Falling oil prices took a toll on fixed income sectors with significant exposure to oil- and gas-related industries, including U.S. high yield bonds and emerging market debt. Shorter-term U.S. Treasury yields rose in anticipation of the start of the Fed's policy tightening, which is likely later this year. The yield on the 10-year Treasury note declined significantly amid strong demand for relatively high-yielding safe-haven U.S. government debt, contributing to a flattening in the overall Treasury yield curve. The U.S. dollar continued to gain against most other currencies, which drove returns on eurozone and Japanese government bonds into negative territory in dollar terms. Emerging market currencies experienced considerable volatility.
The Strategic Income Fund returned −0.89% in the quarter compared with 1.68% for the Barclays Global Aggregate ex Treasury Bond USD Hedged Index and −0.95% for the Lipper Global Income Funds Average. For the 12 months ended December 31, 2014, the fund returned 4.32% versus 6.94% for the Barclays Global Aggregate ex Treasury Bond USD Hedged Index and 2.25% for the Lipper Global Income Funds Average. The fund's average annual total returns were 4.32%, 5.48%, and 8.27% for the 1-, 5-, and Since Inception (12/15/2008) periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.84% as of its fiscal year ended May 31, 2014.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
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.
The portfolio maintains a broad risk "barbell" consisting of allocations to riskier sectors such as high yield bonds, emerging market debt, and leveraged loans as well as to lower-risk securities, including developed-market government bonds, that serve as a defensive anchor and source of portfolio liquidity if needed to take advantage of market opportunities. We increased the fund's allocation to global government debt and high yield bonds while decreasing its holdings of emerging market debt and leveraged loans. However, security and currency selection is critical in the current volatile environment. We kept the portfolio's overall duration (a measure of sensitivity to interest rate changes) shorter than the duration of the benchmark, although we tactically lengthened duration. This conservative duration positioning should help relative performance in a rising interest rate environment.
The Federal Reserve is likely on track to raise rates in mid- to late 2015 despite the drop in energy prices putting downward pressure on inflation. The strong U.S. dollar trend will also likely continue. The divergence in central bank policies between countries and regions that will move to raise rates relatively soon, such as the U.S. and the UK, and those that will likely remain accommodative, Japan and the eurozone-could lead to increased volatility and more opportunities to find relative value. In this environment, we believe that our strength in bottom-up, fundamental research on countries and individual securities will allow us to pursue solid long-term performance.