Market Sector Update

• Despite extreme equity volatility in January, led by a number of heavily shorted stocks, the high yield market posted a modest positive total return. Main drivers for performance in the month were continued vaccine rollout, better than anticipated earnings, and optimism around additional fiscal stimulus due to Democrats gaining full control of Congress. In addition, central banks continued to provide support and indicated that their accommodative measures will remain in place for the foreseeable future. Investors also had to contend with technical headwinds during the month as strong primary issuance was met by the second consecutive month of outflows from high yield mutual funds and ETFs, as well as the further spread of COVID-19 and additional shutdown measures.
• The high yield asset class provided a positive total return overall for February, but it was a tale of two halves during the month. The asset class continued January’s trend and rallied in the first half of the month before sharply higher U.S. Treasury rates trimmed some of the earlier gains. This trend continued in March with high yield bonds again providing a modest positive total return. U.S. Treasury rates continued to spike amid expectations of a declining pandemic, rising commodity prices and a larger fiscal package from Congress leading to stronger growth and inflation in 2021 and 2022. Technical headwinds continued throughout the quarter as primary issuance remained strong in February and March, while high yield mutual funds and ETFs continued to report outflows.
• Gross new issue activity totaled $158.6 billion during the quarter, the highest total quarterly issuance on record. High yield mutual funds and ETFs reported outflows of $10.2 billion in the period. The high yield asset class has now seen four consecutive months of outflows. The par-weighted U.S. high yield default rate including distressed exchanges ended March at 5.37%, which is 139 basis points (bps) lower than the start of the year. First quarter default and distressed volume was the lowest since the third quarter of 2018.
• 5- and 10-year U.S. Treasury rates traded 58 bps and 83 bps higher, respectively. The option-adjusted spread (OAS) on the Bloomberg Barclays U.S. Corporate High-Yield Bond Index traded 50 bps tighter during the quarter to end at 310 bps, as U.S. Treasury rates moved sharply higher in February and March. The U.S. dollar strengthened during the quarter, increasing 3.66%.

Portfolio Strategy

• According to Barclay’s data, Ba-rated bonds returned -0.15%, while single-B rated bonds returned 1.16% and Caarated bonds returned 3.58%.
• The Fund returned low-single digits during the quarter, outperforming its benchmark. Security selection and sector selection contributed to performance during the quarter.
• From a security selection standpoint, holdings in the capital goods, communications and finance companies sectors were the most notable contributors, more than offsetting detractions from holdings in energy and consumer cyclical.
• From a sector selection standpoint, overweight allocations to the transportation and energy sectors and an underweight allocation to the communications sector contributed to performance, while an overweight allocation to the electric sector and the cash position detracted from performance.

Outlook

• Heightened inflation fears have driven U.S. Treasury rates sharply higher in March. The 5- and 10-year Treasury rates are now trading at levels not seen since early 2020. Amid rising rate concerns from retail investors, we have seen continued outflows from high yield mutual funds and ETFs.
• From a fundamental standpoint, fourth-quarter 2020 earnings seem positive across the board, with good guidance. Many cost cuts appear permanent, and outlooks foresee decent demand. Travel and leisure and commodity-sensitive credits are outperforming expectations. Despite the potential for disappointment in the pace and quality of improvement being priced into markets, the path for fundamentals is positive.
• Spreads are fair in the near term, though the view on 2021 is that total returns will be positive on an absolute basis and quite attractive relative to the other options. BB and single-B credits, which are more duration sensitive, still look attractive once interest rates settle. While we see the potential for U.S. Treasury rate volatility to pressure higher quality and longer duration segments of the high yield market along with the larger capital structures that make up the largest holdings in ETF vehicles, we see many attractively priced issuer specific opportunities.

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, 2021, 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.

The Bloomberg Barclays U.S. Corporate High-Yield Index measures the U.S. dollar-denominated, high-yield, fixed-rate corporate bond market. It is not possible to invest directly in an index.

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. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. 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. 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. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. 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. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.