Market Sector Update

• Central banks continued to be in the spotlight this quarter, with the U.S. Federal Reserve (Fed) cutting rates twice totaling 50 basis points (bps). The European Central Bank (ECB) announced a rate cut of 10 bps and a restart of openended quantitative easing. The People's Bank of China also delivered on market expectations by cutting the reserve requirement ratio amid a slower economy and heightened trade uncertainties with the U.S.
• Italian sovereign spreads were the star performer this quarter, returning 6.6%. The fear of a standoff between Italy and the European Union abated after the formation of a pro-European government in early September. Spreads further benefitted from the restart of ECB quantitative easing and tightened to levels close to those last seen before the Italian crisis in May 2018. Fear of a recession in the U.S., the reluctance for further rate cuts by the Fed and heavy corporate issuance weighed on U.S. credit.
• In emerging markets, more central banks – in particular the commodity exporters – joined the wave of a global easing cycle this quarter. Fiscal expansion was also delivered in a few Asian economies, such as South Korea, India, Indonesia and Thailand.
• Despite the Fed rate cuts, the U.S. dollar outperformed major developed maraket currencies and almost all major emerging market currencies this quarter. Developed market currencies, such as the Norwegian krone and Swedish Krona, were among the worst performers, while the New Zealand dollar suffered from the central bank’s surprising 50- bp rate cut in July and from still-sliding business confidence.

Portfolio Strategy

• The Fund posted a positive return and outperformed its benchmark for the quarter. Our rates positions, specifically our long duration positions in the U.S. and Germany, were the primary positive contributors to performance.
• Our spread positions had a broadly neutral contribution to performance this quarter, as the positive performance in July and September was offset by the negative performance in August.
• Our developed market sovereign positions contributed, reflecting our 30-year Italian versus Germany bond spread tightening position. Our developed market credit positions had a small contribution, coming mainly from our European subordinated financials and insurance positions. Our emerging market positions detracted from performance, coming mainly from emerging market local rates. Emerging market hard currency positions had broadly neutral performance this quarter.

Outlook

• The global economy has been dragged down over the last year by the manufacturing sector. So far the drag has not translated into weakness in the services and retail sector, which continue to support the U.S. economy. We continue to believe the bigger risk for our portfolio is the U.S. decelerates and moves closer to recession.
• The trade war and the continuous deceleration of the Chinese economy leave Europe and most emerging markets in a fairly vulnerable position. Fiscal policy may come to the rescue, but only in countries that have room and are credible to increase spending without exerting too much pressure on the rates or the currency.

All information is based on Class I shares.

Risk factors: 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. Mortgage-backed and asset-backed securities in which the Fund may invest are subject to prepayment risk and extension risk. The Fund employs investment management techniques that differ from those often used by traditional bond funds, including a targeted return strategy, and may not always perform in line with the performance of the bond markets. The Fund is also non-diversified and may hold fewer securities than other funds and a decline in the value of these holdings would cause the Fund's overall value to decline to a greater degree than a more diversified fund. The Fund expects to use derivatives in pursuing its investment objective. 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. These and other risks are more fully described in the Fund's prospectus.