Mortgage-backed securities (MBS) posted modest positive returns for the quarter. MBS experienced significant selling pressure at the beginning of the year, when declining mortgage rates and policymaker moves to expand lending triggered expectations for increased levels of residential mortgage refinancing, which causes prepayments on MBS and lowers their value. However, the expected wave of prepayments failed to fully materialize, and the sector recovered in February and March. The Federal Reserve prepared markets for an initial interest rate increase, which appears likely to take place later in 2015. However, Treasury yields continued to defy consensus expectations by decreasing over the course of the quarter.
The GNMA Fund returned 0.75% in the quarter compared with 0.75% for the Barclays U.S. GNMA Index and 0.77% for the Lipper GNMA Funds Average. For the 12 months ended March 31, 2015, the fund returned 4.45% versus 4.91% for the Barclays U.S. GNMA Index and 4.05% for the Lipper GNMA Funds Average. The fund's average annual total returns were 4.45%, 3.51%, and 4.44% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2015. The fund's expense ratio was 0.61% as of its fiscal year ended May 31, 2014.
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.
We build the portfolio with the goal of providing shareholders with the most attractive risk- appropriate opportunities in the market, focusing on securities that offer compelling relative value. We added to our intermediate-term MBS allocation as rates in that segment became more attractive relative to short- and long-term MBS. We favored securities backed by mortgages that are not likely to be prepaid. The portfolio holds some out-of-benchmark allocations, such as collateralized mortgage obligations (a type of MBS with structured cash flows and targeted maturity dates), that made a positive contribution to performance.
The Fed is likely on track to raise rates later this year despite the drop in energy prices putting downward pressure on inflation. Even with the Fed poised to raise rates, we expect the pace of monetary tightening to be moderate. However, the Fed's responses to changing economic data could trigger elevated interest rate volatility. We think that the larger risks to the MBS market include changes in how the Fed communicates its strategy for its large MBS holdings and when the central bank will eventually stop reinvesting the proceeds from its portfolio back into the market.