Market Sector Update

• High yield spreads performed well in the third quarter amid a backdrop of optimism related U.S. trade policy, easing pressure in select emerging markets, higher oil and commodity prices and fresh record highs in U.S. equity markets.
• Treasury rates traded higher across all maturities on the curve. 5- and 10-year treasury rates increased by 22 and 20 basis points (bps), respectively, during the quarter.
• The option-adjusted spread (OAS) on the Fund’s benchmark started the quarter at 363 basis points and tightened 47 bps to 316 bps at the end of September.
• New issue supply remained subdued as only $42.1 billion priced which is historically low for the quarter. Retail fund flows were slightly negative during the quarter with $1.0 billion exiting according to AMG data. The high yield market remains significantly undersupplied on a year-to-date basis.

Portfolio Strategy

• The Fund had positive returns for the quarter, but underperformed its benchmark.
• Security selection was the main reason for underperformance during the quarter with sector selection having a muted impact. From a sector selection standpoint, the Fund benefitted from an underweight allocation to retailers and an overweight allocation to cable satellite names. However, these contributions were roughly offset by the impact of having a small cash position. From a security selection standpoint, contributions from gaming, retail and cable satellite names were more than offset by detractions in the oil field services and technology space.
• Despite a backdrop of tighter spreads and higher treasury rates, higher quality and longer duration assets generally maintained pace with lower rated assets. According to Barclays data, Ba-rated bonds returned 2.32%, single-B rated bonds returned 2.29% and Caa-rated bonds returned 2.73%.

Outlook

• Sales and earnings estimates appear to remain strong for the next 2 quarters for public issuers with high yield debt.
• Investors remain disciplined on credit despite a notable lack of supply. From a valuation standpoint, we remain in the OAS range of 310-370, implying a default rate of roughly 2%. Overall levels look fair to fully valued as we see the potential for headwinds from the treasury curve and the impact of collateralized loan obligation/loan spreads balanced by the tailwinds of strong earnings from the leveraged finance issuer base.
• Technical conditions remain positive overall with volatile flows and continued light primary calendar. Trade war fears and commodity price movement continue to have outsized influence on day-to-day fund flows.

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 Sept. 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.

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.