High yield bonds posted strong first-quarter gains. With absolute yields still solidly higher than in other fixed income sectors and because little has changed from a credit fundamentals perspective, high yield portfolios continued to generate strong investor demand. New high yield bond issuance totaled more than $88 billion in the first quarter, but in our assessment, the terms on many of the new offerings is largely unfavorable for investors; many of the deals have relatively low coupons, weak covenants, and limited call protection. However, much of the issuance has been refinancing related, and there is a limited amount of high yield bonds that are set to mature over the next two years, which is supportive of an ongoing low default rate environment.
The High Yield Fund returned 2.92% in the quarter compared with 3.07% for the Credit Suisse High Yield Index and 2.61% for the Lipper High Yield Funds Average. For the 12 months ended March 31, 2014, the fund returned 8.21% versus 7.67% for the Credit Suisse High Yield Index and 6.73% for the Lipper High Yield Funds Average. The fund's average annual total returns were 8.21%, 16.79%, and 8.12% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 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.
As a result of falling long-term U.S. Treasury yields, longer-duration and higher-quality high yield bonds generally outpaced lower-quality issues, reversing the 2013 trend of lower-quality bond outperformance. Overall, the companies we hold generate strong cash flow and earnings and are fundamentally sound. Credit selection contributed to relative performance thanks to strength in the metals and mining and building and real estate sectors. Our conservative positioning was beneficial in the metals and mining sector. However, credit selection detracted from relative results in the utilities sector. We continue to expand our investment opportunity set and have added to allocations in bank loans and European high yield bonds. Our focus in the European market is on B rated bonds with relatively short maturities that yield more than comparable-quality U.S. issues.
In our view, high yield is still one of the best places to invest in the fixed income universe as demand for yield shows no sign of abating. The fundamentals underpinning the asset class are improving as companies reduce their debt service costs and extend the due dates on their borrowings. During the quarter, we reduced our limited exposure to common stocks to lock in gains and trimmed some of our more volatile holdings. 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.