High yield bonds generated modest second-quarter gains and outperformed investment-grade bonds. High yield corporate bonds benefited from their relatively low sensitivity to interest rate changes, solid fundamental underpinnings, and the improving U.S. and European economies. Oil prices steadied at higher levels than at the beginning of the year, providing support for the industry. Bonds from oil-related issuers account for a large proportion of the high yield market. Bank loans, which is a low-duration asset class (duration is a measure of a portfolio's sensitivity to interest rate changes), generated above-average income and also outperformed investment-grade bonds.
The High Yield Fund returned 0.88% in the quarter compared with 0.30% for the Credit Suisse High Yield Index and 0.14% for the Lipper High Yield Funds Average. For the 12 months ended June 30, 2015, the fund returned −0.14% versus −0.70% for the Credit Suisse High Yield Index and −1.29% for the Lipper High Yield Funds Average. The fund's average annual total returns were −0.14%, 8.59%, and 7.45% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2015. 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.
Credit selection in domestic high yield issuers (approximately 80% of portfolio assets) powered relative performance. Security selection in the energy industry was strong. Our overweight to several higher-quality issuers provided ballast in this volatile sector, while our exposure to lower-quality issuers, which lagged during the period, was negligible. We also benefited from increased merger and acquisition activity within the industry. However, security selection in the airline segment weighed on relative results. Several overweight positions in major airlines came under pressure due to concerns about added capacity in the industry. We remained focused on the upper credit quality tiers of the high yield market, bonds rated B and BB. Credit selection in BB and higher-rated bonds generated a strong contribution to the portfolio's relative performance.
The U.S. economy appears to be strengthening, which has supported the domestic high yield market. European economic growth seems to be improving, thanks in part to the European Central Bank's aggressive quantitative easing program, which benefited European high yield bonds. We see improving fundamentals supporting the vast majority of our holdings. Because of several years of refinancing activity, there is not a significant amount of debt coming due over the next few years, which supports our belief that defaults will remain at moderate levels. We are mindful that defaults in the energy and mining segments of the market could rise if oil and commodity prices decline further or remain low for an extended period. Security selection will remain the key to generating outperformance.