High yield bonds posted strong second-quarter gains. With absolute yields still solidly higher than in other fixed income sectors, high yield securities continued to generate strong investor demand. The market performed well as fundamental tailwinds, limited defaults, healthy earnings and free cash flow generation, and low financing costs, remained in place. Mixed U.S. economic data, uncertainty about the timing of Federal Reserve rate hikes, and geopolitical concerns weighed on sentiment at times, but monthly high yield bond returns have been consistently positive in 2014. At the end of April, one of the market's largest issuers, a Texas-based utility, filed for bankruptcy. Although the filing caused a spike in the high yield market's default rate, the event was expected and the market's reaction was muted.
The High Yield Fund returned 2.63% in the quarter compared with 2.41% for the Credit Suisse High Yield Index and 2.12% for the Lipper High Yield Funds Average. For the 12 months ended June 30, 2014, the fund returned 12.36% versus 11.81% for the Credit Suisse High Yield Index and 10.61% for the Lipper High Yield Funds Average. The fund's average annual total returns were 12.36%, 13.28%, and 8.45% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.74% as of its fiscal year ended May 31, 2013.
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.
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.
Returns were positive across all of the portfolio's major industries and credit quality segments in the second quarter, with higher-rated securities edging out CCC rated issues. This was the second consecutive quarter of outperformance by higher-quality bonds in the below investment-grade universe, representing a reversal in the dominance of lower-rated bonds from 2013. Credit selection, especially in cable operators and energy, benefited the portfolio's performance relative to its benchmark. However, credit selection in wireless communications detracted from relative results. We continue to expand our investment opportunity set and have added to allocations in bank loans and European high yield bonds.
In our view, high yield is still one of the best places to invest in the broad fixed income universe as demand for yield shows no sign of abating. We see improving fundamentals within the asset class. Many companies have fortified their balance sheets by issuing new debt at low rates, which bodes well for a continuation of the low default rate environment. However, after a long period of especially strong performance, we've become cautious. 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.