The environment for corporate bonds, particularly high yield securities, remained favorable in the first quarter. Supportive central bank actions helped sustain the rally for riskier assets. With most low-risk assets continuing to offer negligible current income, investors shifted their focus to higher-yielding issues. Corporate bonds with lower ratings did well in this environment, surpassing the returns of Treasuries and mortgage-backed and municipal securities.
The Corporate Income Fund returned 0.43% in the quarter compared with −0.11% for the Barclays U.S. Corporate Investment Grade Bond Index and 0.36% for the Lipper Corporate Debt Funds BBB-Rated Average. For the 12 months ended March 31, 2013, the fund returned 8.79% versus 7.47% for the Barclays U.S. Corporate Investment Grade Bond Index and 7.86% for the Lipper Corporate Debt Funds BBB-Rated Average. The fund's average annual total returns were 8.79%, 7.86%, and 6.49% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 0.65% as of its fiscal year ended May 31, 2012.
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Benchmark Definitions
The natural gas sector was one of our largest overweight positions. We find pipeline companies particularly attractive as they have minimal exposure to natural gas price volatility, and there is considerable demand for more energy infrastructure in the U.S. Further, we are encouraged by the noncyclical nature of these firms, which stems from the long-term contract structure of the pipeline industry. We maintained a modest out-of-benchmark exposure to sovereign and quasi-sovereign emerging markets companies. Our analysts have identified several issuers that display strong credit fundamentals, including high cash balances and low net leverage, as well as attractive relative value.
Although U.S. economic growth has been slow, its steady pace is providing corporations with a stable environment in which to operate, and key credit metrics remain near recent peaks. Technical trends are highly favorable given the low-yielding investment environment and high level of investor demand. We believe we can add value by identifying companies with attractive yields. We view sectors such as energy, natural gas pipelines, and utilities as holding compelling value. Conversely, the banking sector, which is currently undergoing significant regulatory changes, remains less attractive, particularly after the sector's recent outperformance.
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