Mortgage-backed securities (MBS), including GNMAs, saw modest gains but underperformed the broader investment-grade bond market in the quarter. GNMAs and other MBS received a boost as longer-term yields fell, due in part to risk aversion resulting from Russia's annexation of Crimea from Ukraine and concerns about the economic health of some emerging markets. Investors grew more wary about the MBS sector, however, after the Federal Reserve began winding down its long-term asset purchases. By March, the central bank was buying only $30 billion of agency MBS per month, $10 billion less than when its tapering program began.
The Summit GNMA Fund returned 1.59% in the quarter compared with 1.77% for the Barclays U.S. GNMA Index and 1.70% for the Lipper GNMA Funds Average. For the 12 months ended March 31, 2014, the fund returned −1.03% versus −0.18% for the Barclays U.S. GNMA Index and −1.13% for the Lipper GNMA Funds Average. The fund's average annual total returns were −1.03%, 3.74%, and 4.21% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2014. The fund's expense ratio was 0.60% as of its fiscal year ended October 31, 2013.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
The portfolio has a modest allocation to non-GNMA securities in an attempt to increase diversification and boost returns. For example, we have a small position in collateralized mortgage obligations, where we added to our positions, particularly in interest-only securities. Investors have grown more comfortable with these securities due to a lower level of prepayments than expected and a reduction in policy risk due to increased clarity surrounding federal refinancing assistance programs. Our emphasis on five-year maturities detracted from performance, as intermediate-term securities bore the brunt of worries that the Fed might boost short-term interest rates earlier than expected.
Although they have easily absorbed new issuance in recent months, the Fed's purchases of GNMAs and other MBS should eventually fall short of new supply. In addition, the possibility exists that the central bank will soon cease reinvesting paydowns from its mortgage holdings. With more than $1.6 trillion in MBS on the Fed's balance sheet near the end of March, this would have significant implications for the market. Finally, yields are not much higher than those on Treasuries, which may discourage banks and other institutional investors from stepping in to absorb supply. Partly for these reasons, we continue to keep an eye on opportunities in more credit-sensitive sectors, where we rely heavily on our extensive team of credit analysts, who provide careful, fundamental research on individual securities