Market Sector Update

• In a month that changed the world, March 2020 ended the first quarter of the new decade with record amounts of monetary and fiscal stimulus, global travel bans, spiking unemployment rates and a sharp downturn in global growth. As the COVID-19 virus was officially declared a global pandemic, world governments imposed lock down or ‘shelter from home’ measures to contain the spread of the virus. Workers adjusted to working from home or lost their livelihoods altogether, and the subsequent economic impact was quickly felt. Adding to the uncertainty, Saudi Arabia and Russia engaged in a price war over oil output, prompting oil prices to collapse to a 17-year low mid-March.
• Investors rushed to raise cash, resulting in equity and bond markets declines and volatility rising to levels last seen in the 2007-2009 crisis. The increased regulations on market makers arising out of last decade’s crisis resulted in those same players unable to provide the liquidity needed in this crisis. U.S. Treasuries sold off as market participants sold to meet redemptions or cover losses. When trading conditions in the most liquid bond market in the world, the $18 trillion U.S. treasury market, started deteriorating, the U.S. Federal Reserve (Fed) quickly and aggressively stepped in. In one month and two rate cuts, the Fed slashed rates to zero, opened up its balance sheet by broadening its asset purchase program, and opened swap lines to provide more foreign banks greater access to the U.S. dollar. The U.S. government also passed a $2 trillion stimulus program aimed at providing relief to individuals and business impacted by the economic fall-out from the virus. Other central banks and governments in both developed and emerging countries also cut rates and provided monetary and fiscal support packages of various degrees.
• Risk aversion dominated investor sentiment as the quarter ended, with U.S. Treasuries the clear safe haven asset of choice. Developed market sovereigns performed strongly with the U.S., followed by Sweden and Canada. European governments, with negative rates and fewer policy tools available, lagged, with the periphery governments of Italy and Spain underperforming.
• Developed and emerging market spread markets suffered as concerns over the pending global downturn were compounded by the extreme lack of liquidity and volatile prices. Risk premiums, reflected in credit spreads, were wider in both cash and indices as credit markets priced in the possibility of a global recession. Both investment grade and high yield sold off across all sectors, as investors looked to raise cash and de-risk on concerns of ratings migrations and potential defaults. Trading in credit was effectively frozen, both in cash bonds and indices, until central banks expanded their asset purchase programs.

Portfolio Strategy

• The Fund underperformed its benchmark over the quarter. Positive contribution from rates and currencies was pulled down by spread, which detracted in all sectors. Our long bias in our dollar bloc was positive, primarily from U.S. duration but also Canada, as well as our long Norway. Our France versus bund spread widener position performed well, while our peripheral spreads tightening position (in Italy and Spain) had a small detraction over the quarter. Our long U.S. dollar and short emerging market currencies contributed strongly.
• Safe haven currencies like the yen, euro and Swiss franc had a broadly neutral contribution this quarter.
• Spread in both developed and emerging markets strongly underperformed over the quarter across all sectors, reflecting the dislocation seen in the credit markets and not necessarily reflecting underlying credit fundamentals of individual issuers. In developed markets, financials, consumer cyclicals and energy underperformed the most along with real estate in Asia.
• Over the quarter, we kept portfolio duration largely the same, but re-allocated the composition of our duration, favoring U.S. Treasuries being the deepest, most liquid bond market, and mainly in intermediate maturities. We reduced our long positions in Norway back into bunds and reduced our long in Canada, both profitably after their central banks cut rates and launched quantitative easing (QE).

Outlook

• What initially was a liquidity crisis triggered by the breakdown of the negotiations between Saudi Arabia and Russia became a solvency crisis as many countries went into complete lockdown as the COVID-19 virus spread around the world. Central bank QE and liquidity injections worth in 2020 close to 10% of the major countries gross domestic product (GDP) may go a long way to solve the liquidity vacuum, keeping in mind that the banking sector’s capacity to extend that liquidity to markets and the broader economy had been greatly diminished since the Global Financial Crisis (GFC). It will take some time for the liquidity to reach the lower rated areas of the bond market and consumers in particular. The lockdown implies that whole industries have had to stop operating but continue to shoulder the burden of their fixed costs, with the airline industry and the leisure and hospitality sectors as perfect examples of this.
• In this case, we believe fiscal policy is a more effective tool to support these industries, as it buys time for these industries to continue operating. But this support is limited by the capacity of governments to issue debt and is limited in time and scope. The best governments can hope for is to ease the burden on the health systems and envisage for a return to more normal economic conditions in 3-5 months time. That is why it is so hard to assess the depth of this economic downturn. What we can say is that so far, it is similar in terms of the drop in GDP to the GFC but in a much faster and concentrated period.

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.

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. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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.