Uncertainty about the timing and extent of changes in Federal Reserve policy dominated investor thinking during the quarter. Earlier confusion about when the Fed would begin to taper its asset purchase program kept investors somewhat divided over the course of the central bank's policy. In December, however, the Fed indicated that it would gradually begin to unwind its monthly asset purchases beginning in January, but it is likely to keep short-term rates low a while longer. As a result, the fed funds rate remained anchored around 0%, where it has been for some time.
The Ultra Short-Term Bond Fund returned 0.07% in the quarter compared with 0.03% for the Barclays Short-Term Government/Corporate Index. For the 12 months ended December 31, 2013, the fund returned 0.28% versus 0.25% for the Barclays Short-Term Government/Corporate Index. The fund's 1-year and Since Inception (12/03/2012) average annual total returns were 0.28% and 0.27%, respectively, as of December 31, 2013. The fund's expense ratio was 0.61% as of its fiscal year ended May 31, 2013.
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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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Our investments during the quarter were focused on building a broadly diversified portfolio of investment-grade corporate bonds. Corporate issuers currently represent almost two-thirds of the fund's holdings. Average credit quality remains strong at around A+. Our preference has been toward adding floating rate bonds with maturities in the one- to three-year range as protection against rising interest rates, and these bonds now represent about 30% of the portfolio. Single-A issuers seem to offer the best opportunity to pick up yield without compromising credit quality, and accordingly, they constitute close to half of our holdings.
The next six months should bring greater clarity to our economic outlook, Fed policy intentions, and the market's reactions to tapering. We believe rates will eventually move higher, and the pace and extent of those rate increases will be in response to the strength of the economy. For investors requiring liquidity but despairing of money market rates that are likely to remain unchanged for an extended period, the fund presents a good alternative. For investors concerned about outsized market reactions to shifts in Fed policy, the fund's defensive characteristics could make it an ideal place to ride out the uncertain environment.