Market Sector Update

• Despite weaker domestic and global data momentum and tighter financial conditions, the U.S. Federal Reserve (Fed) hiked policy rates in December for the fourth time this year, despite pressure from U.S. President Trump not to do so. While the hike was generally expected by the markets, the accompanying commentary was not as dovish as hoped, only slightly toning down the forward guidance, with Fed Chair Powell stating that the current policy rate is at the bottom end of their neutral range.
• Similar to the moves in the U.S. Treasury, German bunds also rallied in the quarter on a solid but declining growth outlook and subdued inflation, with curve flattening over the quarter. At the last policy meeting of the year, the European Central Bank (ECB) announced the end of quantitative easing as expected.
• As at the start of the year, spread markets closed the quarter and year on a risk-off tone, in line with the general sell-off in equities, and slowing growth expectations.
• Currency markets were mixed over the quarter as the U.S. dollar outperformed most major currencies, as U.S. growth remained on track and the U.S. Fed continued to hike policy rates. The U.S. dollar underperformed select currencies on specific country events over the quarter, such as following the dramatic rate hike of 6.25% to 25% by the Central Bank of Turkey late in the prior quarter.

Portfolio Strategy

• The Fund outperformed its benchmark in the quarter. Our rates positions strongly contributed to performance, due to our long duration positions in both the U.S. Treasury and German bunds.
• Our spreads positions detracted from performance, as our financial and insurance positions in Europe underperformed as well as some of our emerging-market hard currency positions in Latin America, the Middle East and China.
• The contribution from our currency positions was positive, due mainly to our long positions in Japanese yen.

Outlook

• There is a fair amount of agreement that emerging markets offer value, but the Fund's positioning does not reflect this view much. Regarding rates, the consensus view continues to be that not enough is priced in terms of hikes for the Fed, whereas the consensus seems to agree with pricing very few rate hikes from the ECB. Our value biases then make us more comfortable in taking spread risk in the portfolios now, and makes us more cautious about taking duration risk in Europe.
• We also believe there is now more value in the long end of the U.S. curve than in the intermediate and short part of the curve. We agree with the consensus in that there is value in emerging markets, both corporate and sovereign spreads, and selected local markets where too many rate hikes are priced in.

The opinions expressed are those of the Fund’s managers for 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 Dec. 31, 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.

Sarah Hargreaves served as a portfolio manager on the Fund until May 31, 2018.

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.