Market Sector Update

• High yield spreads rallied in the first quarter along with most other risk asset classes.
• Investor sentiment improved amid a backdrop of progress on U.S.-China trade talks, stable or better than expected corporate earnings releases and, most importantly, a dovish pivot from U.S. Federal Reserve (Fed) Chairman Jerome Powell and the Federal Open Market Committee (FOMC).
• In contrast to Chairman Powell’s December statement that the Fed’s balance sheet wind-down was on “autopilot,” he reversed course in January by reassuring investors that the central bank would be flexible with respect to all policy measures, including the timing and magnitude of the balance sheet runoff. Subsequently, FOMC statements dropped any bias towards hiking rates and added the word “patient” providing further assurance of a dovish stance.
• 10-year Treasury rates rallied 28 basis points (bps) during the quarter while the option-adjusted spread on the Bloomberg Barclays U.S. Corporate High-Yield Index rallied 135 bps.

Portfolio Strategy

• The Fund outperformed its benchmark during the quarter. Outperformance was primarily due to security selection with sector selection having a small negative impact.
• From a security selection standpoint, the most notable contributions came from holdings in the communications, technology and basic industry sectors. These contributors more than offset the negative impact from holdings in the energy sector.
• From a sector selection standpoint, a small cash position and an underweight allocation to the consumer non-cyclical sector detracted from performance. These detractors more than offset contributions from overweight allocations to finance companies and government-owned names.

Outlook

• We continue to monitor four important factors when evaluating the most attractive risk/reward opportunities: credit fundamentals, future Fed action, the macroeconomic environment and corporate earnings.
• Credit fundamentals generally remain solid, and spreads continue to be attractive versus other fixed income alternatives. Spreads are trading in the 350-400 bps range, which implies a default rate of approximately 2%. We believe valuations at this level are fair, but unlikely to tighten further on a relative basis, as loans remain wide of 400 bps.
• The Fed’s new dovish tone could be favorable across U.S. fixed income this year, as it is now indicating that it will be patient with further monetary tightening unless warranted by an uptick in growth or inflation. Although the Fed continues to see favorable growth and a strong labor market ahead, it also has acknowledged the risk increase for a less favorable outlook.
• We continue to see relatively low odds for a U.S. recession this year, though a few macro indicators are flashing subtle warnings. Low sovereign rates globally and flat yield curves suggest reasons for caution.
• Primary issuance has picked up, but we believe the market still is better bid. However, recent equity-linked weakness and CCC underperformance indicate that the positive technical environment may reverse quickly.

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, 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.

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.

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.