U.S. stocks fell in the third quarter amid worries about a China-led global economic slowdown and concerns about the wider impact of looming Federal Reserve interest rate hikes. Energy and materials stocks, many of which are tied to slowing Chinese demand and a stronger U.S. dollar, were particularly weak. Non-U.S. developed markets stocks trailed U.S. shares, while emerging markets equities lagged with steeper losses. U.S. investment-grade bonds posted modest gains, benefiting from increased risk aversion. Non-U.S. developed markets debt gained modestly in U.S. dollar terms but lagged U.S. investment-grade debt, while emerging markets bonds fell for the period as most currencies weakened against the U.S. dollar.
The Global Allocation Fund returned −6.32% in the quarter compared with −5.54% for the Morningstar Global Allocation Index. For the 12 months ended September 30, 2015, the fund returned −2.48% versus −4.36% for the Morningstar Global Allocation Index. The fund's 1-year and Since Inception (05/28/2013) average annual total returns were −2.48% and 3.14%, respectively, as of September 30, 2015. The fund's expense ratio was 1.88% as of its fiscal year ended October 31, 2014.
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Diversifying allocations to fixed income sectors not present in the portfolio's benchmark weighed on results. Against the backdrop of a broadly risk-averse environment, exposure to high yield bonds, dollar-denominated emerging markets debt, and emerging markets debt denominated in local currencies hurt performance. Security selection within our equity portfolios also weighed on results, especially international growth equities and U.S. large-cap stocks. Exposure to alternative investments had little net impact as the negative exposure to the broad hedge fund asset class was offset by our inclusion of a diversified conservative hedge fund-of-funds that outperformed.
The U.S. economy should remain resilient in the face of slowing growth overseas, with support from consumer spending and fading headwinds from weakness in the energy sector. Second-quarter economic growth was revised upward to an annualized 3.9%, with 2016 estimates in the 2.0% to 2.5% range. Low wage pressures plus falling commodity prices will likely keep inflation moderated, giving the Fed the option to delay normalization of monetary policy if financial conditions worsen. Outside the U.S., growth expectations are mixed, with developed markets gradually improving while major emerging markets, including China, Russia, and Brazil, are weighing on global growth. Global market volatility may increase in response to concerns over growing signs of weakness among emerging markets economies and falling commodity prices.