Federal Reserve policymakers opted not to increase short-term interest rates during the quarter, believing that financial market turbulence and slowing growth outside the U.S. outweighed the ongoing improvements in the U.S. labor market. The "risk off" environment supported the prices of securitized debt, including mortgage-backed securities (MBS). This sector enjoys relatively strong liquidity, which attracted investors who moved away from riskier sectors such as high yield and emerging markets bonds. MBS benefited from relative insulation from the turbulence in international financial markets and volatile commodity prices, and the Fed continues to reinvest interest and principal payments from its holdings back into the sector, providing further support.
The GNMA Fund returned 0.79% in the quarter compared with 1.11% for the Barclays U.S. GNMA Index and 0.43% for the Lipper GNMA Funds Average. For the 12 months ended September 30, 2015, the fund returned 2.13% versus 2.85% for the Barclays U.S. GNMA Index and 1.92% for the Lipper GNMA Funds Average. The fund's average annual total returns were 2.13%, 2.77%, and 4.27% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.59% as of its fiscal year ended May 31, 2015.
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The liquidity and strong credit quality of agency MBS are key characteristics of the sector that continue to attract fixed income investors. We build the portfolio with the goal of providing shareholders with the most appealing, risk-appropriate opportunities in the MBS market, focusing on securities that offer compelling relative value. Positioning was little changed during the period, but we sold some of our collateralized mortgage obligations, which are bonds backed by mortgage pass-throughs whose cash flows are directed in different ways to different classes, and purchased higher-quality commercial mortgage-backed securities. Prepayment concerns increased during the period because of declining long-term interest rates. As a result, our positioning in higher-coupon securities detracted from relative results.
Although the timing of a Fed rate increase is uncertain, and could come as soon as December, we anticipate that the pace of rate hikes will be measured relative to historical cycles of monetary policy tightening. We expect an uptick in fixed income market volatility up to and around the time of the Fed's rate liftoff, but we don't anticipate a major liquidity crunch that would affect the MBS market. Security selection is still critical, however, and we will continue to rely heavily on our extensive team of analysts who conduct careful, fundamental research on individual bonds.