Decreasing Treasury yields and the resulting concerns about faster prepayments held back returns on mortgage-backed securities (MBS), which finished the second quarter with modestly positive returns. Faster prepayments on the mortgages backing MBS generally hurt their value. New issuance of asset-backed securities (ABS) was relatively light, and demand for high-quality bonds offering incremental yield over Treasuries supported the segment. Conditions in the housing market have been solidifying recently, with home prices increasing at a sustainable rate while the percentage of delinquent or foreclosed loans has been trending lower. The Federal Reserve has continued reinvesting principal payments from its holdings of MBS.
The GNMA Fund returned 0.93% in the quarter compared with 0.90% for the Barclays U.S. GNMA Index and 0.85% for the Lipper GNMA Funds Average. For the 12 months ended June 30, 2016, the fund returned 3.10% versus 3.97% for the Barclays U.S. GNMA Index and 2.45% for the Lipper GNMA Funds Average. The fund's average annual total returns were 3.10%, 2.49%, and 4.50% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2016. The fund's expense ratio was 0.59% as of its fiscal year ended May 31, 2015.
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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.
We trimmed our position in commercial mortgage-backed securities during the period due to macroeconomic uncertainty and liquidity constraints in the market. We structure the portfolio to provide shareholders with the most attractive risk-appropriate opportunities in the market, and balancing the cost of liquidity against risk level is an integral part of our investment and risk-monitoring process. The management team also uses internally and externally developed quantitative tools to track and manage the risk profile of the portfolio as market conditions change.
While MBS appear fairly valued relative to Treasuries, we see value opportunities within the sector. Moreover, the higher yields and liquidity of MBS relative to some other fixed income sectors are attractive. The biggest risk to the sector is a change in monetary policy that would lead the Fed to start reducing its reinvestments of principal payments on its MBS holdings sooner than is currently expected. However, this seems unlikely before 2017. Security selection is still critical, and we will continue to rely heavily on our extensive team of analysts, who provide careful, fundamental research on individual bonds.