Market Sector Update

• The Fund's benchmark, the JP Morgan GBI-EM Global Diversified Index, declined 10.4% in the quarter stemming from weaker bond prices. Key macro drivers included the sharp rise in U.S. Treasury yields, boosting the U.S. dollar and exposing vulnerabilities such as Argentina and Turkey.
• Added to the mix was the trade war between the U.S., China and the European Union as well as political concerns in Italy.
• Argentina declined 34% despite emergency rate hikes of 9.75% to 40%, while the government secured an International Monetary Fund loan of $50 billion. Brazil was down 16% where the central bank announced it would intervene with up to $20 billion. Mexico declined 6.6% after interest rates there were hiked by 25 basis points to 7.75% and a presidential election win by Lopez Obrador was expected.
• Colombia was down 4.2% after Ivan Duque won the presidential election, and he is considered market-friendly. Turkey declined 22% after the central bank implemented emergency rate hikes to 17.75%. S&P downgraded Turkey to BB and President Erdogan was re elected. South Africa returned -17%, with growth worse than expected at 0.8% year on year.
• The Czech Republic declined 9%, with the central bank hiking interest rates by 25 basis points. Indonesia, down 9%, hiked interest rates twice by a total of 75 basis points as it sought to act “pre emptively.” The Philippines, down 6%, hiked interest rates by a total of 50 basis points. The opposition in Malaysia won the election and the market declined 4.7%.

Portfolio Strategy

• Our current strategy is to be overall underweight local rates. We believe higher-trending global core yields and less accommodative emerging market central banks support our bias to be underweight. Markets with inflationary pressures, a hawkish bias or poor fundamentals are prime candidates for active underweight local rate positions.
• We believe Malaysia and Czech Republic are two key examples. At the same time we are looking to find the right entry point to selectively move overweight emerging-market currencies that were oversold during the sell-off and/or have improving growth and fundamentals.
• We also continue to look at opportunities to be underweight certain currencies. We expect more idiosyncratic moves this year, which will result in our implementing more relative value plays. For example, we are more likely to be positive in the Mexican peso as risks are already priced in versus the Brazilian real as we believe investors are underestimating the risks.

Outlook

• There are several macro, geopolitical and emerging-market drivers, which sparked a sell-off in April, extending into June. However, we still believe the market has become oversold and may now present selected opportunities.
• Strong U.S. growth, underpinned by fiscal stimulus and higher oil prices should keep core rates well anchored and 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 is pricing in interest-rate hikes in most emerging-market countries, keeping benchmark-weighted forward looking real rates at multi-year highs. We believe this means that most bad news-flow has already been priced in. However, we expect some currencies to face further stress such as the Turkish lira and Brazilian real.
• As a region, Asia is more manufacturing-export-driven, which could help it outperform other regions if global data improves. This is still a sovereign investment-grade asset class, returning more than 6.5% with potential returns from currencies, so it remains one of the most attractive asset classes versus other fixed-income alternatives over the long term in our opinion.

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 June 30, 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.

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.