Market Sector Update

• The first quarter of 2021 marked the one-year anniversary of the COVID-19 pandemic, with success on the vaccine rollout in some countries contradicted by a third COVID-wave and rising death tolls in other countries. After a tumultuous start, the U.S. government transitioned to a new administration which has prioritized vaccinations and expansive fiscal stimulus programs to spur economic growth. In Europe, caution on vaccine approval and procurement and another wave of variant outbreaks led to verbal vaccine wars with the U.K., internal strife among member states on allocations, and renewed lockdowns. Global supply chains were interrupted when a massive container ship became wedged in the Suez Canal, totally blocking one of the world’s busiest trading waterways for almost a week. Inflation expectations rose, leading to a poor first quarter for bond markets, similar in scope to the taper tantrum of 2013 but without the accompanying volatility.
• The U.S. Treasury market had one of the worst quarterly performances in decades as the yield curve sharply bear steepened (long-dated maturities rising more than short-dated maturities). The benchmark 10-year yield ended the quarter at 1.74%, close to pre-pandemic levels, having started 2021 at below 1%. The accelerating pace of the vaccine rollout in the U.S. implied a quicker economic recovery and potential inflation, prompting selling from so-called bond vigilantes.
• The European Central Bank (ECB) reaffirmed its accommodative stance by keeping monetary policy unchanged, but yields in the eurozone sold off in line with U.S. rates, but without the justification of pending economic recovery. The ECB accelerated the weekly pace of its bond buying program. Short-dated yields were anchored but longer-dated German bund and peripheral yields nevertheless rose, with longer-dated bund yields pulling out of negative territory.
• Developed market (DM) sovereigns, particularly peripheral Europe, sold off in line with general inflation concerns, despite the lack of any signs of sustained economic recovery. In DM corporates, focus also shifted to growth and inflation concerns.
• Currency movements over the quarter were ultimately driven by the outlook for the U.S. economy. After the Democrats gained control of the U.S. Senate at the beginning of the year, the expectation of more fiscal stimulus and better COVID-19 management led to markets pricing in higher yields and tighter U.S. Federal Reserve (Fed) policy.

Portfolio Strategy

• The Fund underperformed its cash benchmark over the quarter. Our rates positions were the strongest detractors to performance, primarily due to our long U.S. duration, held in long-dated maturities. Our long German bund duration also detracted, with negative contribution as well from our long duration in Australia, Norway and Canada. Our spread positions were positive.
• Currency positions were positive contributors to performance with positive contribution from our euro versus U.S. dollar shorts and our emerging market currency shorts in Asia, Latin America and in the Middle East. Our short pound and long yen detracted over the quarter.
• Over the quarter, we reduced duration in an attempt to stabilize the portfolio, primarily in the U.S., keeping our bias in long-dated U.S. Treasuries and increasing our curve flattener position. We increased duration in the eurozone slightly.

Outlook

• As the Fed’s positive growth and inflation scenario is pretty much priced in by the market, the global rates market has found some stability. We believe this environment should continue to prevail in the absence of meaningful developments in the virus situation or the geopolitical environment which remains tense in many areas of the world. Not surprisingly, investors have turned to spread again to generate returns and stable rates should support this trend at least for the moment. Most debate in markets centers around inflation overshoot concerns and how soon will the Fed be ready to start tightening policy. We feel this debate might be a bit premature.
• Given that optimism dominates global markets, we feel that some mild caution over the next few months is warranted as some of that optimism gets re-assessed. Flattening curve positions should do well if growth is too strong that the market brings forward rate-hike expectations or if inflation expectations fail to materialize. Given the U.S. centric nature of this recovery, we believe having an allocation to U.S. dollars versus emerging market currencies makes sense. Emerging markets finds itself in a tricky position as higher rates in the U.S. and a higher U.S. dollar makes financing costs more expensive even in local currency. If the spill-over effects of this U.S. recovery fail to be strong enough to pull emerging market growth, a weaker currency is the only way to alleviate this already difficult situation.

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, 2021, 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.

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.