Market Sector Update

• The high yield municipal curve performed well during the quarter. The long end of the curve, notably maturities greater than 20 years, benefitted the most as the Federal Reserve (Fed) indicated it will not raise rates in 2019 and expects only one more increase in this tightening cycle. Overall, we believe the short and long ends of the municipal curve are richly valued relative to Treasuries.
• Puerto Rico bonds strengthened during the quarter with mid-to-high single digit returns due to the restructuring of the island’s sales-tax-backed debt. We continue to be wary of these bonds as additional restructurings will need to proceed through bankruptcy courts, which could take years. We still believe Puerto Rico bonds are “dead money,” meaning investors will receive no income from the bonds for the foreseeable future. We would be remiss to pursue an investment with a high likelihood of offering no income.
• While debt issuance was higher in the first quarter than a year earlier it remained lower than historical norms. We are confident that supply should rise materially over the remainder of the year.
• The rally in rates during the quarter has led us to become less constructive on the high yield municipal space as new issues come to market with historically low absolute yields and weak collateral for investors. Broadly, we have turned more bearish on the credit market as spreads hover near the lows of 2007.

Portfolio Strategy

• The Fund returned low-single-digits during the quarter, but underperformed relative to its benchmark. Fund’s underweight to the tobacco sector detracted from performance. Several tobacco refundings are on the calendar and we will look to add attractive opportunities at discounts to par.
• The Fund has been reducing exposure to non-rated bonds. At the end of the quarter, exposure to non-rated bonds was 27%. Non-rated bond spreads are at record lows, so we feel it is prudent to own more liquid rated bonds in order to provide us the opportunity to exploit any credit widening.
• Approximately 3% of non-rated bonds in the Fund are pre-refunded, which means while non-rated the bonds are highly liquid. In total, the portfolio holds more than 9% of pre-refunded bonds, which affords ample liquidity to exploit investment opportunities as they arise. We plan on continuing to hold more than 9% of the Fund in pre-refunded bonds as a source of additional liquidity moving forward.
• We continue to favor revenue bonds over tax-backed debt. We think revenue bonds provide higher yields and better diversification from the general tax and pension issues currently affecting many municipalities. While general obligations have favored well in Chapter 9 bankruptcies, this trend changed post-Detroit and we expect the same outcome in the Title IV filing in Puerto Rico.

Outlook

• We believe the strength in the high yield municipal market should continue in the near term as inflows along with low levels of issuance continue to generate positive results. We believe demand for municipal bonds will stay consistent with normal levels, but one significant outlier would be additional issuance caused by a large infrastructure bill passed by Congress.
• We will look for opportunities with more defensive structures as interest rates continue to hover near historically low levels and credit spreads remain tight. We believe it makes sense to remain shorter duration relative to the benchmark as the sector seems fully priced.
• We expect the Fed to remain on the sidelines for the remainder of the year. We are concerned about potential global trade wars with China and the European Union and the impact on the global economy. On a positive note, with the government shutdown over, we expect second-quarter gross domestic product to rebound slightly.
• We will continue to monitor how tariffs and the one-year threat of closing the southern border might cause the Fed to reassess current interest rate policy. With the Fund’s duration at 49% of its benchmark, we feel appropriately structured to weather the impact of a long trade war and potential border closure.
• We believe investors will continue to search for tax-exempt yield even after the tax legislation was passed. We view the tax cuts as favoring lower income brackets, but with the top tax rate at 37% we believe municipal bonds remain highly attractive.
• Going forward, we believe supply should increase about 20% from 2018 levels; however we believe the demand is strong enough to handle the increase. One growing concern is the consolidation of assets into a select few high yield municipal bond funds. With three firms controlling a significant percentage of high yield municipal assets, a potential market disruption may cause an issue if investors decided to redeploy capital into other asset classes. We feel if that was to occur we are well positioned to redeploy capital at more attractive spreads and lengthen duration quickly.

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 March 31, 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 is an investment strategy that attempts to manage risk within your portfolio but it does not guarantee profits or protect against loss in declining markets.

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.