Global equities climbed in the quarter amid signs that the U.S. economy was recovering from a weather-driven contraction in the first quarter and hopes that new stimulus measures in Europe would boost eurozone economies. Investors were also encouraged by signs the crisis in Ukraine was de-escalating. Developed non-U.S. equity markets narrowly lagged large-cap U.S. shares, but emerging markets performed well. Intermediate- and long-term U.S. Treasuries rallied, driving yields lower and confounding market expectations for higher interest rates. High yield corporate bonds slightly outperformed investment-grade corporates. Non-U.S. developed market government bonds produced good returns, although they significantly lagged emerging markets debt.
The Personal Strategy Income Fund returned 3.18% in the quarter compared with 2.81% for the Combined Index Portfolio* and 2.90% for the Lipper Mixed-Asset Target Allocation Conservative Funds Index. For the 12 months ended June 30, 2014, the fund returned 14.04% versus 11.16% for the Combined Index Portfolio* and 10.65% for the Lipper Mixed-Asset Target Allocation Conservative Funds Index. The fund's average annual total returns were 14.04%, 11.17%, and 7.02% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. 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.
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Our inclusion of diversifying non-benchmark sectors was the largest contributor to relative performance, particularly emerging markets, high yield, and non-U.S. bonds. Our exposure to real asset equities also contributed to relative performance. Stock valuations appear generally reasonable on a historical basis, though small-caps seem rich to us. We favor non-U.S. equities and are overweight to emerging markets stocks as valuations seem more attractive than in developed markets. We trimmed our overweight to high yield bonds and initiated an overweight to emerging markets bonds as yields have become more attractive.
We expect modest global growth over the coming months. The U.S. economy should continue to gradually progress as fiscal constraints abate, job growth picks up, and consumer finances improve. Central banks are likely to maintain accommodative monetary policies for some time to come, helping to support growth and reduce downside risk. Although Treasury yields have trended lower more recently on heightened geopolitical risk and slower growth in the U.S., Europe, and China, we expect yields and U.S. interest rates to trend higher in the coming months as Fed tapering unfolds and economic growth improves. Over the long term, we believe our highly diversified portfolios and diligent fundamental research can enhance our ability to produce good returns.