The third quarter saw significant volatility in bond yields. The United States continued to show modest growth, with strong results in key sectors such as autos and housing, accompanied by low inflation. For much of the period, interest rates rose driven by fears that the U.S. Federal Reserve would soon begin tapering their bond purchases under quantitative easing. Despite the Feds stated desire for transparency surrounding monetary policy, investors struggled to understand plans for its asset purchase program and benchmark federal funds rate.
At its September meeting, the Fed surprised investors by failing to announce a tapering in its bond purchase program and downgrading the forecast for economic growth for 2013 and 2014. In addition, the Feds forward guidance indicated an expectation for the federal funds rate to remain at very low levels for much longer than investors had been anticipating. The Feds weaker outlook and signaling of a continuation of extremely accommodative policies led to lower yields across the interest rate curve as the quarter closed.
The Fixed Income Funds return of 0.71% for the quarter outperformed its benchmark. An overweight position in corporate bonds and an underweight to U.S. Treasuries made the largest contributions to performance. Our fundamental research added value through security selection as well, as corporate holdings in the Fund appreciated significantly more than those held in the Index. The Funds yield curve positioning relative to the benchmark during the quarter represented the largest detractor from relative performance.
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.