The high yield market posted solid first-quarter returns in the current low-rate environment. The period was characterized by generally encouraging economic data and solid corporate earnings in the U.S., although renewed concerns about the eurozone emerged. With investors' appetite for risk and demand for yield largely intact throughout the period, lower-rated issues outperformed higher-rated credits within our market. New issue activity was robust in the first three months of the year. As coupon rates on new high yield bonds continue to fall, detailed credit research and assessment of downside risks become increasingly important. Of concern, many high yield bonds now trade at a significant premium above par value, and we believe that this is an indication that valuations in the market have become somewhat stretched.
The High Yield Fund returned 3.74% in the quarter compared with 2.94% for the Credit Suisse High Yield Index and 2.74% for the Lipper High Yield Funds Average. For the 12 months ended March 31, 2013, the fund returned 13.07% versus 12.43% for the Credit Suisse High Yield Index and 11.80% for the Lipper High Yield Funds Average. The fund's average annual total returns were 13.07%, 10.60%, and 9.08% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 0.75% as of its fiscal year ended May 31, 2012.
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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.
The High Yield Fund charges a 2%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
Benchmark Definitions
Overall, the portfolio holdings remain fundamentally sound, and its companies are generating strong cash flows and earnings. The largest industry allocations include energy, services, and financials. A modest exposure to equity-linked securities, issued by companies in the high yield universe, boosted results in the period, especially in the airlines and energy sectors. Credit selection in the telecommunications and metals and mining industries was also strong. The portfolio's comparison with the benchmark was hampered by several strong-performing issuers that we avoided for credit-specific reasons.
Demand for high yield bonds should stay strong as investors search for yield in a low interest rate environment. However, more than 80% of the asset class is now trading above par value following the strong multiyear run, making it difficult to uncover bonds that offer capital appreciation potential. Nevertheless, we remain comfortable with the fundamental underpinnings in the high yield market, despite the stretched valuations in certain segments. The asset class appears attractive when compared with other fixed income assets, and in our view, there will not be a material rise in the default rate in 2013.
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