Market Sector Update

• The Fund's benchmark, the JP Morgan GBI-EM Global Diversified Index, was up 2.1%, mostly from the yield. The quarter saw a substaintial drop in oil prices and rising U.S. Treasury yields until early November when the 10-year yield suddenly dropped a massive 56 basis points by year end.
• While Colombia was down 6.5% on the back of lower oil prices, Brazil gained 11.4% as Bolsonaro was elected president and was expected to be more market friendly than his main opponent, driving early gains. Mexico fell 6.5% as President Lopez-Obrador cancelled the building of a new airport; lower oil prices did not help either. Mexico hiked interest rates by a total of 50 basis points. Argentina gained 17% as the crisis subsided although growth is expected to be -3.5% for 2018. While the Polish zloty weakened, this was more than offset by bond prices as inflation unexpectedly dropped to 1.3%.
• Russia was down 4% where interest rates were hiked by 25 basis points and the conflict with Ukraine re-ignited concerns of more sanctions.
• Turkey gained 30% as the crisis subsided and inflation should benefit from lower oil prices. Indonesia gained 6% where interest rates were hiked 25 basis points. The Philippines gained 5% where the tightening policy helped the currency while inflation is now falling.

Portfolio Strategy

• Our current strategy is to move selectively overweight local rates versus previous months as most interest-rate hikes have already been priced in and real yields look attractive in a number of markets.
• A less hawkish U.S. Federal Reserve (Fed) is, of course, also a key factor. However, markets where inflation may surprise on the upside and fundamentals on the downside may result in selective opportunities to move underweight. Conversely, attractive real yields, such as in Russia, or low growth and inflation in Thailand support the potential for selected overweights.
• At the same time, we are looking to find the right entry point to selectively move overweight emergingmarket currencies that we feel were oversold during the sell-off and/or have improving growth and fundamentals. But again, the short-term outlook for global growth is less positive and this is making us more cautious.
• We expect more idiosyncratic moves this year, which will result in our implementing more relative value plays.

Outlook

• We expect to see global economic data to either flat-line or weaken. However, we believe emerging-market growth may hold up better than developed market growth, which is more late cycle.
• While U.S. growth is also expected to stop improving or decline, a less hawkish Fed could be supportive for emerging-market local rates. However, less optimism over growth is normally not supportive for currencies. President Trump’s aggressive rhetoric relating to new tariffs to Chinese exports looks to have calmed down, which is a supportive factor. Taking this all into account, we still believe the market has become oversold and may now present some very selective opportunities, especially on a relative-value basis, but timing is key.
• Relatively stable U.S. growth, underpinned by fiscal stimulus, should keep core rates well anchored, but at times volatile, putting pressure on local bond prices. Recent emerging-market currency weakness will likely lead to some higher inflation, but this risk is relatively contained given output gaps are not yet closed in most countries.
• Furthermore, the market has generally already priced in interest rate hikes in most emerging-market countries, keeping benchmark weighted forward-looking real rates at multi-year highs. This is still a sovereign investment-grade asset class, yielding around 6.5%, with potential returns from currencies.

The opinions expressed are those of the Fund’s managers regarding Class I shares 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, 2018, 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.

Effective December 2018, Wee-Wing Ting, portfolio manager, left the firm to pursue other opportunities.

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.