U.S. stocks were mixed in the third quarter amid geopolitical unrest in the Middle East and Ukraine and Federal Reserve tapering. Large-cap equities generated modest gains as investors focused on favorable economic and corporate fundamentals in the U.S. Mid-cap and small-cap shares declined. Non-U.S. developed and emerging markets stocks fell as anticipation of the onset of Fed rate hikes around mid-2015 helped strengthen the dollar against most currencies. Domestic bonds were also mixed. Short- and intermediate-term Treasury yields increased. High yield bonds declined and underperformed investment-grade issues due largely to greater risk aversion. Non-U.S. developed and emerging markets debt fell for U.S. dollar-based investors.
The Retirement 2005 Fund returned −1.25% in the quarter compared with −0.82% for the Combined Index Portfolio - Retirement 2005 Broad Index. For the 12 months ended September 30, 2014, the fund returned 7.69% versus 7.48% for the Combined Index Portfolio - Retirement 2005 Broad Index. The fund's average annual total returns were 7.69%, 8.20%, and 6.47% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.59% as of its fiscal year ended May 31, 2014.
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We changed our overweight to stocks relative to bonds to a neutral position. Stocks are broadly priced at or above historical averages across multiple measures. At current valuations, the risk/return profile for equities now appears more evenly balanced, with less expected upside support from multiple expansion and margins at peak levels. We reduced our overweight to high yield relative to investment-grade bonds amid favorable liquidity conditions, and we reduced exposure to emerging market bonds relative to U.S. investment-grade bonds and now have a neutral position. We decreased our position in nondollar bonds relative to U.S. investment-grade bonds as the U.S. dollar is supported by improving growth prospects and the potential for higher interest rates in the U.S. in 2015.
We expect modest global economic growth over the next few quarters. The U.S. economy is improving gradually, supported by diminishing fiscal headwinds, increased state and local government spending, moderate job growth, and better private sector demand. Corporate balance sheets and profits remain healthy, while revenue growth in the low to mid-single digits is consistent with modest economic growth. Japanese and European growth has moderated recently, with Europe still hindered by high debt levels, elevated unemployment, and deflation worries. Slowing growth in China, Brazil, and other emerging economies weighs on global trade. Key risks to global markets include the impacts of global monetary policy actions and growing geopolitical concerns, particularly in the Middle East and Eastern Europe.