U.S. bond returns were mixed for the third quarter as long-term Treasury yields declined to their lowest levels in more than a year but rose above late-quarter lows. The Federal Reserve continued reducing its asset purchases, aiming to end the program in October. Developed non-U.S. bond markets fell moderately in dollar terms, hurt by a stronger dollar versus the yen, euro, and British pound. The European Central Bank (ECB) cut its benchmark lending rates to help stimulate eurozone economic growth and said it would start limited bond buying program. High yield bonds declined, underperforming investment-grade issues, as credit spreads widened due to risk aversion and supply-weakened demand. Emerging markets bonds declined but outpaced developed markets bonds. U.S. large-cap stocks posted a small advance.
The Spectrum Income Fund returned −1.32% in the quarter compared with 0.17% for the Barclays U.S. Aggregate Bond Index and −0.97% for the Lipper Multi-Sector Income Funds Average. For the 12 months ended September 30, 2014, the fund returned 5.75% versus 3.96% for the Barclays U.S. Aggregate Bond Index and 5.59% for the Lipper Multi-Sector Income Funds Average. The fund's average annual total returns were 5.75%, 6.60%, and 6.04% for the 1-, 5-, and 10-year periods, respectively, as of September 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 it can hold income-oriented stocks as well. Non-benchmark diversifying sectors, particularly investments in non-U.S., high yield, and emerging markets bonds, detracted from relative performance as each sector underperformed the fund's fixed income benchmark. Security selection within the underlying Equity Income and Emerging Markets Bond Funds detracted as each underperformed its style-specific benchmark. Tactical decisions slightly detracted from results, notably our underweight to long-term Treasuries, as long-term interest rates fell throughout the quarter. This was offset somewhat by our underweight to non-U.S. bonds, which lagged U.S. investment-grade bonds primarily due to a strong U.S. dollar. With the prospect of steadily improving growth in the U.S. and the potential for higher interest rates as the Fed completes tapering, we favor investment-grade over nondollar bonds and high yield over investment-grade bonds.
We have modest expectations for the global growth in the coming months. While central bank monetary policies remain accommodative, the U.S. Federal Reserve is about to end its asset purchase program and begin to normalize interest rates in mid-2015 as the economy continues to gradually improve. However, the ECB, Bank of Japan and People's Bank of China are embarking on more stimulus actions. Slow growth and deflation worries among others weigh on European growth. In Japan, growth and inflation is pressured by the impact of last April's sale tax increase, stubbornly low real wages, and lack of progress on structural reforms. Slowing growth in China, Brazil, and other emerging markets weighs on global trade.