U.S. Stocks enjoyed strong gains in the third quarter, despite slowing profit growth, buoyed by hopes for continued monetary stimulus and a rebound in the global economy. Developed non-U.S. stock markets generated strong returns. Developed European markets outperformed most markets in Asia and the Americas largely due to signs of improving economic growth and investor sentiment. Despite several bouts of heightened volatility, Asia's largest markets, China and Japan, returned solid third-quarter results. However, most emerging markets continued to struggle amid concerns about slowing growth, rising interest rates across developed markets, political unrest, and currency weakness. The emerging Europe, Middle East, and Africa region outperformed other emerging regions. The U.S. fixed income market featured generally rising yields, briefly pushing the yield on the benchmark 10-year Treasury note through the 3% barrier before falling lower in September on the Fed's decision to delay tapering.
The Personal Strategy Income Fund returned 4.44% in the quarter compared with 3.22% for the Combined Index Portfolio* and 2.49% for the Lipper Mixed-Asset Target Allocation Conservative Funds Index. For the 12 months ended September 30, 2013, the fund returned 9.11% versus 7.09% for the Combined Index Portfolio* and 5.15% for the Lipper Mixed-Asset Target Allocation Conservative Funds Index. The fund's average annual total returns were 9.11%, 8.74%, and 7.08% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.76% as of its fiscal year ended May 31, 2013.
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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.
Our exposure to non-U.S. and high yield bonds as diversifiers had the most positive impact to returns. Our allocation to stocks also had a positive impact on relative performance, as did good stock selection among large-cap stocks. Our allocation to small-cap equities negatively impacted returns, however, as small-caps outperformed large-caps. We continue to like high yield relative to investment-grade bonds, favoring their yield advantage and lower duration profile. However, we favor U.S. investment-grade bonds over nondollar credits. We continue to like stocks, particularly large-caps, because they are reasonably valued and offer dividend yields that are generally competitive with bond yields. We also like non-U.S. shares for their attractive valuations, partciularly in emerging markets.
Our global growth expectations remain modest over the next several quarters. Gradual improvement in U.S. economic activity is supported by the housing recovery and moderate job growth, yet it is hindered by fiscal headwinds that should fade going into year-end, provided that the government shutdown and any tangle over the debt ceiling are short-lived. European economies have begun to benefit from a shift in policy to ease back on austerity, but slowing growth in China, Brazil, and other emerging economies is weighing on global trade. The favorable fiscal positioning of many emerging market sovereign issuers stands in contrast to the budget and funding challenges faced by many developed markets. However, the possible drawdown in the Fed's asset purchase program has the potential to raise U.S. rates and make emerging market rates less attractive, pressuring EM currencies. Countries with meaningful current account deficits are particularly vulnerable, and lower commodity prices could pressure the fiscal accounts of commodity-exporting countries even further.