U.S. corporate bonds generated positive returns amid weak inflation readings and decelerating economic growth. High-grade issuance has been strong, partly because companies are eager to lock in lower borrowing costs given the possibility of Federal Reserve rate hikes later in the year. The U.S. market was supported by increased demand from Europe, as eurozone investors sought out the higher yields offered by U.S. securities.
The Corporate Income Fund returned 2.50% in the quarter compared with 2.32% for the Barclays U.S. Corporate Investment Grade Bond Index and 2.07% for the Lipper Corporate Debt Funds BBB-Rated Average. For the 12 months ended March 31, 2015, the fund returned 7.23% versus 6.81% for the Barclays U.S. Corporate Investment Grade Bond Index and 6.75% for the Lipper Corporate Debt Funds BBB-Rated Average. The fund's average annual total returns were 7.23%, 6.93%, and 5.94% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2015. The fund's expense ratio was 0.63% as of its fiscal year ended May 31, 2014.
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Security selection in banking was one of the top contributors to relative returns, led by positions in large U.S. banks. Major U.S. money center banks are improving from a credit perspective, as their balance sheets are benefiting sustained low interest rates and regulatory pressures to hold more capital. We are also attracted by the solid liquidity they provide for the portfolio. Our out-of-benchmark allocation to noncorporate bonds performed poorly in the quarter.
Solid fundamentals and consistent inflows continue to support investment-grade corporate bonds, despite some periods of market volatility. Investor demand, particularly for new issues, remains firm given similarly tight valuations across the fixed income opportunity set. Debt levels are manageable, and profit margins sit near multiyear highs. Financial sector balance sheets continue to improve amid more stringent regulatory requirements, providing a relatively stronger fundamental base. Outside financials, we expect that slower earnings growth could weigh on fundamentals and credit ratings, particularly in the industrials space. Merger and acquisition activity has generally remained credit neutral, despite increased activity especially in the pharmaceutical space. Corporate default rates are expected to remain relatively subdued, although continued oil price weakness will likely result in increased defaults and asset sales within the energy sector. 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 alpha generation. Given the uncertainty in the macro environment, we will continue keeping a close eye on risk within the strategy.