Market Sector Update

• Concerned about a persistent inflation undershoot and downside risks from global trade, the U.S. Federal Reserve (Fed) made a notable shift from signalling a cumulative three hikes through 2020 at its December meeting to indicating only one hike (zero in 2019 and one hike in 2020) at its March meeting. Also coming as a dovish surprise to the markets was a shift in its balance sheet reduction plans, from being on “autopilot” to ending in September (monthly cap on Treasuries roll-offs will also be halved starting in May). Furthermore, the Fed seems to be more welcoming of an inflation overshoot, as several members advocated consideration of a move to targeting an average inflation rate, which will form part of the Fed’s review of its policy framework in June. Such changes in the Fed’s reaction function resulted in a significant rally in the U.S. Treasury market this quarter, especially in the intermediate part of the curve.
• Amid still weak data, the European Central Bank (ECB) also turned more dovish. At its March meeting, the ECB extended the forward guidance of no rate hike through the end of the year. Markets have also started to price in some possibility of rate cuts, after ECB President Mario Draghi talked about easing the pressures on bank profitability from negative rates, which gave rise to hopes for a tiered deposit rate system. German bunds rallied sharply in the quarter with long-dated bunds outperforming, reflecting weak data and the increasing chaos around Brexit.
• With the exception of the Norges Bank, which hiked rates in March and struck a hawkish tone (due to oil strength), the other develped market central banks have all turned more dovish. The Bank of England remained on hold, while the Bank of Canada which previously stated its desire to return to neutral policy rate, is now seeing future increases becoming “highly uncertain”.
• Despite domestic central banks turning more dovish, the generally risk-friendly first quarter sent the traditional carry/commodity currencies, such as the Canadian dollar, New Zealand dollar and Australian dollar, higher against the U.S. dollar. The traditional safe-haven currencies such as the Japanese yen and and Swiss franc unperformed.

Portfolio Strategy

• The Fund posted a positive return and outperformed its benchmark in the quarter. Our rates positions had a strong positive contribution, reflecting our long duration positions in the U.S. and Europe, as well as our flatter curve position in German bunds.
• Our spread positions, in both developed and emerging markets, also contributed positively to performance over the quarter. More specifically, in developed markets, our holdings in financials contributed the most, while in emerging markets, our holdings in Asia (Chinese corporates and India and Indonesia government and quasi-sovereigns) outperformed.
• Overall, our currency positions was a small detractor to performance for the period.

Outlook

• The first quarter of the year was dominated by downgrades to the global growth outlook and a more dovish tone by most central banks around the world. So far, financial assets have welcomed the recent central bank dovishness as long as growth remains positive. We continue to believe this mediocre growth / dovish central bank environment is very favorable for fixed income in particular credit and emerging market spreads but we are mindful that this view can be challenged by further weakness in global growth.
• We agree that in the U.S. chances are that the positive impact of last year’s fiscal package start to fade, tilting the odds towards a weaker economy. Short maturity yields in Europe discard completely the possibility of any policy normalization, which we may argue, also corresponds to concerns about Brexit and the volatile situation in Turkey. Despite all the noise around Brexit, the U.K. has moved towards trying to remove the risk of a "hard Brexit," we have then moved to underweight U.K. Treasuries and kept our long British pound positions.
• Currencies were mixed during the quarter, reflecting the Fed’s dovishness combined with the reluctance of many central banks around the world to allow their currencies to appreciate against the U.S. dollar in the face potentially weaker growth. We have then moved to reduce our duration in the Fund and have increased our U.S. dollar position in an effort to protect the Fund against another leg down in growth outside the U.S.

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 March 31, 2019, 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.

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.