Market Sector Update

• High-yield bonds generated strong returns during the quarter as trade tensions eased, fears of slowing global growth abated and developed market central banks continued to engage in the next phase of stimulus. The Federal Reserve (Fed) made an anticipated 25 basis points (bps) cut at its October 2019 meeting, the third cut in as many meetings, lowering the federal funds target range to 1.50%-1.75%. It also began expanding its balance sheet.
• Growth in Asia appears to have stabilized as many central banks eased policies. The U.S. economy rose by a betterthan- expected 1.9% in the third quarter of 2019, while the strong consumer remained strong.
• Progress of a phase one trade deal between the U.S. and China improved investor sentiment during the quarter. This year’s high-yield performance trend of higher quality credit outperforming lower quality continued in October and November, but notably reversed in December with lower quality assets outperforming by a relatively large margin.
• In previous months, the high-yield market had diverged into two distinct segments. Large and liquid BB-rated credits were trading at, or near, post-crisis tight spread levels, while smaller and generally more cyclical B-rated names traded at relatively wide spread levels. In December, the difference in performance between BB, B and CCC-rated credits narrowed. Notable was the outperformance of generally more cyclical and commodity-related energy and metals and mining areas. By the end of the quarter, U.S. Treasury rates pushed towards the top end of recent trading ranges, while the Federal Open Market Committee refreshed its dot plot signaling no rate action in 2020 with the potential for one rate hike in 2021.
• The 5- and 10-year U.S. Treasury rates traded 15 bps and 25 bps higher during the quarter, respectively. The optionadjusted spread (OAS) on the Bloomberg Barclays U.S. High Yield Index traded wider in October, but spreads rallied in November and December moving the spread tighter 37 bps to end the quarter at 336 bps.
• High yield mutual funds and ETFs reported inflows of $3.6 billion in the quarter. Inflows totaled $19.3 billion in 2019.

Portfolio Strategy

• The Fund had a positive return, but underperformed its benchmark. Security selection contributed to performance during the quarter, while sector selection detracted. From a security selection standpoint, holdings in the communications and technology sectors were the largest contributors, more than offsetting detractors in the energy and capital goods sectors. From a sector selection standpoint, the cash position was the most notable detractor, with an underweight allocation to the energy sector also detracting, while overweight allocations to finance companies and basic industry sectors contributed.
• By rating, Ba-rated bonds returned 2.45%, while single-B rated bonds returned 2.61% and Caa-rated bonds returned 3.74%.

Outlook

• Developed market central banks reversed course in 2019 and engaged in additional stimulus. The European Central Bank reintroduced its asset purchases, along with a rate cut, while the Fed enacted its ‘mid-cycle’ adjustment of three 25 bps rate cuts. Despite concerns relating to economic weakness and absence of inflation, we believe central banks will prefer to refrain from any additional rate cuts as long as currency levels remain stable and political risks are kept in check.
• Following its three cuts, the Fed appears to be setting a higher threshold for 2020 in terms of cuts or hikes, with a strong bias to maintain current levels. This sets the stage for government bond rates in developed markets to remain range-bound for 2020, but with tail risks that are primarily policy-related. Our base case of a still-accommodative central bank backdrop and no recession is supportive of credit spread assets.
• Despite recent strong performance, when looking at 2019 overall, the demand aversion to lower quality and more cyclical areas of high yield has resulted in attractive opportunities in the B-rated space. We remain constructive on middle-rating tiers as well as higher and lower quality credits that stand to benefit from improving fundamental profiles and a supportive technical environment.

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 Dec. 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.

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. 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.