High yield bonds posted third-quarter losses as nearly every sector in the high yield universe declined. The steepest sell-offs were in the energy and metal and mining sectors, which combined represent about 20% of the high yield market. In aggregate, higher-quality below investment-grade bonds held up better than lower-quality issues. The default rate rose to 2.3% in the period from 1.9% at the end of June but remained well below the long-term average of 3.9%, based on J.P. Morgan data. A modest $60 billion of high yield bond new issuance came to market in the quarter, with strategic merger and acquisition activity accounting for about 70% of the volume.
The High Yield Fund returned −5.19% in the quarter compared with −5.17% for the Credit Suisse High Yield Index and −4.48% for the Lipper High Yield Funds Average. For the 12 months ended September 30, 2015, the fund returned −3.43% versus −3.96% for the Credit Suisse High Yield Index and −3.77% for the Lipper High Yield Funds Average. The fund's average annual total returns were −3.43%, 6.05%, and 6.68% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.74% as of its fiscal year ended May 31, 2015.
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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.
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.
The portfolio's relative returns benefited from its below-benchmark allocation to the energy and metals and mining sectors. Security selection in the energy and services sectors also contributed to relative performance. However, credit selection in metals and mining, information technology, and utilities hurt relative results. In an effort to dampen the portfolio's volatility, we have reduced our exposure to CCC rated holdings. We also increased its allocation to bank loans, which are senior in the capital structure and tend to be less volatile than high yield bonds, and European high yield, which has been supported by the eurozone's quantitative easing (QE) program. The portfolio remains focused on the upper credit quality tiers of the high yield market (bonds rated B and BB).
The U.S. economy generated solid second-quarter economic growth, which should help to support the domestic high yield market. In a positive for European high yield bonds, European economic growth is also improving, thanks in part to the European Central Bank's aggressive QE program. However, we remain cautious in the near term as defaults could continue to rise in the energy and coal segments. That being said, we do not foresee a broad-based meltdown in the high yield asset class. As always, our focus is on delivering high current income while seeking to contain the volatility inherent in this market.