Market Sector Update

• Municipal market performance was primarily driven by a strong rally in the U.S. Treasury market.
• Performance was also enhanced by a continued supply/demand imbalance (albeit less extreme than the previous two quarters), as well as continued investor interest in tax-avoidance strategies linked to the cap on the state and local tax (SALT) deduction and increased foreign demand in the asset class. The Federal Reserve (Fed) has rapidly pivoted toward rate cuts, with the market now pricing in between 25 and 50 basis points (bps) of cuts by year end. Trade/tariff uncertainty, slowing global growth, as well as heightened concerns around a slowing U.S. economy were cited as key concerns.
• Interest rates declined sharply in the quarter and the yield curve flattened significantly. The Treasury market yield curve remains inverted between the 3-month bill and the 10-year note which the market is interpreting as a signal that a recession is forthcoming. We are not convinced this metric holds the same validity as in the past due to the unconventional easy monetary policy operations implemented by the Fed and other central banks in the last decade.
• Defaults in the municipal bond asset class continue to be rare. While we anticipate increased headline risk from municipal issuers that have severely underfunded pensions and other post-retirement benefit obligations, we continue to believe these problems are not systemic and they will remain isolated. However, recent weakness in U.S. economic data has elevated our level of concern.

Portfolio Strategy

• The Fund had a positive return, but underperformed its benchmark. Treasury and municipal rates remain at very low historical levels. The portfolio duration is currently shorter than our benchmark, and the portfolio is defensively structured. We will continue to look for attractive opportunities to re-invest cash flow from bond income and maturity proceeds. After falling to all-time recorded market low levels during the quarter, municipal bond rates have backed up slightly.
• We will continue to place emphasis on diversification, higher (overall) credit quality and yield curve positioning.
• We expect to see continued headlines on municipal pension underfunding and other post-retirement benefits issues. We do not believe investors are being adequately compensated for moving down in credit.We will remain vigilant in monitoring these situations and we will endeavor to avoid investments with these issuers.

Outlook

• We remain confident that municipal bond defaults will continue to be much lower than any other fixed-income alternatives except U.S. Treasuries.
• While we ultimately expect Treasury yields to be the key driver of the municipal market, we believe municipal bonds provide relative value for fixed income investors, as the market has backed up from previously stretched valuations. However, we have also experienced unprecedented cash flows into the municipal bond asset class year to date. Historically, it has been prudent to not invest aggressively at extremes. Therefore, we are exercising patience based on the belief there will be a more attractive entry point to deploy some of our excess cash.
• We enter the fourth quarter with tempered expectations. We are cautiously optimistic that a solid trade deal with China will get done which we believe will unlock restrained U.S. capital expenditures, and boost overall consumer confidence and optimism.
• Anticipated higher levels of Treasury issuance in the future to finance budget deficits, as well as a potential inflation surprise could force the Fed to temper its extremely dovish policy stance. The big wild card moving forward is the Trump presidency. Because the House of Representatives is solely focused on one issue, impeachment, we have become very pessimistic that any meaningful legislation that would spur economic growth gets addressed. A lack of resolution in the trade conflict with China or an escalation of tensions, a very messy Brexit, as well as the possibility of a policy mistake by the Fed could prove to be destabilizing.

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 Sept. 30, 2019, 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.

Diversification and asset allocation are investment strategies that attempt to manage risk within your portfolio but do not guarantee profits or protect against loss in declining markets.

All information is based on Class I shares.

Risk factors: The value of the Fund's shares will change, and you could lose money by investing. 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. The Fund may include a significant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax (AMT). Exempt-interest dividends the Fund pays may be subject to state and local income taxes. The portion of the dividends the Fund pays that is attributable to interest earned on U.S. government securities generally is not subject to those taxes, although distributions by the Fund to its shareholders of net realized gains on the sale of those securities are fully subject to those taxes. The municipal securities market generally, or certain municipal securities in particular, may be significantly affected by adverse political, legislative or regulatory changes or litigation at the Federal or state level. 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.