U.S. high yield bonds posted losses and underperformed most other fixed income sectors in the fourth quarter. Nonetheless, the asset class still posted positive absolute returns for the sixth consecutive year. The most significant detractor for our market has been plunging oil prices and the negative impact on the energy industry, the largest segment of the high yield market. Concerns about economic growth in Europe and China weighed on investor sentiment over the quarter. Credit spreads (which measure the additional yield that investors demand as compensation for holding a bond with credit risk versus a similar-maturity Treasury security) widened, yields rose, and higher-quality bonds outperformed in response to heightened volatility. However, the U.S. economy continues to show signs of improvement, which bodes well for our issuers.
The High Yield Fund returned −1.51% in the quarter compared with −1.59% for the Credit Suisse High Yield Index and −1.62% for the Lipper High Yield Funds Average. For the 12 months ended December 31, 2014, the fund returned 2.00% versus 1.86% for the Credit Suisse High Yield Index and 1.00% for the Lipper High Yield Funds Average. The fund's average annual total returns were 2.00%, 8.63%, and 7.15% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.75% as of its fiscal year ended May 31, 2014.
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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.
Energy bonds, the portfolio's largest industry allocation, endured steep losses as the price of oil declined sharply. However, credit selection and the portfolio's underweight allocation to energy bonds contributed positively to performance relative to the benchmark. The majority of the portfolio's companies (including those in the energy sector) are in good financial shape, and we believe that the U.S. economic expansion is stable and durable. We remained focused on the upper credit quality tiers of the high yield market, bonds rated B and BB. However, the portfolio was underweight to BB rated bonds versus the benchmark, and this allocation hurt relative performance as did security selection within financials.
Aside from the uncertainty emanating from the energy sector, the fundamentals underpinning the companies in our market appear solid. Many companies have issued debt that has lowered their financing costs and extended the maturity dates on those obligations. Looking ahead, the market's default rate should remain range bound in 2015. We had been expecting a correction given the previously high valuation levels in high yield, but we do not believe the current weakness will persist for an extended period. As always, our goal is to deliver high current income and attractive total returns over time, while seeking to limit the volatility inherent in our market.