Most major U.S. stock indexes rose strongly and reached multiyear or all-time highs in the fourth quarter. Non-U.S. equities generally lagged U.S. shares, with developed markets handily outperforming emerging markets. U.S. investment-grade bond returns were mixed as longer-term interest rates increased, while high yield bonds decisively outperformed higher-quality issues, helped by continued strong demand for securities with attractive yields. Government bonds in developed non-U.S. markets fell slightly in U.S. dollar terms. Emerging markets debt fared better than non-U.S. developed market bonds, although there was considerable return disparity by country.
The Global Allocation Fund returned 4.73% in the quarter compared with 4.40% for the Morningstar Global Allocation Index. The Since Inception (05/28/2013) total return was 6.61% as of December 31, 2013. The fund's expense ratio was 1.27% as estimated on the fund's inception date, May 28, 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.
With the ability to position the portfolio according to our views on economic and market conditions, we continue to favor stocks relative to bonds in the current low-yield environment. However, we slightly moderated our overweight to equities because the significant rise in stock prices in 2013 has expanded equity valuations to the point that they no longer appear cheap. Emerging markets shares, on the other hand, have attractive valuations relative to developed markets, and the fund is overweight emerging markets stocks. In fixed income, we are overweight high yield relative to investment-grade bonds because of their yield advantage and lower sensitivity to changes in interest rates. The fund includes a position in a hedge fund of funds that can help temper the effects of an equity market downturn. However, this allocation can underperform in a period of strong equity market returns, as was the case in the fourth quarter.
We have modest expectations for global growth over the next several quarters. The housing recovery, moderate job growth, muted energy prices, and diminishing fiscal headwinds should continue to support gradual improvement in U.S. economic activity. In Europe, large debt loads, high unemployment, and deflation worries will likely hinder growth. Overall, equity valuations are reasonable relative to historical levels based on measures, including price-to-earnings. In the fixed income market, we believe that investment-grade corporate debt is fairly valued in general, while high yield bonds have the potential poised to post solid returns.