U.S. stocks capped a strong year with robust fourth-quarter gains as the economy strengthened and the Federal Reserve's announcement that it would begin tapering its asset purchase program in January 2014 removed uncertainty from markets. European stocks also rose, benefiting from signs of a nascent economic recovery, while gains for Japanese stocks were modest after an otherwise excellent year. Emerging markets equities were mixed as Asian markets advanced and Latin American shares declined. U.S. investment-grade bond returns were also mixed as longer-term interest rates increased. High yield bonds decisively outperformed high-quality issues, helped by favorable corporate fundamentals, demand for yield, and lower interest rate sensitivity. Bonds in developed non-U.S. markets rose modestly but were outpaced by U.S. dollar-denominated emerging markets bonds.
The Retirement Income Fund returned 3.41% in the quarter compared with 3.23% for the Combined Index Portfolio - Retirement Income Broad Index. For the 12 months ended December 31, 2013, the fund returned 9.15% versus 9.22% for the Combined Index Portfolio - Retirement Income Broad Index. The fund's average annual total returns were 9.15%, 10.37%, and 5.82% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.57% as of its fiscal year ended May 31, 2013.
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We favor stocks versus bonds but reduced our overweight during the period. Recent stock price gains have been driven mainly by multiple expansion rather than earnings growth. Nevertheless, stocks remain reasonably valued and offer dividend yields that are competitive with bond yields. We trimmed our overweight to emerging markets (EM) stocks. Over the long term, however, many EMs should benefit from healthier fundamentals, and their recent underperformance underscores their attractive valuations. We increased our overweight to high yield relative to investment-grade bonds, favoring the yield advantage and lower sensitivity to interest rates provided by the high yield sector. We reduced our underweight to nondollar bonds as the U.S. dollar is supported by good growth prospects and the potential for higher interest rates.
We expect modest global economic growth over the next few quarters. The U.S. recovery is supported by a housing recovery, decent job growth, muted energy prices, and relative accord in government fiscal policy. Europe appears to be on the road to economic recovery, while growth-oriented policies have provided a positive jolt to Japan's economy. However, policymakers in Europe and Japan must still address fiscal imbalances and important structural reforms. Emerging markets offer compelling valuations after recent underperformance, but prospects are mixed between countries due to divergent fundamentals. China seems to be stabilizing at lower, more sustainable growth rates as the economy transitions to a consumer focus, but an incremental approach to reforms may hinder growth in the coming years.