The U.S. Treasury yield curve flattened as two- and five-year Treasury yields increased while 10- and 30-year yields decreased. Short-maturity Treasuries sold off as the market began pricing in a mid-2015 initial interest rate hike from the Federal Reserve. Longer-term Treasuries rallied as forward inflation expectations dropped. Economic data show diverging global growth patterns, with the U.S. strengthening while Europe struggles and China slows. The U.S. dollar gained against most currencies. Credit spreads, which measure the additional yield that investors demand as compensation for holding a bond with credit risk versus a similar-maturity Treasury security, widened as risk aversion began to increase from low levels. Emerging markets debt prices fell, with bonds denominated in local currencies experiencing the steepest losses in dollar terms.
The Strategic Income Fund returned −0.47% in the quarter compared with 0.71% for the Barclays Global Aggregate ex Treasury Bond USD Hedged Index and −1.62% for the Lipper Global Income Funds Average. For the 12 months ended September 30, 2014, the fund returned 6.45% versus 5.60% for the Barclays Global Aggregate ex Treasury Bond USD Hedged Index and 3.76% for the Lipper Global Income Funds Average. The fund's average annual total returns were 6.45%, 6.11%, and 8.81% for the 1-, 5-, and Since Inception (12/15/2008) periods, respectively, as of September 30, 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.
We maintained a broad risk "barbell" consisting of allocations to riskier sectors such as high yield and emerging markets debt as well as to lower-risk securities that we can quickly reallocate into areas that offer attractive value. One of the portfolio's successful currency themes is based on divergent global central bank policies. We positioned the portfolio for declines in the British pound, euro, and yen versus the U.S. dollar. However, our positions in emerging markets currencies underperformed on the dollar's strength. As Treasury inflation-protected securities (TIPS) cheapened, we initiated positions in TIPS. We kept the portfolio's duration (a measure of sensitivity to interest rate changes) shorter than the duration of the benchmark, which should help relative performance in a rising interest rate environment.
We expect ongoing slow economic growth in the U.S., with the Fed on pace to tighten monetary policy beginning in mid-2015. However, we think that the eurozone will continue to struggle to grow and will likely need direct government bond purchases by the European Central Bank at some point. 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, remains a key theme in our investment thesis. In this environment, we believe that our strength in bottom-up, fundamental research on countries and individual securities will allow us to continue to generate solid long-term performance.