Intermediate- and long-term U.S. Treasuries rallied during the quarter, driving their yields significantly lower and confounding market expectations for higher interest rates. The Treasury yield curve flattened as shorter-term rates held relatively steady or ticked upward slightly. The Federal Reserve maintained the gradual tapering of its quantitative easing program. The European Central Bank (ECB) introduced an expanded long-term loan program to encourage banks to increase their lending and also cut its deposit rate to -0.10%. The ECB actions triggered a significant rally in eurozone sovereign debt and helped emerging markets bonds, particularly those denominated in U.S. dollars, extend their rebound from an early year sell-off.
The Strategic Income Fund returned 2.81% in the quarter compared with 2.30% for the Barclays Global Aggregate ex Treasury Bond USD Hedged Index and 2.38% for the Lipper Global Income Funds Average. For the 12 months ended June 30, 2014, the fund returned 7.83% versus 5.84% for the Barclays Global Aggregate ex Treasury Bond USD Hedged Index and 6.70% for the Lipper Global Income Funds Average. The fund's average annual total returns were 7.83%, 7.48%, and 9.32% for the 1-, 5-, and Since Inception (12/15/2008) periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.84% as of its fiscal year ended May 31, 2013.
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We reduced the size of the fund's allocation to leveraged loans after the rally in noninvestment-grade debt made their valuations less compelling. However, the fundamental underpinnings of high yield issuers did not deteriorate, and we slightly increased our allocation to high yield bonds to take advantage of their attractive yield. We increased the fund's allocation to emerging markets debt denominated in local currencies, which we think offers some of the most attractive relative value across all fixed income sectors. We kept the fund'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.
As we look ahead to eventual increases in the target federal funds rate, we believe that the move toward higher U.S. rates will take place in an orderly fashion and that inflation-adjusted interest rates are likely to continue to be lower than in previous cycles. European and Japanese rates are likely to remain lower than in the U.S. because the lagging economic recoveries in the eurozone and Japan should keep the ECB and the Bank of Japan biased toward continued easing of monetary policy. We believe the return potential going forward resides more with emerging markets than developed economies, albeit with a different set of risks.