Market Sector Update

• During the quarter, the U.S. Federal Reserve (Fed) expectedly raised rates and indicated they plan on one additional rate increases in 2018. The Fed has stated they will continue on the path to unwind its multi-trillion-dollar balance sheet, which the market anticipates.
• Emerging-market growth is now under pressure from the combination of a stronger U.S. dollar and higher oil prices in the quarter. The outlook is further clouded due to aggressive U.S. trade policy and rhetoric regarding numerous nations, with China being a particular focus of escalating tariffs.
• U.S. Treasury yields continued their climb higher in the quarter. The 2-year note increased 29 basis points (bps) to 2.82% and the 10-year note rose 20 bps to 3.06%.
• Revised estimates showed second quarter gross domestic product increased at a 4.2% growth rate. This was the strongest reading since 2014. President Trump’s pro-business policies and tax cuts are credited with improving business confidence, capital expenditures and overall output. Most of the incoming economic data exhibited strength including consumer confidence and the ISM manufacturing surveys.

Portfolio Strategy

• The Fund outperformed its benchmark in the third quarter. The Fund’s rates positions detracted from performance, due to our long duration positions in both U.S. Treasuries and German bunds.
• Our spreads positions, in both developed and emerging markets, contributed positively. The contribution from our currency positions was negative, due mainly to our long positions in the Japanese yen and Argentine peso. However, our short positions in the euro and South African rand mitigated the loss to some extent.

Outlook

• The U.S. economy seems to be powering ahead, where there is mounting evidence that China and Europe peaked at some point towards the end of 2017. Our explanation is quite simply that there is a substantial divergence still in place between U.S. fiscal policy and fiscal policy in the rest of the world, which we believe is unlikely to change anytime soon.
• In Europe, the discussions continue to be around the EU members’ adherence to the Maastricht criteria, as evidenced by the recent discussions between the EU commission and the newly-formed Italian government. In China, the government is constrained by the weight of the social security deficit and the implicit liabilities the government has visa- vis the state owned enterprises and the stability critical sectors like banks and asset management companies.
• The U.S. policy mix of tight monetary policy and loose fiscal policy has favored the U.S. dollar since the second quarter of 2018. U.S. assets, except for U.S. Treasuries, have outperformed the rest of the world assets. The recent selloff in U.S. rates to 3.25% for 10-year yields confirms this bullishness on the U.S. economy. Yet, we sense the market is getting a bit ahead of itself regarding the prospects for the U.S. economy for 2019.

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 Sept. 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.

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.