Bond prices fell and yields rose for most of the third quarter as investors anticipated that the Federal Reserve would start moderating its monetary stimulus. But on September 18, the Fed unexpectedly announced it would maintain the current pace of its monthly asset purchases. The delay in the Fed's tapering plans lifted bond market sentiment, particularly for higher-risk sectors like emerging markets and high yield debt. Treasury prices rallied and yields declined after the Fed's announcement, but by quarter-end longer-term Treasury yields were still higher than they were on June 30. Short-term Treasury yields inched lower over the quarter as the yield curve steepened. Agency mortgage-backed securities (MBS), another beneficiary of the Fed's stimulus program, turned in respectable returns.
The Strategic Income Fund returned 0.82% in the quarter compared with 0.95% for the Barclays Global Aggregate ex Treasury Bond USD Hedged Index and 1.14% for the Lipper Global Income Funds Average. For the 12 months ended September 30, 2013, the fund returned 1.31% versus 0.27% for the Barclays Global Aggregate ex Treasury Bond USD Hedged Index and −1.30% for the Lipper Global Income Funds Average. The fund's 1-year and Since Inception (12/15/2008) average annual total returns were 1.31% and 9.31%, respectively, as of September 30, 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.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
Our investment strategy continues to favor a barbell-like structure that encompasses both ends of the credit risk spectrum. On the lower-risk end, we hold liquid assets including Treasuries, agency MBS, and other high-quality government securities; on the higher-risk end, we favor credit-sensitive assets, such as bank loans, dollar- and local currency-denominated emerging markets bonds, and high yield debt. While we prefer to keep the fund fully invested, our allocation to Treasuries and other reserves provide us with tactical allocation flexibility and liquidity to buy higher-risk bonds in times of market volatility. During the quarter, we added to dollar-denominated sovereign or quasi-sovereign emerging markets bonds, which appeared inexpensive versus U.S. investment-grade credit. We also reduced our MBS exposure based on valuation and favorable supply-demand trends due to a decline in new issues and the Fed's ongoing MBS purchases.
The Fed's September announcement implied that liquidity will not be removed as quickly as markets had expected and that interest rates will likely stay lower for longer. This has placed downward pressure on Treasury yields and should support higher-risk assets in the near term. The U.S. economy has been resilient in the face of fiscal restraint, and the Fed recognizes the risks of waiting too long to normalize policy. We believe that the Fed will begin cutting back on quantitative easing within the next few meetings, and yields will likely resume rising before the announcement. Political gridlock over the budget and debt ceiling is a wild card. We expect Congress will reach an agreement on these issues when faced with a worst-case scenario of a default. Still, negotiations will likely be contentious and go down to the wire, potentially generating financial market turbulence. Over the longer term, we expect rates to gradually rise as an improving global economy and less accommodative Fed policy call for more normal yield levels. As always, our analysts remain focused on fundamental research and look to uncover bonds that have been unfairly valued due to market volatility.