U.S. stocks rose modestly for the quarter as a strong rally in the latter half of the period erased earlier losses. Worries that a slowing global economy might drag the U.S. down caused markets to get off to a poor start in 2016. However, market sentiment rebounded in mid-February amid higher oil prices and improved U.S. economic data. International developed markets stocks fell in the period, but emerging markets stocks gained. The U.S. dollar weakened against several major currencies, boosting equity returns for U.S. investors. Domestic fixed income securities produced positive returns, as intermediate- and long-term Treasury yields declined. High yield bonds produced good returns amid reduced risk aversion and rebounding commodity prices in the latter part of the quarter. Government bonds in developed non-U.S. countries produced strong returns, as did emerging markets debt.
The Global Allocation Fund returned 0.67% in the quarter compared with 2.44% for the Morningstar Global Allocation Index. For the 12 months ended March 31, 2016, the fund returned −2.80% versus −1.30% for the Morningstar Global Allocation Index. The fund's 1-year and Since Inception (05/28/2013) average annual total returns were −2.80% and 3.89%, respectively, as of March 31, 2016. The fund's expense ratio was 1.35% as of its fiscal year ended October 31, 2015.
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Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
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We have a neutral position in stocks versus bonds. Equity markets rallied from their mid-February lows, but earnings growth has fallen. As a result, valuations are modestly above historical averages, with less support from earnings and revenue growth and declining margins. Within equities, we continued to reduce our underweight allocation to U.S. small-cap stocks as relative valuations have moved broadly in line with U.S. large-caps after a prolonged period of small-cap underperformance. We expect modest returns from bonds as the current low-yield environment offers a weak foundation and rising interest rates should be a headwind when they occur. Within fixed income, we increased our diversifying exposures to high yield and emerging markets bonds.
Our global growth expectations remain modest as weak global trade and lower commodity prices weigh on global economies. The U.S. Federal Reserve downgraded its economic growth and inflation expectations for 2016 while remaining committed to interest rate policy normalization at a "gradual" pace. Central bank policies in Europe, Japan, and some emerging markets continue to diverge from the U.S. as they implement quantitative easing measures and negative interest rates to stimulate growth. Key risks to global markets include the impacts of global monetary policy actions, including the potential adverse consequences of negative interest rates on banking sector profitability, increased currency volatility, and political and policy uncertainties facing many countries already weighed down by weaker growth.