The makeup of global economic growth underwent a shift in 2013. Large emerging economies, whose rapid growth over the past few years had been vital to struggling developed economies, have slowed. On the other hand, growth in the developed world has begun to accelerate. During the last quarter, the United States registered modest growth and low inflation, while data indicated that the eurozone is continuing to recover from the longest recession since its monetary union was formed in 1999.
Bond market performance was volatile during the quarter, driven by fears the Federal Reserve would taper its quantitative easing program. Despite the Feds stated desire for transparency regarding its monetary policy, investors struggled to understand future plans for the central banks asset purchase program. The Fed surprised the markets at its September meeting when it downgraded its forecast for economic growth for 2013-2014 and did not announce any tapering. In addition, the Feds statements show that it believes the federal funds rate could stay lower for much longer than investors have anticipated. These developments led to lower yields across the bond market during the latter portion of the quarter.
The Fund returned 0.62%, outperforming the 0.40% return of its benchmark. An overweight to corporate bonds and an underweight in U.S. Treasuries made the largest contributions to performance. Security selection also added value, as holdings in corporate bonds appreciated significantly more than those in the Index.
If you are an income-oriented investor who is looking to diversify your investments by gaining broad exposure to the U.S. bond market, through shorter-term maturities, then this Fund may be right for you. It offers a diversified portfolio of bond securities invested primarily in U.S. investment-grade debt.
- Invest primarily in domestic investment-grade debt obligations with an average maturity, under normal circumstances, between one and three years.
- Buy and sell securities using a relative value approach that employs models that analyze and compare expected returns and assumed risks.
- Emphasize securities and types of securities (such as Treasury, agency, asset-backed, mortgage-related and corporate securities) that we believe have the potential to provide a favorable return.