Market Sector Update

• The Fund's benchmark, the JP Morgan GBI-EM Global Diversified Index, returned 9.8% in U.S. dollar terms over the quarter, staging a sharp recovery from earlier losses this year.
• The unprecedentedly large and rapid monetary and fiscal stimulus packages put in place by major economies led to a stabilisation in market sentiment, initially through improving liquidity conditions and declining volatility and more recently seeing follow-through in stronger activity data, fuelling expectations for a solid global growth rebound and boosting asset prices strongly.
• Despite negative flows driving foreign participation in emerging market local markets to new lows, local rates performed strongly as domestic players became increasingly involved in light of the policy and inflation outlook.
• CThe total return rebound observed over the quarter was well spread across countries and regions with notably robust performance from high real rate countries such as Indonesia, Russia, Colombia, Mexico and South Africa.

Portfolio Strategy

• The Fund posted positive performance and outperformed its index over the quarter with strong performance from the local rates and off benchmark hard currency exposures and small positive contribution from currency exchange where a bout of U.S. dollar strength at the end of the quarter eroded some of the gains made in earlier months.
• On the local rates side, overweight positions to local rates and bonds in Russia, Mexico and Colombia were notable contributors to performance. The timing and curve positions in South African local rates was also a solid contributor over the quarter, where our more constructive view based on valuations and central bank support added to performance.
• Main detractors to performance over the quarter were our underweights in Brazil, where we felt that the fiscal situation and very easy monetary stance warranted caution. In Asia, our overweights to Thai rates also detracted from performance where steepening pressure hurt our positioning.
• Our positions in currencies added to performance, predominantly in the first two months of the quarter but gave back some of the gains in June, as the U.S. dollar strengthened on market concerns about a pickup in COVID-19 infections globally. Longs in the Mexican peso, Russian ruble and proxy positions in the Australian dollar contributed positively, fuelled by signs of a robust global growth recovery.
• The main detractor was our underweight in Turkish lira, where concerns regarding persistent currency intervention against a precarious reserves position was cause for the team’s negative view and underweight.

Outlook

• While the negative impact of COVID-19 is likely to remain with us for some time, structurally shifting the way supply and demand channels operate, the unprecedented wave of stimulus in the form of a powerful cocktail of monetary and fiscal easing delivered by global central banks will continue to support markets and financial conditions in the months ahead.
• The encouraging activity trends we are currently observing signal a further strengthening of growth at a global level, with regions such as Asia and Europe somewhat ahead, validating the optimism we have seen in markets.
• While risks of further waves of the pandemic remain in the background and can lead to bouts of volatility, we believe the bar for full scale lockdowns is very high and as such the potential for disruption is more limited. That said, the recovery is unlikely to be linear – after an impressive rebound in the second quarter and a likely continuation of this trend over the summer, the pace of incremental improvement is likely to slow as economies and balance sheets need time to heal.
• We believe this will necessitate keeping monetary policy and liquidity loose for an extended period of time providing a strong anchor for emerging market bonds. While the easing cycle in emerging markets is likely near its end as central banks are approaching their effective lower bound, the extended clarity on the outlook for interest rates from the likes of the U.S. Federal Reserve combined with the structurally lower inflation and currency passthrough observed across our universe will allow emerging market central banks to follow suit, keeping monetary policy loose for much longer.
• On the currency side, we see the medium-term support for the U.S. dollar as having eroded materially and as such remain constructive on emerging-market currencies which we expect will benefit from a revival of external demand, better external positions and a healthier capital flow picture. We are however mindful that virus related uncertainties are likely to lead to periodic bouts of U.S. dollar strength that we seek to navigate.

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 June 30, 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 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.

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.

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.