U.S. stocks posted solid first-quarter returns, although large-cap equities notably underperformed small- and mid-cap companies. Non-U.S. developed market stocks generated gains for U.S.-based investors even after accounting for the marked strengthening in the dollar. In general, emerging markets equities lagged the returns of non-U.S. developed markets. U.S. Treasuries were volatile but finished with gains, marking the fifth consecutive quarter of positive returns for U.S. government debt. The Federal Reserve prepared markets for an eventual interest rate increase, which appears likely to take place sometime later this year. The U.S. dollar's strength also hurt the returns on most non-U.S. dollar-denominated debt for U.S.-based investors. However, dollar-denominated emerging market bonds generated solid gains.
The Global Allocation Fund returned 3.27% in the quarter compared with 1.73% for the Morningstar Global Allocation Index. For the 12 months ended March 31, 2015, the fund returned 5.94% versus 3.50% for the Morningstar Global Allocation Index. The fund's 1-year and Since Inception (05/28/2013) average annual total returns were 5.94% and 7.71%, respectively, as of March 31, 2015. The fund's expense ratio was 1.88% as of its fiscal year ended October 31, 2014.
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With the ability to position the portfolio according to our views on economic and market conditions, we maintained a neutral allocation of approximately 60% in stocks and 30% in bonds and cash. Stocks are broadly priced at or slightly above historical average valuation levels. We expect moderate returns from bonds as the current low-yield environment remains a headwind. We added to our modest overweight in international equities, which could benefit from more accommodative central bank policies outside the U.S. We increased the fund's overweight to high yield bonds based on the sector's attractive yields and added to the allocation in locally denominated debt. The fund includes a position in a hedge fund of funds that seeks to improve risk-adjusted returns; this allocation helped the fund's performance relative to the benchmark during the quarter.
Diminishing fiscal headwinds, improving private sector demand, and moderate job growth should continue to support U.S. economic activity. While growth in Japan remains tepid, there are signs of economic improvement in Europe. The European Central Bank's aggressive quantitative easing measures and a weaker euro should provide support for strengthening in the eurozone, although high debt loads and elevated unemployment still hinder many countries in the region. There is considerable variation in economic growth across emerging markets, and further declines in energy prices could widen that disparity. While the pace of the strengthening in the U.S. dollar is likely to moderate in the short term, the prospects for Fed rate increases should continue to support the dollar in the longer run.