U.S. stocks produced strong gains in the fourth quarter, supported by steady U.S. economic growth and new stimulus efforts in the eurozone and Japan. Small-cap stocks outperformed large- and mid-cap stocks. Value stocks narrowly outpaced growth stocks in the large- and mid-cap universes, while the opposite was true among small-caps. Stocks in developed non-U.S. markets declined in dollar terms due to the further weakening of non-U.S. currencies, particularly the euro and the yen. Shares in emerging markets declined as the dollar strengthened and oil prices fell. U.S. bond returns were mostly positive, as high-quality issues appreciated but lower-quality bonds declined. Long-term Treasury bonds performed best, as long-term interest rates and inflation expectations declined. High yield bonds declined primarily due to risk aversion. Developed non-U.S. bond markets also fell, due to the U.S. dollar's strength versus almost all currencies.
The Personal Strategy Income Fund returned 0.98% in the quarter compared with 1.71% for the Combined Index Portfolio* and 0.94% for the Lipper Mixed-Asset Target Allocation Conservative Funds Index. For the 12 months ended December 31, 2014, the fund returned 4.50% versus 5.47% for the Combined Index Portfolio* and 4.67% for the Lipper Mixed-Asset Target Allocation Conservative Funds Index. The fund's average annual total returns were 4.50%, 8.21%, and 6.25% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.73% as of its fiscal year ended May 31, 2014.
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Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
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Our exposure to non-benchmark, diversifying sectors was the largest detractor from relative performance in the quarter. Non-U.S., high yield, and emerging markets bonds lagged our fixed income benchmark. Real asset equities also underperformed as energy prices fell and the dollar rose. Security selection hurt the portfolio's relative results overall, but generated a positive contribution in our non-U.S. developed and emerging markets portfolios. Asset allocation decisions benefited relative returns. Our underweight to non-U.S. bonds helped due to the strong dollar; however, our underweight to small-caps weighed on relative performance. We currently favor non-U.S. over U.S. equities and emerging over developed markets equities. We are also overweight to U.S. growth versus value stocks. Finally, we favor investment-grade over nondollar bonds, but remain overweight to high yield versus investment-grade bonds for their significant yield advantage.
Our global growth expectations remain modest over the next several quarters. Gradual improvement in the U.S. economy is supported by diminishing fiscal headwinds, increased state and local government spending, improving private sector demand, and moderate job growth. In contrast, Japanese and European growth momentum has moderated recently, with Japan slipping back into recession and Europe remaining hindered by high debt loads, high unemployment, and deflation worries. Slowing growth in China, Brazil, and other emerging economies also weighs on global trade. These divergent conditions bolster our belief that our highly diversified portfolios and diligent fundamental research can enhance our ability to produce good long-term returns.