Calendar year 2013 saw the largest corporate debt issuance in history, and both investment-grade and high-yield corporate issues continued to enjoy robust demand in the fourth quarter. Driven by a search for yield in the low interest rate environment, investors continued to find corporate debt attractive and credit spreads narrowed. U.S. company balance sheets remain in good shape, with a record amount of cash on their books. While leverage has been rising over the past year, record low interest rates have kept the interest cost at exceptionally low levels, providing investors comfort that they will be repaid in a timely manner.
Against this backdrop, the Funds return of 0.76% for the quarter outperformed the benchmark. The largest contributor to performance came from security selection, as Fund holdings appreciated significantly more than those held in the benchmark. The Funds overweight positions in corporate bonds and commercial mortgage-backed securities and underweight positions in residential mortgages and U.S. Treasuries were also significant contributors. The largest detractor from performance relative to the benchmark was the positioning of assets along the yield curve.
If you're a conservative, income-oriented investor who wants higher current income than that generally offered by the U.S. Government Fund and you're willing to assume moderately more risk in exchange, you may find this Fund suitable. This Fund can also be an appropriate choice for investors who want to broaden and diversify their fixed income portfolio.
- Invest primarily in investment-grade domestic debt obligations with an average maturity, under normal circumstances, between three and 15 years, but may own, to a limited extent, securities of foreign issuers and non-investment-grade debt.
- 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, mortgage-related and corporate securities) that we believe have the potential to provide a favorable return.