Market Sector Update

• The Fund's benchmark, the JP Morgan GBI-EM Global Diversified Index, weakened by 0.8% in U.S. dollar terms over the quarter.
• Argentina dropped 60% following a shock presidential primary election leading to currency controls and heightened default risk. Brazil fell 5% despite good progress on pension reform, while bond prices gained given 75 basis points (bps) in interest rate cuts. Mexico gained 2.4% where 50 bps in interest rate cuts drove local bond prices more than offsetting a weaker currency.
• Russia gained 1% with 50 bps in interest rate cuts propelling local bonds and offsetting a weaker currency. Despite Turkey’s contraction in growth, local bonds gained 19% as interest rates were slashed by 325 bps to 16.5%. South Africa fell 6.3% despite energy reforms and plans to cut government budgets as low growth and inflation persist.
• Thailand gained 6.8%, and interest rates were cut by 25 bps. Indonesia gained 1.9% from local bond prices as subdued inflation and lower growth momentum resulted in 75 bps in interest rate cuts. Malaysia gained 0.8% given a dovish central bank. The Philippines gained 3.2% on the back of 75 bps in interest rate cuts.

Portfolio Strategy

• The Fund posted negative performance and underperformed the benchmark for the quarter. Our current strategy continues to be overweight local rates where we believe yields look attractive and/or the central bank has a dovish bias, or where the yield curve is steep. The quarter saw 56 interest rate cuts by central banks globally versus only six interest rate hikes.
• While we continue to look for the right entry point to selectively move overweight emerging market currencies, lackluster global growth and trade wars means we are being very selective and careful with the timing. For example, the Fund is currently overweight the Russian ruble and Mexican peso, but underweight the Romanian leu and Chilean peso.

Outlook

• Dovish central banks and a data dependent U.S. Federal Reserve has introduced more volatility to the asset class, but is generally supportive for emerging market local rate markets. We expect global growth to remain weak, but believe emerging market growth will hold up better than developed market growth, which is more late cycle.
• While less optimism over growth is normally not supportive for currencies, a favorable growth differential – currently at around 2% in favor of emerging market growth – should be supportive, while valuations look appealing compared to their long-term equilibrium levels. At the same time, we expect the U.S. dollar to remain range bound unless we see a big risk-off event.
• We believe emerging market inflation remains low on average and the outlook remains favorable given output gaps are not yet closed in most countries and are actually widening again. In local rates, we see selected Asian countries, Mexico and Russia with a dovish bias offering opportunities to remain overweight as key examples.

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, 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.

The JP Morgan GBI-EM Global Diversified is an unmanaged index that tracks the performance of emerging market debt. It is not possible to invest directly in an index.

All information is based on Class I shares.

Risk factors: As with any fund, 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. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. 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, especially securities with longer maturities. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may seek to manage exposure to various foreign currencies, which may involve additional risks. The value of securities, as measured in U.S. dollars, may be unfavorably affected by changes in foreign currency exchange rates or exchange control regulations. Investing in foreign securities involves a number of risks that may not be associated with the U.S. markets and that could affect the Fund’s performance unfavorably, such as greater price volatility; comparatively weak supervision and regulation of securities exchanges, fluctuation in foreign currency exchange rates and related conversion costs, adverse foreign tax consequences, or different and/or less stringent financial reporting standards. Sovereign debt instruments are also subject to the risk that a government or agency issuing the debt may be unable to pay interest and/or principal due to cash flow problems, insufficient foreign currency reserves or political concerns. Risks of credit-linked notes include those risks associated with the underlying reference obligation, including but not limited to market risk, interest rate risk, credit risk, default risk and foreign currency risk. The buyer of a credit-linked note assumes the risk of default by the issuer and the underlying reference asset or entity. If the underlying investment defaults, the payments and principal received by the Fund will be reduced or eliminated. Also, in the event the issuer defaults or there is a credit event that relates to the reference asset, the recovery rate generally is less than the Fund’s initial investment, and the Fund may lose money. The use of derivatives presents several risks including the risk that fluctuation in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. Moreover, some derivatives are more sensitive to interest rate changes and market fluctuations than others, and the risk of loss may be greater than if the derivative technique(s) had not been used. Derivatives also may be subject to counterparty risk, which includes the risk that a loss may be sustained by the Fund as a result of the insolvency or bankruptcy of, or other non-compliance by, another party to the transaction. These and other risks are more fully described in the Fund's prospectus.