The Federal Reserve remained in the spotlight, as investors expected the central bank to begin winding down its quantitative easing (QE) in September. Interest rates increased in anticipation of Fed tapering, triggering a sell-off among rate-sensitive assets. But, the Fed ultimately decided not to taper its QE program, and the financial markets generally rallied on the news. Overall, strong stock returns in July and September offset negative results in August, and the quarter ended with positive returns.
The Income Equity Fund posted a total return of 4.23% for the quarter, compared with 5.24% for the Funds benchmark, the S&P 500® Index. The Funds underperformance primarily was due to exposure to interest-rate-sensitive stocks and to company selections within the equity allocation. Overall, company selections in the consumer discretionary, healthcare and information technology sectors detracted from relative performance, while selections in the energy, telecommunications services and industrials sectors contributed. The Funds convertible securities generally performed in line with the benchmark, benefitting from the broad stock market rally.
The Fund continues to seek equity-like returns with more income and less volatility than the benchmark and low turnover. Convertible securities are important equity substitutes and help us achieve these objectives. Nevertheless, the supply of the
high-quality convertibles we prefer remains relatively low. Therefore, we continue to invest more heavily in large-cap common stocks, particularly companies with attractive dividend payments. These stocks generally lagged non-dividend-paying stocks during the quarter, given their sensitivity to rising interest rates.
Looking ahead, we will continue to focus on company selection with consistent emphasis on valuation. Security selection between stocks and convertibles will remain a secondary consideration. Due to our investment discipline and an expected further reduction in the convertibles universe, it will be challenging to maintain the Fund's current convertible allocation.
If you are a moderate-risk investor looking for a relatively high level of current income, but don't want to forego the capital appreciation potential of the stock market, you may like this Fund.
- Select securities with the potential to generate high current yields, such as dividend-paying common stocks, preferred stocks and convertible securities, as well as selected fixed income securities.
- Maintain a conservative, broadly diversified portfolio of companies with strong prospects for growth and appreciation potential.
- Analyze the upside/downside ratio of individual securities in relation to the underlying stocks in an effort to identify those issues that are priced to have more exposure to the upside.