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Market environment continued to improve
Just one year ago, investors were digesting the Lehman Brothers collapse — one event among many notable structural changes in the financial marketplace and in a climate in which the credit markets had effectively closed for business. Fast forward to September 2009. Yield spreads have tightened considerably because of ongoing government intervention to remove illiquid assets from bank balance sheets. New issuance has turned a corner and seen a healthy pickup in 2009. Risk aversion has abated and an appetite for risk has taken hold over the course of these past several months. Spread compression this quarter was greater for securities rated at a lower tier in credit quality. By many accounts, it seems that the economy’s slide has been checked, with muted or rising indicators signaling that we may be in the initial stages of a recovery (albeit a slow and sluggish one). Thus far, the Federal Reserve Board has indicated that it will not move the target rate from the zero-to-0.25% range at any point in the near term.
Treasury yields decreased across all maturities in the third quarter, despite the continued massive supply of Treasury debt to fund the Treasury department’s unprecedented spending in response to the financial crisis.
In this environment, the fund solidly outperformed its benchmark, the Barclays Capital U.S. Aggregate Bond Index, which returned 3.74%.
Emphasis on spread sectors aided returns; security selection in CMBS detracted1
The fund’s bias toward spread sectors helped results overall. In particular, the fund’s stake in investment-grade bonds drove returns for the period. An overweight in financials, mainly banks and insurance, as well as natural gas pipelines also proved favorable.
Security selection among commercial mortgage-backed securities (CMBS) slightly hampered performance. The fund holds seasoned, conservative CMBS securities, which were issued when underwriting standards were less lenient. Newer production loans, underwritten in 2006 and 2007, fared better relative to some of the fund’s securities. Lower-quality BBB-rated CMBS outperformed higher-quality AAA-rated securities.
Market Outlook
In light of the fact that the Federal Reserve Board has already purchased $830 billion of agency MBS, on its way to $1.25 trillion, we believe that the sector as a whole is rich. We see better risk/reward opportunities in the other two securitized sectors, most notably CMBS. We also remain positive in our outlook for certain areas within the corporate bond market.
Performance data quoted represents past performance, and current performance may be lower or higher. Past performance is no guarantee of future results.
Please read and consider the investment objectives, risks, charges and expenses for any fund carefully before investing. For a prospectus, which contains this and other important information about the fund, contact your Columbia Management representative or financial advisor or go to www.columbiamanagement.com.
The Barclays Capital U.S. Aggregate Bond Index is a market-value-weighted index that tracks the daily price, coupon, pay-downs and total return performance of fixed-rate, publicly placed, dollar-denominated and nonconvertible investment-grade debt issues with at least $250 million par amount outstanding and with at least one year to final maturity. It is unmanaged and unavailable for investment.
Unlike mutual funds, indices are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index.
Effective November 3, 2008 the Lehman indices were renamed Barclays Capital indices.
1Determinations of contributors and detractors are based on performance relative to the fund’s benchmark.
Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that the forecasts will come to pass. The views and opinions expressed are those of the portfolio managers and analysts of the affiliated advisors of Columbia Management Group, are subject to change without notice at any time, may not come to pass and may differ from views expressed by other Columbia Management associates or other divisions of Bank of America. These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security or sector.
There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. It should not be assumed that any securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions made in the future will be profitable or will equal the investment performance of the securities discussed herein.
Columbia Management Group, LLC (“Columbia Management”) is the investment management division of Bank of America Corporation. Columbia Management entities furnish investment management services and products for institutional and individual investors. Columbia Funds are distributed by Columbia Management Distributors, Inc., member FINRA and SIPC. Columbia Management Distributors, Inc. is part of Columbia Management and an affiliate of Bank of America Corporation. |