U.S. stocks rose in the third quarter. Non-U.S. equities in developed markets outperformed their U.S. counterparts, as a weaker U.S. dollar versus other major currencies lifted returns to U.S. investors in dollar terms. Emerging markets equities generally appreciated but significantly trailed developed non-U.S. markets. U.S. bond returns were mostly positive, thanks to gains in September, when the Federal Reserve surprised many investors by deciding to maintain the pace of its asset purchases. High yield bonds outperformed investment-grade issues, helped by their attractive yields and lower interest rate sensitivity. Government bonds in developed non-U.S. markets produced strong returns in U.S.-dollar terms, while emerging markets bond returns were mostly flat.
The Global Allocation Fund returned 5.71% in the quarter compared with 5.11% for the Lipper Global Flexible Funds Index. The Since Inception (05/28/2013) total return was 1.80% as of September 30, 2013. The fund's expense ratio was 1.27% as estimated on the fund's inception date, May 28, 2013.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
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 of the economic and market environment, we have an overweight position in stocks despite their appreciation year-to-date. We believe that stocks remain reasonably valued and offer dividend yields that generally are competitive with bond yields, while the current low-yield environment is less favorable for bond returns. We remain underweight to small-cap stocks because relative valuations favor large-cap stocks. In fixed income, our non-U.S. dollar-denominated bonds benefited from weakness in the dollar and positive economic news out of Europe. We favor high yield bonds over investment-grade debt. To enhance its level of diversification and help moderate volatility, the fund includes allocations to several strategies which exhibit low correlations with equity markets. The fund's position in a hedge fund of funds, for example, 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 third quarter.
As the Fed gets closer to winding down its stimulus, fundamental factors, such as corporate earnings and cash flow, should become more important in the market's valuation of U.S. equities. We remain optimistic about the intermediate- and long-term prospects for non-U.S. developed-market equities. However, short-term gains may be somewhat muted as stocks have moved up in anticipation of improved fundamentals. We are confident that emerging markets stocks are an attractive asset class over the medium to longer term. In the fixed income market, we believe that investment-grade corporate debt is fairly valued in general. On the other hand, we think that high yield bonds and dollar-denominated emerging markets debt appear poised to post solid returns.