Market Sector Update

• The Fund's benchmark, the JP Morgan GBI-EM Global Diversified Index, fell by 15.2% in U.S. dollar terms over the quarter.
• The increasing global impact of COVID-19 became the primary driver contributing to a collapse in oil prices and a rush towards safe-haven assets. Emergency interest rate cuts by the U.S. Federal Reserve (Fed) and other major central banks along with quantitative easing and stimulus measures were implemented.
• There were more than 90 interest rate cuts by central bank across the globe. All of this was supportive leading to some stabilisation in the last few days of March. Brazil and Colombia each fell 21% while Mexico dropped 19%.
• Chile fell 14% and Peru only 6%. Russia was down 21% where the collapse in oil prices was a key factor. Turkey declined 10% where oil prices should be beneficial. Hungary declined 13% partly from local bond prices as inflation pressures have been growing. South Africa fell 29% where, in a widely expected move, their rating was downgraded given vulnerable economic dynamics. Asia held up better, though Indonesia with its large budget deficit was an exception, down 18%. China gained 2% all from local rates while Malaysia and the Philippines were each down around 4%.

Portfolio Strategy

• The Fund posted negative performance and underperformed its benchmark index for the quarter. Selected overweights to local rates continues to be a key strategic theme for the portfolio. We like markets where the yield curve is too steep, there is solid domestic investor demand, after inflation yields are attractive and the central bank is dovish or at least on hold.
• Taking into consideration the liquidity of these markets is also a key criteria. Local rate overweights in Mexico, Russia and China are key convictions. Conversely, we believe there are some opportunities for underweights, such as Hungary, as inflation pressures are building. We will also look for underweight opportunities in countries we believe have deteriorating fundamentals and environmental, social, and governance (ESG) factors.
• In terms of emerging market currencies, we believe valuations look even more attractive and it is not clear that the U.S. dollar will continue to strengthen. We believe it is more likely to weaken as COVID-19 curves flatten and markets stabilise. But currencies are not necessarily a mean reverting asset class and if a particular currency looks cheap, it may be for very good reasons. So while we are seeking to be overweight, selection and timing is critical while we are also looking at specific relative value trades.

Outlook

• The negative impact of COVID-19 will likely continue for months, impacting both global demand and supply chains and increasing the likelihood of a global recession this year, but with the potential of a ‘V’ shaped recovery.
• This environment is unique as it’s the first time we have had a combination of a severe global health pandemic, a collapse in oil prices and a financial markets shock. Countries heavily dependent on oil exports and those not well prepared for an outbreak of COVID-19 are countries we are monitoring very closely.
• Major global central banks have acted like never before to support markets in both monetary and fiscal ways and we believe this will now help provide an anchor for the asset class.
• We believe most emerging market countries still have high real rates and further room to use the traditional means of cutting interest rates, making selected local rate markets still attractive, particularly after recent moves. Emerging markets allowed their currencies to be the natural pressure release valve with very limited use of their foreign reserves to support their currencies as in some previous crises. The result is that emerging market currencies are now at multiyear lows, but we need to see a flattening in the COVID-19 curve in the most heavily impacted countries, a genuine peak in market volatility and more constructive investor sentiment before underlying fundamentals start to feed through again.

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, 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.