High yield bonds posted third-quarter losses, as weakness in July and September more than offset the market's strong performance in August. There were several crosscurrents that affected the asset class: favorable economic trends in the U.S. that were overshadowed by technical weakness, concerns of potential asset price bubbles, and troubling macro developments in other parts of the world. The U.S. dollar was remarkably strong against this backdrop. While corporate fundamentals remained solid, investors grew more risk averse and many reduced their high yield allocations to lock in longer-term gains. Not surprisingly, lower-rated high yield bonds underperformed in this risk-averse environment. However, the high yield default rate continued to decrease, ending the quarter below 2%.
The High Yield Fund returned −1.95% in the quarter compared with −1.94% for the Credit Suisse High Yield Index and −2.06% for the Lipper High Yield Funds Average. For the 12 months ended September 30, 2014, the fund returned 7.40% versus 7.08% for the Credit Suisse High Yield Index and 5.94% for the Lipper High Yield Funds Average. The fund's average annual total returns were 7.40%, 10.21%, and 7.79% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.75% as of its fiscal year ended May 31, 2014.
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.
While we sensed a general shift toward higher-quality issuance in the high yield asset class during the third quarter, we did not make any major adjustments to the portfolio's overall positioning. In our opinion, this credit cycle still has some room to run based on the benign default outlook, and higher-rated, longer-duration bonds appear to be vulnerable to a potential sell-off in U.S. Treasuries. The portfolio's largest allocations remain in bonds rated B and BB. Much of the highest-rated exposure is in companies that we believe are upgrade candidates, and we've maintained a meaningful allocation to bank loans.
In our view, high yield is still one of the best places to invest in the fixed income universe as the fundamentals remain solid, many companies have fortified their balance sheets by issuing new debt at low rates, and demand for yield shows no sign of abating. We had been expecting a correction, but we do not believe the current weakness will persist. We think that value in the primary market will improve, and long-term-focused institutional investors will step in and add to the asset class on weakness. Our confidence is largely based on the fact that the market's underlying fundamentals are little changed and absolute yields compare favorably with other fixed income sectors. 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.