the volatility inherent in this market.