U.S. stocks fell in the third quarter amid worries about a China-led global economic slowdown and concerns about the wider impact of looming Federal Reserve interest rate hikes. Energy and materials stocks, many of which are tied to slowing Chinese demand and a stronger U.S. dollar, were particularly weak. Non-U.S. developed markets stocks trailed U.S. shares, while emerging markets equities lagged with steeper losses. U.S. investment-grade bonds posted modest gains, benefiting from increased risk aversion. Non-U.S. developed markets debt gained modestly in U.S. dollar terms but lagged U.S. investment-grade debt, while emerging markets bonds fell for the period as most currencies weakened against the U.S. dollar.
The Personal Strategy Balanced Fund returned −5.77% in the quarter compared with −4.91% for the Combined Index Portfolio* and −5.17% for the Lipper Mixed-Asset Target Allocation Moderate Funds Index. For the 12 months ended September 30, 2015, the fund returned −1.86% versus −1.38% for the Combined Index Portfolio* and −2.33% for the Lipper Mixed-Asset Target Allocation Moderate Funds Index. The fund's average annual total returns were −1.86%, 8.22%, and 6.19% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.84% as of its fiscal year ended May 31, 2015.
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We have a neutral position in stocks relative to bonds. Increased volatility and broad market corrections have lowered equity valuations, but they remain above historical averages with less support from earnings growth. Underlying fundamentals across most sectors remain solid, and improving economic growth should be supportive. We increased our overweight to emerging markets equities as valuations have fallen below long-term historical averages relative to developed markets. We reduced our overweight to high yield relative to investment-grade bonds given the advanced stage of the credit cycle coupled with a backdrop of increased uncertainty about global growth and U.S. Federal Reserve policy.
The U.S. economy should remain resilient in the face of slowing growth overseas, with support from consumer spending and fading headwinds from weakness in the energy sector. Second-quarter economic growth was revised upward to an annualized 3.9%, with 2016 estimates in the 2.0% to 2.5% range. Low wage pressures plus falling commodity prices will likely keep inflation moderated, giving the Fed the option to delay normalization of monetary policy if financial conditions worsen. Outside the U.S., growth expectations are mixed with developed markets gradually improving while major emerging markets, including China, Russia, and Brazil, are weighing on global growth. Global market volatility may increase in response to concerns over growing signs of weakness among emerging markets economies and falling commodity prices.