The high yield market posted solid first-quarter returns. High yield investor sentiment appeared to track energy and commodity prices (energy is the largest sector in the high yield asset class). Higher-rated noninvestment-grade bonds generally outperformed lower-quality issues, in part due to the overall rally in U.S. Treasuries and investors' general preference for higher-rated bonds within the asset class. During the quarter, the Federal Reserve continued to prepare the market for its first interest rate increase since 2008, which most forecasters believe will happen later in 2015.
The High Yield Fund returned 2.51% in the quarter compared with 2.59% for the Credit Suisse High Yield Index and 2.16% for the Lipper High Yield Funds Average. For the 12 months ended March 31, 2015, the fund returned 1.59% versus 1.39% for the Credit Suisse High Yield Index and 0.59% for the Lipper High Yield Funds Average. The fund's average annual total returns were 1.59%, 8.21%, and 7.54% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 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.
The fund generated strong absolute and relative performance from credit selection in the media and telecommunications and energy sectors. We have positioned the portfolio to benefit from merger and acquisition activity in the media industry, and the overweight allocation contributed to the portfolio's relative results. Our underweight allocation to the energy sector also benefited relative performance. However, security selection in the financials and services sectors hurt relative returns. The fund remained focused on the upper credit quality tiers of the high yield market (bonds rated B and BB). However, we were underweight to BB and higher-rated bonds versus the benchmark, and this allocation hurt the fund's relative performance. Consistent with our effort to shorten the portfolio's duration (a measure of the fund's interest rate sensitivity), we modestly increased our exposure to leveraged loans. Loans are senior in the capital structure, and they provide about the same yield as BB rated bonds.
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 their obligations. We remain constructive on the U.S. high yield corporate credit, as well as European high yield and, selectively, emerging market corporate bonds as we cast a wider net beyond the traditional high yield universe. Dislocations from geopolitical events can create attractive opportunities. Looking ahead, the market's default rate should remain below its long-term historical average in 2015. As always, our goal is to deliver high current income and attractive total return over time while seeking to limit the volatility inherent in our market.