For the majority of the third quarter, the fixed income market featured generally rising yields and a distinct aversion to riskier assets as analysts and traders largely anticipated that the Federal Reserve would begin to "taper" the volume of its asset purchases. However, in mid-September the Fed decided to delay tapering, which boosted fixed income market sentiment in general. In the investment-grade universe, agency mortgage-backed securities performed best as mortgage refinancing activity diminished and the Fed refrained from tapering its asset purchases. Government bonds in developed non-U.S. markets produced strong returns as the U.S. dollar weakened versus major currencies, which boosted returns to investors in dollar terms. Overall, emerging markets bond returns were mostly flat in U.S. dollar terms, as losses early in the quarter were offset by a strong rally in September following the Fed's decision. Income-oriented equity sectors lost ground on rising bond prices, notably utilities and telecommunication services.
The Spectrum Income Fund returned 1.75% in the quarter compared with 0.57% for the Barclays U.S. Aggregate Bond Index and 1.10% for the Lipper Multi-Sector Income Funds Average. For the 12 months ended September 30, 2013, the fund returned 2.60% versus −1.68% for the Barclays U.S. Aggregate Bond Index and 2.09% for the Lipper Multi-Sector Income Funds Average. The fund's average annual total returns were 2.60%, 7.70%, and 6.30% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.69% as of its fiscal year ended December 31, 2012.
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Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
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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. Exposure to non-benchmark securities, notably non-U.S. bonds, dividend-paying equities, and high yield bonds, was the primary driver of positive returns this quarter. A tactical underweight to long-term Treasuries also boosted performance as yields rose sharply and prices fell. Security selection within a number of underlying funds, particularly the International Bond Fund and Emerging Markets Bond Fund, weighed on relative returns. Our current strategy favors high yield over U.S. investment-grade bonds. Although the covenant terms in recent issues have become less favorable to investors, high yield bonds remain attractive relative to other sectors in this low-yield environment. Our allocation also favors U.S. investment-grade bonds over nondollar credits as the dollar has been supported by prospects for improving growth and the potential for higher rates in the U.S.
Our global growth expectations remain modest over the next several quarters. Gradual improvement in U.S. economic activity is supported by the housing recovery and moderate job growth, yet hindered by fiscal headwinds that should fade going into year-end, provided that the government shutdown and any tangles on the debt ceiling are short-lived. European economies are hindered by debt loads but have begun to benefit from a shift in policy to ease back on austerity. Slowing growth in China, Brazil, and other emerging economies weighs on global trade. While European Central Bank actions have moderated risk in Europe, the favorable fiscal positioning of many emerging market (EM) sovereign issuers stands in contrast to the budget and funding challenges faced by a number of developed market governments. However, the Fed's asset purchase program, which has the potential to raise U.S. rates, makes current EM rates less attractive and puts pressure on EM currencies. Countries with meaningful current account deficits are particularly vulnerable, and lower commodity prices could pressure the fiscal accounts of net commodity-exporting countries even further.