Money market yields remained historically low during the fourth quarter of 2014, while short-term rates beyond the money market yield curve rose slightly. The Federal Reserve's commitment to keep the fed funds target rate anchored near 0% as it concluded its quantitative easing (QE) program in October contained yields on the shortest-term securities. We believe the Fed is likely to begin raising short-term interest rates next year, which would be a welcome change for conservative fixed income investors who have endured negligible returns since the end of 2008.
The Ultra Short-Term Bond Fund returned −0.01% in the quarter compared with 0.00% for the Barclays Short-Term Government/Corporate Index. For the 12 months ended December 31, 2014, the fund returned 0.28% versus 0.18% for the Barclays Short-Term Government/Corporate Index. The fund's 1-year and Since Inception (12/03/2012) average annual total returns were 0.28% and 0.27%, respectively, as of December 31, 2014. The fund's expense ratio was 0.49% as of its fiscal year ended May 31, 2014.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
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.
Given the uncertainties surrounding the timing of projected interest rate increases, we managed the portfolio to reflect these challenges. Maturities within the portfolio favor the one- to two-year range, as they offer some pickup in yield above shorter-term money market maturities. That said, we also recognize the risks related to an overly defensive posture, especially with inflation low, growth in China slowing, and Europe and Japan engaged in QE programs of their own. Therefore, about 30% of the portfolio is invested in two- to three-year securities. Floating rate bond exposure remained about 25% of the portfolio. The performance of these bonds has been a drag on the portfolio's yield, but the prospects for rising interest rates could translate into better results going forward.
We believe that the next six months or so should provide greater clarity as to 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.