Investment-grade corporate bonds generated negative absolute returns in the fourth quarter of 2015. However, the sector outperformed U.S. Treasuries for the period. While risk sentiment fluctuated during the quarter, the predominant theme for IG corporates was the bifurcation of the market as a result of falling oil and commodity prices. While many industrial sectors lagged as a result of the price volatility, financials garnered strong investor demand as an alternative. Ultimately, IG corporates proved resilient throughout the increased period of volatility and fluctuating risk sentiment, to end the quarter as one of the top absolute performers among fixed income asset classes.
The Corporate Income Fund returned −0.33% in the quarter compared with −0.58% for the Barclays U.S. Corporate Investment Grade Bond Index and −0.75% for the Lipper Corporate Debt Funds BBB-Rated Average. For the 12 months ended December 31, 2015, the fund returned −0.66% versus −0.68% for the Barclays U.S. Corporate Investment Grade Bond Index and −1.71% for the Lipper Corporate Debt Funds BBB-Rated Average. The fund's average annual total returns were −0.66%, 4.88%, and 5.22% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2015. The fund's expense ratio was 0.62% as of its fiscal year ended May 31, 2015.
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Credit selection within the U.S. diversified banking sector contributed most to relative results. Several bonds issued by large U.S. banks aided returns. Financial sectors performed well during the quarter as a lower-volatility option relative to industrial credits exposed to oil and commodity price volatility. The banking sector further benefited when, in November, it became evident that most institutions would not have to raise burdensome amounts of capital to meet the Fed's Total Loss-Absorbing Capacity (TLAC) regulations.
Corporate fundamentals have peaked in the U.S., and demand for corporate debt has been uneven. Investors remain more selective given the potential longer-term headwinds that could result from lower oil and commodity prices. However, demand has been resilient for new issues with stronger credit fundamentals. With the Fed's first rate hike now in place, the market will focus more attention on the pace of rate normalization. Even though the pace is likely to be gradual, we believe the general direction of the Fed's tightening efforts will keep upward pressure on yields, particularly on the shorter end of the yield curve. As usual, the longer end of the yield curve is likely to be driven more by global growth prospects and domestic inflation expectations.