Market Sector Update

• The tentative signs of growth recovery saw earlier this year seems to have run out of steam over the quarter. Not only has the escalation of the U.S. and China trade tensions contributed to the worsening in business sentiment, it has also seemed to have affected the mood among U.S. consumers. Employment growth has also slowed and so has inflation.
• Amid increasing market expectations of rate cuts, the Federal Open Market Committee (FOMC) delivered a dovish message in June. They dropped the “patient” stance from the policy statement, replacing it with an assurance to “act as appropriate” on the back of global growth concerns and muted inflation. They also signaled a strong bias to lower rates this year, although it may not be as imminent and as large as expected by markets.
• Spread products in Europe, in particular peripheral sovereigns and European subordinated banks, were the two best performers this quarter as the European Central Bank (ECB) was preparing markets for additional asset purchases. Renewed trade tensions and lower oil prices pushed emerging market spreads wider in May. However, spreads tightened back in June after seeing lower bond yields, a depreciating U.S. dollar, higher oil prices as well as an agreement between the U.S. and China on resuming trade talks.
• The safe haven currencies of the Japanese yen and the Swiss franc were among the best performing currencies this quarter, with most of the gains seen in the “risk-off” environment in May. On the other hand, the “risk-on” proxies of the Australian and the New Zealand dollar underperformed. The British pound was one of the worst performing currencies this quarter reflecting Prime Minister Theresa May’s resignation in May and the top Prime Minister candidates’ harder Brexit stance.

Portfolio Strategy

• The Fund posted a positive return and outperformed its benchmark in the quarter. Our rates positions, specifically our long duration positions in the U.S. and Germany, were the primary positive contributors to performance. Our spread positions, in both developed and emerging markets, also contributed positively to performance.
• In developed markets, our holdings in European banks, insurance and properties contributed the most, while in emerging markets, our hard currency sovereign holdings in the Middle East, North Africa and Europe performed the best.
• Overall, our currency positions had a broadly neutral contribution to performance for the period.

Outlook

• In the aftermath of the re-initiation of the trade talks between the U.S. and China, markets have breathed a sigh of relief, having feared a trade war that could have toppled the global economy into recession. Global manufacturing and capital expenditure have been weak and central banks seem to be willing to ease policy again to avoid a more protracted slowdown. We believe inflation provides the perfect excuse to ease, as it peaked in the second half of 2018.
• After the Trump administration managed to re-stimulate the economy last year with a fiscal package, we believe everybody else wants to follow suit, the main condition is that monetary policy remains loose so yield rises and currency appreciations do not offset the effects of the additional government spending.
• We have reduced our exposure to the front end of the U.S. curve as we believe the market was too quick to price rate cuts by the U.S. Federal Reserve in July, although we still believe the Fed will start cutting rates in September.

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 June 30, 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.

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.