U.S. investment-grade bond returns were mixed, while high yield bonds decisively outperformed. International bond markets posted modest losses as many currencies depreciated against the U.S. dollar and yields rose on bonds in a number of regions. Depreciation in the Japanese yen had a large negative impact on the returns of Japanese bonds. Sovereign bonds issued by countries that were at the center of the eurozone debt crisis, including Spain, Italy, and Ireland, rallied as the eurozone region continued to recover. The delay in Federal Reserve tapering boosted demand for emerging markets debt, which posted a positive quarterly return.
The Strategic Income Fund returned 1.13% in the quarter compared with 0.40% for the Barclays Global Aggregate ex Treasury Bond USD Hedged Index and 0.65% for the Lipper Global Income Funds Average. For the 12 months ended December 31, 2013, the fund returned 0.30% versus −0.38% for the Barclays Global Aggregate ex Treasury Bond USD Hedged Index and −2.05% for the Lipper Global Income Funds Average. The fund's average annual total returns were 0.30%, 8.46%, and 9.07% for the 1-, 5-, and Since Inception (12/15/2008) periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.84% 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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We continue to maintain a risk "barbell," overweighting high-quality liquid sectors such as global government bonds combined with exposure to higher-risk sectors. Our allocation to U.S. Treasuries and reserves provides us with tactical flexibility to take advantage of buying opportunities should we see market volatility. We maintain more modest exposure to moderate-risk sectors, including U.S. and European investment-grade corporate bonds and agency mortgage-backed securities. In terms of interest rate positioning, we kept the fund's duration (a measure of sensitivity to interest rate changes) shorter than the duration of the benchmark, which helped relative performance as interest rates rose.
The U.S. economy appears to have gained traction in recent months, and the Fed announced that it will begin scaling back its asset purchases in January as it brings its monetary policy back to more normal levels of accommodation. In this environment, we are looking for more modest interest rate increases than we experienced in 2013 absent unexpected strength in the U.S. recovery or a surprise increase in inflation. While UK and Canadian rates could move with U.S. rates, European and Japanese rates are likely to remain less tied to U.S. rates given differing central bank policies biased more toward continued easing of monetary policy. Our return expectations going forward are much more modest and dependent on the global economic recovery.