U.S. stocks posted decent gains in a volatile first quarter. Shares fell in January as the Federal Reserve began to taper its asset purchases but rebounded in February amid favorable U.S. economic data and good corporate earnings. Equities fell in March due to geopolitical tensions in Ukraine and signs of a slowdown in China. Non-U.S. developed markets stocks registered more modest gains, while emerging markets equities declined slightly. Domestic bonds generated good returns. In the investment-grade universe, long-term Treasury bonds performed best, and municipal bonds enjoyed a strong quarter. Corporate bonds also did well, while high yield bonds generated strong returns. Non-U.S. developed markets debt rose modestly but was outpaced by U.S. dollar-denominated emerging markets bonds.
The Retirement 2050 Fund returned 1.38% in the quarter compared with 1.61% for the Combined Index Portfolio - Retirement 2050 Broad Index. For the 12 months ended March 31, 2014, the fund returned 19.24% versus 17.58% for the Combined Index Portfolio - Retirement 2050 Broad Index. The fund's average annual total returns were 19.24%, 20.22%, and 6.07% for the 1-, 5-, and Since Inception (12/29/2006) periods, respectively, as of March 31, 2014. The fund's expense ratio was 0.78% 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.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
We favor stocks versus bonds but reduced our overweight. Recent equity gains have been driven mainly by multiple expansion rather than earnings growth. Nevertheless, stocks remain reasonably valued overall, and the current low-yield environment is less favorable for bonds. Outside the U.S., we increased our focus on value versus growth stocks as many non-U.S. economies are in earlier stages of economic expansion, which should support value as economic growth and earnings improve. We continue to favor the yield advantage and lower duration profile provided by high yield bonds but reduced our exposure in light of favorable liquidity and pricing. We lowered our exposure to nondollar bonds as the U.S. dollar is supported by good growth prospects and the potential for higher interest rates.
We expect modest global economic growth over the next few quarters. The U.S. recovery is supported by improved housing and labor markets, muted energy prices, and diminished fiscal headwinds. Economic data suggest that Europe's shallow economic recovery will continue, helped by the gradual easing of austerity measures, supportive monetary policy, and positive impacts from the U.S. recovery. Japan's stimulative policies have breathed life into the economy, but sustainability will depend on more challenging structural reforms. Emerging markets remain vulnerable to rising U.S. interest rates, with nations highly dependent on external funding most at risk. Healthy balance sheets and cash flows may allow corporations to increase capital expenditures, engage in mergers and acquisitions activity, and return capital to shareholders.