Most major U.S. stock indexes advanced in the first quarter. According to various Russell indexes, mid-cap shares outperformed their larger and smaller counterparts, and value stocks topped growth shares across all market capitalizations. Equities in developed non-U.S. markets recorded slight gains and lagged U.S. shares, while emerging markets equities fell slightly against a backdrop of geopolitical tensions and slowing growth in various economies. Investment-grade U.S. bonds produced solid returns despite the Federal Reserve’s tapering of asset purchases, and high yield bonds posted another quarter of strong gains. Emerging markets bonds endured a volatile quarter to finish up significantly.
The Global Allocation Fund returned 1.51% in the quarter compared with 1.90% for the Morningstar Global Allocation Index. The Since Inception (05/28/2013) total return was 8.23% as of March 31, 2014. The fund's expense ratio was 2.03% as estimated on the fund's inception date, October 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.
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 expect modest global growth over the next several quarters. The housing recovery, moderate job growth, 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. Although yields have declined and the terms on recent high yield bond issues have become less favorable to investors, we believe that high yield debt is attractive relative to other fixed income asset classes given our outlook for slow economic growth and the potential for rising interest rates.