Corporate bonds were mostly positive in the third quarter, thanks to gains late in the period. Longer-term interest rates increased through early September, then retreated from two-year highs as the Federal Reserve unexpectedly delayed its reduction of asset purchases. The Fed also kept its fed funds target rate in the 0.00% to 0.25% range, and it plans to keep short-term rates very low as long as the national unemployment rate remains above 6.5% and inflation is projected to be no more than 2.5% in the next 12 to 24 months.
The Corporate Income Fund returned 0.96% in the quarter compared with 0.82% for the Barclays U.S. Corporate Investment Grade Bond Index. For the 12 months ended September 30, 2013, the fund returned −1.04% versus −1.58% for the Barclays U.S. Corporate Investment Grade Bond Index. The fund's average annual total returns were −1.04%, 9.02%, and 5.58% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.62% 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.
Our positioning along the yield curve helped performance, as we added to both shorter- and longer-term bonds. Previously, our overweight in 10-year securities had trimmed fund results. Our overweight allocation to the media sector was negative, given increased rumors of merger-and-acquisition activity, which created the potential for a credit downgrade to key holdings. To the extent that volatility in the market continues, it may provide attractive opportunities to add to companies with strong fundamentals that have suffered from adverse technical factors or macroeconomic pressures. As always, our investment team will maintain its commitment to a risk-conscious investment approach with a long-term perspective.
Investment-grade corporate bonds continue to benefit from strong investor demand and attractive yields relative to U.S. Treasury securities. However, firms are facing a number of uncertainties that may act as headwinds in the coming months. Political leaders have struggled to address fiscal policy, resulting in a federal government shutdown and uncertainty over the looming U.S. debt ceiling. While it is likely that policymakers will eventually resolve the fiscal impasse and avoid a more damaging debt default, these issues are weighing on the country's economic prospects. Despite these concerns, the U.S. economy has remained on stable ground, although recent employment and housing data have been mixed. Corporate default rates are expected to remain low, but credit fundamentals have started to deteriorate from strong levels. Stock buybacks, dividend increases, and other shareholder-friendly activities have persisted, but we do not expect them to be a major factor. Lower-risk assets should perform well in the intermediate term, given the economic headwinds and eventual reduction in Fed stimulus.