The market's alternating responses to incoming economic data and Fed statements drove interest rates higher across the short-term bond market over the fourth quarter. The bond market, which expected a Fed move at its September meeting, rallied after the central bank paused to assess global uncertainties. Bond prices then fell and rates moved higher in expectation of a December rate hike, which arrived on December 17 when the Fed increased its rate target for the first time in nine years.
The Ultra Short-Term Bond Fund returned −0.17% in the quarter compared with −0.02% for the Barclays Short-Term Government/Corporate Index. For the 12 months ended December 31, 2015, the fund returned 0.41% versus 0.26% for the Barclays Short-Term Government/Corporate Index. The fund's 1-year and Since Inception (12/03/2012) average annual total returns were 0.41% and 0.32%, respectively, as of December 31, 2015. The fund's expense ratio was 0.45% as of its fiscal year ended May 31, 2015.
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Rising rates and widening spreads contributed to lower prices on portfolio holdings. These negatives were only partially offset by higher income levels. Spreads on the fund's structured product holdings moved wider. These AAA and AA rated asset-backed securities (ABS) comprise consumer, auto, and mortgage loans.
Looking forward, we believe that the ultra-short strategy will offer incremental returns over money funds, while mitigating some of the downside a rising rate environment might present to longer-term bond strategies. We expect that the pace of further Fed rate hikes will be moderate as the central bank will be careful to monitor and consider the impacts of its moves before taking subsequent steps. With the Fed tapping on the brakes, the current cycle of expansion and profit builds will slow, further pressuring credit spreads. Still, a gradual pace of rate increases will present the opportunity to add yield into the portfolio, offsetting some of the potential price declines.