U.S. stocks enjoyed strong gains in the third quarter, despite slowing profit growth, buoyed by hopes for continued monetary stimulus by the Fed and a rebound in the global economy. Non-U.S. equities in developed markets outperformed their domestic counterparts, as a rise in other currencies relative to the U.S. dollar boosted returns for U.S. investors. Emerging equity markets produced moderate gains but significantly trailed developed non-U.S. equity markets. U.S. bond returns were mostly positive in the third quarter, thanks to gains in September, with the yield on the 10-year Treasury note flirting with the 3% level before retreating when the Fed decided to delay tapering. Government bonds in developed non-U.S. markets produced strong returns in U.S. dollar terms, rebounding from a weak second quarter but also retreating on the Fed's decision.
The Personal Strategy Balanced Fund returned 6.05% in the quarter compared with 4.66% for the Combined Index Portfolio* and 4.22% for the Lipper Mixed-Asset Target Allocation Moderate Funds Index. For the 12 months ended September 30, 2013, the fund returned 13.58% versus 11.29% for the Combined Index Portfolio* and 10.92% for the Lipper Mixed-Asset Target Allocation Moderate Funds Index. The fund's average annual total returns were 13.58%, 10.06%, and 8.03% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.85% as of its fiscal year ended May 31, 2013.
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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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Our exposure to non-U.S and high yield bonds, which serve to diversify the portfolio outside the benchmark, contributed the most to positive performance. Our overweight to stocks versus bonds also had a positive impact on relative performance as stocks outperformed fixed income over the period. Our underweight to small-cap stocks muted relative performance as small-caps outperformed large-caps for the quarter. We continue our overweight to stocks, particularly large-caps, because they are reasonably valued and offer dividend yields that are generally competitive with bond yields. Within our equity allocation, we are modestly overweight to non-U.S. shares owing to more attractive valuations. We also prefer emerging markets shares over developed markets. In fixed income, we are overweight to high yield relative to investment-grade bonds, favoring their yield advantage and lower sensitivity to changes in interest rates.
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 it is hindered by fiscal headwinds that should fade going into year-end, provided that the government shutdown and any tangle over the debt ceiling are short-lived. European economies have begun to benefit from a shift in policy to ease back on austerity, but slowing growth in China, Brazil, and other emerging economies is weighing on global trade. The favorable fiscal positioning of many emerging market sovereign issuers stands in contrast to the budget and funding challenges faced by many developed markets. However, the possible drawdown in the Fed's asset purchase program has the potential to raise U.S. rates and make emerging market rates less attractive, pressuring EM currencies. Countries with meaningful current account deficits are particularly vulnerable, and lower commodity prices could pressure the fiscal accounts of commodity-exporting countries even further.