Market Sector Update

• The second quarter ended with a return of the markets to a sense of normalcy as lock-down restrictions began to ease with businesses re-opening to varying degrees. While the measures to open up economies were welcomed, regional spikes in infection rates caused restrictions to be re-imposed, particularly in the U.S.
• Protests on race relations continued in the U.S., although at lower levels of violence than previously seen, and becoming a growing part of the upcoming U.S. election rhetoric. Meanwhile in the U.K., the June 30 deadline for extending the transition period for the country to leave the European Union (EU) passed, putting a ‘hard Brexit’ back in the headlines as trade negotiations stalled. In Europe, the European Council Summit ended without an agreement on the EU recovery fund. Commitment to assist the virus-impacted countries remained firm, as Germany assumes the rotating six-monthly presidency of the EU on July 1. In China, a sweeping new national security law was imposed on Hong Kong, prompting outcries over civil liberties and renewing tensions with the U.K. and the U.S.
• The accommodative stance of central banks continued during the quarter as the dramatic rates cuts earlier in the year were followed by unlimited asset purchase programs and numerous emergency lending programs aimed at supporting a wide range of asset classes.. The Bank of Japan and Bank of England both announced fresh stimulus programs to aid in the recovery of their economies, noting caution on the pace of any rebound.
• In the U.S., positive news on the economy came from improving manufacturing and services data. Jobs data improved by quarter-end, albeit from a weakened and low base. Nevertheless the U.S. Federal Reserve (Fed) expressed concerns over the economy at its June meeting, keeping the U.S. Fed Funds rate unchanged at 0-0.25% as expected, and indicating that rates will remain near zero through 2022.
• Credit markets were well-supported over the quarter as central bank bond purchase schemes were expanded, particularly in the U.S. The Fed announced plans to purchase individual corporate issues versus just exchange-traded funds. Credit spreads continued to compress over the quarter as this central bank support gave impetus to continued inflows into the corporate debt market which was also technically supported by lack of secondary supply in the markets. High yield credit, supported by better energy prices, was the strongest sector over the quarter, as increased issuance was met with investor demand along with central bank support.

Portfolio Strategy

• The Fund performed strongly over the quarter, recouping the drawdown from the first quarter. Rates contributed positively as our long duration position in both U.S. Treasuries and German bunds benefitted from the continued accommodative monetary policies. Peripheral sovereigns performed well on strong European Central Bank (ECB) support. Overall, risk assets performed well during the quarter, particularly our hard currency emerging market sovereign and corporate positions. China property bonds were the strongest emerging market corporate contributors, while in developed markets, our financial and energy positions performed well. Currency positions, primarily our basket of short emerging market currency holdings, detracted from performance.
• In rates, we increased overall portfolio duration during the quarter. In Europe, we kept our overall long duration exposure in the eurozone steady. We closed our long Norway and reduced our position in Sweden, as spreads versus Germany were tighter. In the U.S., we increased overall duration, adding to U.S. Treasury intermediate maturities via options. We added to our long China duration position.
• In credit, we continue to trade into higher quality issuers in the new issue market when levels are believed to be attractive and liquidity is available.

Outlook

• After a record-breaking quarter, the dynamics of the markets have not changed much: governments and central banks continue to pump spectacular amounts of money into the economy, households and corporations continue to save most of that cash, worried about the economic situation and the spread of the virus. This in turn is propping up markets in the search for yield. Investors continue to be cautious, given the growing disconnect between market valuations and the economy. We believe those are the necessary ingredients for a continued risk rally as more and more investors begin to chase market returns.
• Besides the risks of another lockdown, renewed diplomatic tensions between China and the U.S., U.K. or Australia, there is also a risk of another fiscal/monetary policy combo in the U.S. as COVID-19 thwarts the opening up of the economies in Texas, California, Florida and Arizona. There is also a risk that the EU agrees on a fiscal plan for the most affected areas of the EU in their upcoming summit. Therefore we judge the risks fairly balanced currently in markets.

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, 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.