Uncertainties about the near-term path of interest rates continued in the first quarter. Minutes from the most recent Federal Reserve policy meeting shed little light on the timing of a liftoff in rates. However, they did provide some insight into the much more restrained pace of tightening that is likely after rate increases begin. Still, lower oil prices, low rates, and global central bank easing suggest support for the economy. Treasury rates declined at the end of the period amid indications of a slowdown in first-quarter growth. Corporate bond issuance remained strong, as issuers continued to take advantage of the low rate environment. Additionally, demand for asset-backed securities (ABS) was healthy despite a steady calendar of new issuance.
The Ultra Short-Term Bond Fund returned 0.37% in the quarter compared with 0.09% for the Barclays Short-Term Government/Corporate Index. For the 12 months ended March 31, 2015, the fund returned 0.58% versus 0.19% for the Barclays Short-Term Government/Corporate Index. The fund's 1-year and Since Inception (12/03/2012) average annual total returns were 0.58% and 0.40%, respectively, as of March 31, 2015. The fund's expense ratio was 0.49% as of its fiscal year ended May 31, 2014.
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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.
A Fed rate increase seems inevitable in 2015, and prudence suggests a somewhat more defensive posture than in the past. As a result, we used the recent rally to shorten the portfolio's duration to less than one year. Duration is a measure of a fund's sensitivity to changes in interest rates. The bulk of the portfolio remained in investment-grade corporate bonds and notes. Several of our energy-related holdings performed well even following the steep fourth-quarter drop in oil prices, which seems to have been digested by investors and the market. ABS and U.S. Treasuries were the next-largest holdings. Higher-rated asset-backed issues continue to offer good relative value.
We believe that the next few months should provide greater clarity about the timing and pace of the Fed's interest rate liftoff. The Ultra Short-Term Bond Fund will remain nimble as the months unfold, since rate increases will likely have a significant impact on the securities within our investment horizon. We continue to manage the fund with a tilt toward generating income and an eye on minimizing share price fluctuations. While a rapid shift in interest rates will ultimately result in higher income to investors, we are mindful that near-term share price movement could affect the fund's total return.