Market Sector Update

• High yield bond spreads came under modest pressure in the second quarter amid increased volatility in equity, Treasury and oil markets.
• Primary topics in the market included investor concerns related to U.S. trade policy and the potential impact on global growth expectations.
• On the Central Bank front, we saw a Federal Open Market Committee meeting that leaned slightly hawkish. While the European Central Bank announced it would end its bond purchase program by the end of 2018, they also signaled that any interest rate hike was still distant.
• The option-adjusted spread on the Bloomberg Barclays U.S. Corporate High Yield Bond Index started the quarter at 354 basis points, traded as tight as 314 in early April, then widened to end the quarter at 363, nine basis points wider overall.
• Treasury rates traded higher with the curve flattening. The 5- and 10-year Treasury rates traded 18 and 12 basis points higher, respectively. The technical backdrop for high yield remains supportive. So far this year, issuance is down by approximately 25% compared to this same period last year and net issuance is actually negative.

Portfolio Strategy

• Lower quality assets outperformed higher quality assets during the reporting period. According to Bloomberg Barclays data, BB-rated bonds returned -0.17% while single-B rated bonds returned 1.42% and CCC-rated bonds generated a total return of 2.87%.
• Relative performance was attributable mainly to strong security selection, although sector selection did have a positive, yet smaller, impact on results.
• From a sector selection standpoint, the portfolio benefited from underweight allocations to banking and consumer cyclical areas, as well as an overweight allocation to energy. These contributions more than offset the negative impact of an overweight allocation to other industrials and an underweight allocation to consumer non-cyclical sectors.
• Contributions from credit selections were broad based across the majority of sectors. Most notable were contributions from credits in the communications, energy and consumer cyclical segments of the market. These contributions more than offset the detracting impact of credit selection in the technology, real estate investment trust and finance company sectors.

Outlook

• Earnings season was very good, with energy, basics, industrials and technology leading the pack. The market also got positive surprises from several situations where expectations were low. We anticipate continued positive comparisons for the remainder of the year.
• Technical conditions remain quite volatile session-to-session, with light issuance and investors’ buying dips remaining constant. The pace of issuance may pick up in the second half of 2018 now that managements have digested the impact of the tax reform bill and the AT&T/Time Warner deal seems to have greenlighted merger and acquisition deals.
• Fund flows remain bound by trade war fears and commodity price movement. From a valuation standpoint, spreads remain range bound, trading around a current 63 basis point option-adjusted spread, which approximates fair value. We see the potential for spreads to trade through fair value due to earnings strength and lack of primary issuance.

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, 2018, 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 Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded.

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.