U.S. bonds generated moderate gains in the second quarter, as longer-term Treasuries rallied, driving their yields lower amid expectations of higher rates. A hint of inflation appeared in mixed economic data as the unemployment rate fell, but first-quarter gross domestic product (GDP) contracted considerably. High yield bonds slightly outperformed investment-grade issues, as investors continued to favor bonds with attractive yields in a low interest rate environment. The Federal Reserve continued to reduce its asset purchase program, and the European Central Bank began loosening monetary policy, which triggered a significant rally in eurozone sovereign debt. Emerging markets bonds outpaced developed markets bonds as low inflation and interest rates in developed markets pushed investors to seek yields from higher-risk securities.
The Spectrum Income Fund returned 2.87% in the quarter compared with 2.04% for the Barclays U.S. Aggregate Bond Index and 2.42% for the Lipper Multi-Sector Income Funds Average. For the 12 months ended June 30, 2014, the fund returned 9.03% versus 4.37% for the Barclays U.S. Aggregate Bond Index and 7.79% for the Lipper Multi-Sector Income Funds Average. The fund's average annual total returns were 9.03%, 8.69%, and 6.48% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.69% as of its fiscal year ended December 31, 2013.
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The Spectrum Income Fund invests for high current income primarily through a range of domestic fixed income classes and quality styles, but can hold income-oriented stocks as well. Non-benchmark diversifying sectors, particularly investments in non-U.S. bonds and dividend-paying stocks, boosted performance. Our underweight allocation to long-term Treasury bonds detracted as interest rates declined and prices rose throughout the quarter. Security selection, particularly in high yield bonds, was somewhat helpful. We continue to favor high yield over U.S. investment-grade bonds in this low-yield environment, though we recently trimmed our allocation as we took advantage of favorable liquidity and pricing conditions.
We expect modest global growth over the coming months. U.S. interest rates are likely to trend higher in the coming months as Fed tapering winds down and economic growth improves. Europe's economy should gradually improve as challenges in the eurozone periphery recede, though concerns remain about slow progress on economic reforms by some member states, high unemployment, and declining inflation. Japan's fiscal and monetary policies have revived its economy, but structural reforms will be required for further progress. Emerging markets remain vulnerable to potentially higher interest rates stemming from Fed tapering. Over the long term, we believe our highly diversified portfolios and diligent fundamental research can enhance our ability to produce good returns.