Investment-grade (IG) corporate bonds generated positive total returns in the third quarter but underperformed comparable U.S. Treasuries. IG corporates struggled for most of the period amid increased risk aversion from investors and supply concerns. The market strengthened somewhat during the periods of lower primary issuance, but the struggles with technical imbalances persisted. Dovish signals from the Fed exacerbated concerns about potential oversupply in the event that rates remain low, and spreads for the IG corporate market began to widen in the wake of the Fed's September decision to keep rates steady. Mergers and acquisitions continued to be a driver of corporate bond issuance, especially in the health care and cyclical sectors.
The Corporate Income Fund returned 0.15% in the quarter compared with 0.83% for the Barclays U.S. Corporate Investment Grade Bond Index and −0.06% for the Lipper Corporate Debt Funds BBB-Rated Average. For the 12 months ended September 30, 2015, the fund returned 1.18% versus 1.66% for the Barclays U.S. Corporate Investment Grade Bond Index and 0.65% for the Lipper Corporate Debt Funds BBB-Rated Average. The fund's average annual total returns were 1.18%, 4.62%, and 5.35% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.62% as of its fiscal year ended May 31, 2015.
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Security selection in energy was the top detractor to relative returns in the quarter. Several energy-related bonds underperformed as oil and other commodity prices remained low. An overweight allocation to the insurance sector contributed to returns as investors turned to this typically more defensive segment.
Corporate fundamentals are likely approaching a peak in the U.S., and demand has been uneven as investors grow more selective. Overly active new issuance and U.S. Treasury rate volatility could weigh on the asset class heading into the end of the year. Demand has been mostly resilient for new issues, but many market participants are more wary about continued periods of oversupply. Uncertainty has grown over the timing of rate hikes in the U.S., given the recent global macroeconomic volatility. In keeping with our long-term strategy, we believe identifying lower-rated, asset-rich companies that provide the portfolio with a notable yield and spread premium over the benchmark is a significant driver of superior returns. Given the uncertainty in the macro environment, as evidenced by weakness in China, other emerging markets, and commodity volatility, we continue to keep a close eye on risk within the strategy.