The fixed income market ended mostly lower during the second quarter of 2015. Longer-term Treasury yields increased but finished June below their highest levels of the quarter as fears that Greece would exit the eurozone prompted investors to favor the safety of U.S. government bonds. The Federal Reserve refrained from raising short-term rates but signaled that rate hikes will commence by the end of the year. In the investment-grade universe, Treasuries fared worst, especially longer-term securities. Corporate bonds declined amid heavy new issuance stemming from merger activity and anticipation of higher borrowing rates in the future.
The Corporate Income Fund returned −2.91% in the quarter compared with −3.16% for the Barclays U.S. Corporate Investment Grade Bond Index and −2.95% for the Lipper Corporate Debt Funds BBB-Rated Average. For the 12 months ended June 30, 2015, the fund returned 1.00% versus 0.75% for the Barclays U.S. Corporate Investment Grade Bond Index and 0.54% for the Lipper Corporate Debt Funds BBB-Rated Average. The fund's average annual total returns were 1.00%, 5.66%, and 5.25% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2015. The fund's expense ratio was 0.63% 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.
We were most heavily weighted in consumer cyclical bonds, which helped boost our performance. Interest rate management also contributed positively to fund performance, as we were most heavily exposed to 2- and 10-year securities. On the downside, our overall sector allocations weighed on results. We were overweight in basic industry companies, which trimmed performance during the period. An overweight position in noncorporate bonds was another negative, while underweight positions in health care and pharmaceutical bonds and in U.S. banking debt also weighed on the fund's relative results.
Concerns about liquidity have gained traction in recent months. Regulators have expressed fears that rising rates and falling bond prices in the coming months could trigger outflows from bond funds, putting a strain on the market. Stricter regulations stemming from the 2008 financial crisis have altered the landscape for fixed income funds, resulting in a change of strategy in some cases. On a positive note, declining liquidity creates opportunities for fixed income investors. Less liquid bonds become attractive when issuers are fundamentally sound and investors are adequately compensated with attractive yields. As always, we will continue to search for value and seek out securities offering reasonable yields without taking on an inordinate level of risk.