The Fund returned 0.29% in the first quarter and outpaced its benchmark. The largest contribution to the outperformance came from an overweight to corporate bonds. We also added value through security selection, as corporate holdings in the Fund appreciated significantly more than those represented within the Index. Our generally long duration relative to the benchmark during the quarter detracted from performance.
We continue to believe that corporate bonds with five- to 10-year maturities offer significant value in the low interest rate environment that we expect will continue for the next several years. We believe corporations are in excellent financial condition, having used the low interest rate environment of the past several years to refinance their balance sheets. However, the uncertain economic backdrop is making corporate leaders reluctant to make additional investments in their businesses, with the result that corporations are holding a large amount of cash. This set of circumstances provides fixed-income investors with additional assurance that their investments will be repaid.
A key aspect of our positive view of global economic growth has been the seemingly unending monetary policy accommodation in developed economies. Within the United States, the Federal Reserve has now made further policy accommodation contingent on inflation holding below 2.5% and unemployment remaining above 6.5%. While the Fed believes that their recent statement is consistent with a previous assertion that rates would remain at low levels until mid-2015, it also subjects the Fed to the risk of conjecture by market watchers if either variable closes in on these targets.
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.