Market Sector Update

• The Federal Reserve (Fed) remained a dominant buyer in the U.S. Treasury, U.S. agency mortgage securities and U.S. corporate bond markets in the quarter. This was a continuation of the extreme market support it began in the second quarter. The Fed decided at its December Federal Open Market Committee meeting to continue its purchases of U.S. Treasuries at a pace of $80 billion per month and U.S. agency mortgage securities at $40 billion per month in order to maintain its accommodative monetary policy.
• The Fed’s commitment to keeping rates low has anchored the front end of the yield curve to extremely low levels. Yields on the 2- and 3-year U.S. Treasury notes barely budged in the quarter while the 10-year U.S. Treasury note rose over 20 basis points (bps) in the same period. The U.S. election, stimulus debates and effectiveness and rollout of the vaccines to fight the pandemic all contributed to the move higher in longer rates. It is interesting to note that while the yield on the 10-year U.S. Treasury moved significantly higher in the quarter, it ended the year at 92 bps, about 100 bps lower than a year ago.
• Spreads on U.S. agency mortgage securities continued to tighten in residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), as well as U.S. agency collateral mortgage obligations (CMO) asset classes. Despite the noticeable backup in longer U.S. Treasury rates, mortgage rates available to consumers remain near all-time lows. This keeps the prepayment risk high for both RMBS and for CMOs.

Portfolio Strategy

• The Fund outperformed its benchmark for the quarter. The significant move higher in rates, however, caused a negative quarterly return for both the Fund and the benchmark.
• The Fund is slightly overweight mortgage-backed securities relative to the benchmark and those generated a positive return in the quarter. We have been adding agency CMBS with good current yields and certain prepayment protection.
• The Fund’s duration decreased during the quarter to 93% of the benchmark’s duration, from 98% at the end of the third quarter, contributing to the Fund’s outperformance relative to the benchmark.

Outlook

• The COVID-19 virus is out of control in much of the U.S. at the end of the year, overwhelming the health care systems in several regions. Uncertainty is significant and will likely remain through much of the year until the virus is contained.
• President-elect Joe Biden will be sworn in as the 46th president of the United States on January 20. A high priority will be on the delivery of vaccines across the nation, as well as assisting states in the vaccination process. It is expected that the new administration will encourage more fiscal stimulus in the form of direct checks, extended unemployment insurance, rent and mortgage forbearance, help to impacted businesses, help to state and local governments and an infrastructure program.
• We will continue to look for opportunities to enhance returns in the Fund as we maneuver through the uncertainty ahead.
• We will continue to look for opportunities to enhance returns in the Fund as we maneuver through the uncertainty ahead.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Dec. 31, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

All information is based on Class I shares.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. These and other risks are more fully described in the Fund's prospectus. Not all funds or fund classes may be offered at all broker/ dealers.