U.S. stocks gained in the quarter, but volatility was high amid overseas terrorist attacks, geopolitical instability, and uncertainty over monetary policies in the U.S. and abroad. Terror attacks, as well as concerns about tepid economic growth and smaller-than-expected monetary stimulus measures, weighed on sentiment in Europe, while Japan's market surged higher on positive economic data. Emerging markets stocks rose, but the environment remained muted due to commodities weakness and slowing global growth. The Federal Reserve raised interest rates for the first time since 2006. U.S. investment-grade bonds edged lower, while losses were more pronounced in the commodities-heavy high yield segment. International developed markets debt fell in U.S. dollar terms, while U.S. dollar-denominated emerging markets debt gained modestly.
The Global Allocation Fund returned 2.98% in the quarter compared with 2.30% for the Morningstar Global Allocation Index. For the 12 months ended December 31, 2015, the fund returned −0.29% versus −1.98% for the Morningstar Global Allocation Index. The fund's 1-year and Since Inception (05/28/2013) average annual total returns were −0.29% and 4.00%, respectively, as of December 31, 2015. The fund's expense ratio was 1.88% as of its fiscal year ended October 31, 2014.
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We have a neutral position in stocks versus bonds. Equity valuations remain above historical averages, with less support from earnings and revenue growth. Underlying fundamentals across most sectors remain stable and durable economic growth should be supportive. We expect modest returns from bonds as the current low-yield environment offers a weak foundation and rising interest rates should be a headwind once rates begin to rise. Monetary policies of global central banks are expected to remain accommodative for some time to come as they seek to support growth, which should moderate downside risks to bonds. Additionally, we expect the pace of rising U.S. interest rates to be gradual and limited as growth remains subdued and demand for U.S. bonds persists with U.S. yields among the highest across developed markets.
The U.S. economy grew at a 2.0% annualized rate in the third quarter, supported by resilient consumer spending. Weaker global growth and a stronger dollar are likely to weigh on business inventory spending and exports, but expansionary fiscal spending should support growth in 2016. European economic growth is modest, supported by accommodative monetary policies, low energy prices, and reduced fiscal headwinds. Japan's economy narrowly avoided a recession last year, but growth remains uneven and somewhat fragile. There is considerable disparity among emerging markets. Many commodity exporters will continue to feel the pain of weak oil and materials prices, while net commodity consumers should be in better shape.