U.S. high yield bonds posted solid first-quarter gains, thanks in large part to a strong rebound that began in mid-February and accelerated in March. Factors contributing to the high yield market's near-record March gain included dovish commentary from Fed Chair Janet Yellen, moderating concerns about a U.S. recession, and strong performance from commodities and commodity-related segments. The European high yield market also rallied as the European Central Bank expanded its monetary policy initiatives in March to a greater extent than was expected, and China allayed investor concerns about global growth at the G20 meeting. Although the default rate increased, cash flows into the high yield asset class and a revival in risk appetite helped generate strong gains for below investment-grade bonds.
The High Yield Fund returned 2.69% in the quarter compared with 3.11% for the Credit Suisse High Yield Index and 2.26% for the Lipper High Yield Funds Average. For the 12 months ended March 31, 2016, the fund returned −3.05% versus −4.46% for the Credit Suisse High Yield Index and −4.01% for the Lipper High Yield Funds Average. The fund's average annual total returns were −3.05%, 4.83%, and 6.48% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2016. The fund's expense ratio was 0.74% as of its fiscal year ended May 31, 2015.
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The High Yield Fund charges a 2%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
From an industry perspective, performance across the fund's holdings was strong, with solid absolute contributions from the metals and mining, consumer products, manufacturing, and retail segments. Energy was, by far, the best contributor in our comparison with the benchmark, almost exclusively due to good credit selection. On the other side of the ledger, our underweight allocation to the strong-performing metals and mining segment and credit selection in health care hurt our comparison with the benchmark index. The fund remains focused on the upper credit quality tiers of the high yield market, bonds rated B and BB. We have maintained an allocation to bank loans, which are senior in the capital structure and tend to be less volatile than high yield bonds.
The majority of companies in our market appear to be in good financial shape, and we believe that the U.S. economy will continue to generate stable, albeit modest, growth in 2016. However, we expect that defaults will continue to rise in commodity-related sectors. From a regional perspective, the fund has about three-quarters of its holdings in North American bonds and loans. We remain bullish on European high yield bonds versus their U.S. counterparts. As always, our focus in managing the fund is on delivering high current income while seeking to contain the volatility inherent in this market. Our team maintains a commitment to thorough credit research and risk-conscious investing, which has led to favorable longer-term returns for our shareholders over various market cycles.