Long-term interest rates moved sharply higher during the past three months. The 10-year Treasury note rose to 3.03% by the end of December, the highest level in about two-and-a-half years, as the economy expanded strongly and the Fed prepared to reduce its asset purchases. Investment-grade corporate bonds posted slightly positive returns, while high yield bonds were stronger thanks to the cushion provided by their higher coupons. Long-term Treasuries suffered the most, and other government bonds fell to a lesser extent.
The Corporate Income Fund returned 1.04% in the quarter compared with 1.11% for the Barclays U.S. Corporate Investment Grade Bond Index and 1.10% for the Lipper Corporate Debt Funds BBB-Rated Average. For the 12 months ended December 31, 2013, the fund returned −1.42% versus −1.53% for the Barclays U.S. Corporate Investment Grade Bond Index and −1.17% for the Lipper Corporate Debt Funds BBB-Rated Average. The fund's average annual total returns were −1.42%, 9.57%, and 5.43% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 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.
The fund's positioning along the yield curve was mostly beneficial, as we added to shorter-term securities during the period. Our security selection in consumer cyclical companies also helped. Our exposure to media hindered fund results, since the sector was rife with rumors of potential merger-and-acquisition activity, which put pressure on some fund holdings. We believe the energy sector, particularly natural gas pipelines, holds compelling value with relatively lower risks. We also have a favorable view of subscription-based media companies and consumer cyclicals, which are benefiting from ongoing economic growth. Near-term volatility may provide attractive opportunities to add to companies with strong fundamentals that have suffered from adverse technical factors and other pressures.
The Fed indicated that it would begin to gradually unwind its monthly asset purchases beginning in January, but the central bank stated that it will keep short-term rates tethered close to 0% until the economy strengthens further and inflation begins to accelerate. The U.S. economy has remained on stable ground, with recent employment data showing signs of improvement. Corporate default rates should remain low, but credit fundamentals have started to deteriorate from previously strong levels. Stock buybacks, dividend increases, and other shareholder-friendly activities have persisted but are generally expected to remain credit neutral. Shorter-term corporate bonds will likely do relatively well in the medium term. We believe we can continue to add value by identifying lower-rated, asset-rich companies that provide notable yields and the prospects for ongoing stability.