Market Sector Update

• Credit spreads traded tighter in April, wider in May, but tightened again in June with index levels tighter overall across most fixed income asset classes.
• In April, a better-than-expected earnings season, stable-to-improving growth conditions in China and globally, and a dovish Federal Reserve (Fed) were the catalysts for higher bond prices.
• In May, increased trade tensions drove prices lower as rhetoric from both the U.S. and China grew more rancorous ahead of June’s G20 Summit, followed by President Donald Trump’s threat to initiate escalating tariffs on Mexican imports later in the month. Investors also had to contend with weaker growth data in the form of lower than expected purchasing manager indexes and slower job and wage growth.
• High yield bond prices rose again in June, recapturing May’s losses, as a more dovish Fed and expectations of reduced trade tensions between the U.S. and China improved investor sentiment. At the Fed’s June meeting, the interest rate dot plot showed seven of the 17 Federal Open Market Committee participants advocating for 50 basis points (bps) in cuts by year end. Oil prices also rallied from the lows of the month due to increased geopolitical tensions with Iran, dollar weakness, and an expectation that OPEC would continue its production cut policy.
• U.S. Treasury rates continued to trade lower during the quarter, with 5- and 10-year Treasury yields trading 47 and 40 bps lower, respectively. The 10-year Treasury yield ended June at the lowest level since November 2016. The option-adjusted spread (OAS) on the Bloomberg Barclays U.S. Corporate High Yield Index started the quarter at 391 bps and tightened to 377 at quarter end.
• High yield funds saw inflows in April and June, but outflows in May, the only month of outflows year to date. High yield funds reported $600 million in outflows in quarter, but remain in net inflows for the first half of the year at $12 billion. Gross new issue activity totaled $74.7 billion in the quarter.

Portfolio Strategy

• The Fund had a positive return for the quarter and outperformed its benchmark. Outperformance was driven by security selection, while sector selection detracted from performance.
• From a security selection standpoint, holdings in the communications and technology sectors were the largest contributors, more than outweighing detractions from credits in the other industrial and energy sectors.
• From a sector selection standpoint, an overweight allocation to the finance company sector was the largest contributor, while the cash position and an underweight allocation to the banking sector were the largest detractors.
• Higher quality bonds outperformed lower quality bonds, on average, during the quarter. According to Barclays, Barated bonds returned 3.08%, while single-B rated bonds returned 2.66% and Caa-rated bonds returned 0.29%.

Outlook

• The fundamental picture for the second half of 2019 seems relatively clear, with moderate but lower levels of sales, earnings, and global growth, although U.S. induced trade tensions threaten to hasten the trend.
• Estimate revisions continue the downward trend, with third-quarter earnings comparisons now slightly negative. The default outlook remains relatively benign, and for those few credits with default potential, it is already priced in. The last twelve months default rate at the end of June stood around 1.5%, well below historical averages. Additionally, spreads trading tighter to end June at 377 bps OAS is consistent with our view that the summer will be range-bound and volatile with an expected range of 350-450 bps OAS heading into a challenging earnings season.
• The technical environment has been supportive, despite the primary calendar picking up, as cash and sentiment are both positive. Generally, a positive technical environment lacking any clear fundamental catalyst should lead to continued volatility over the summer based around macroeconomic and trade headlines. We believe the fundamentals of credit markets are quite good; however, with a softening macro picture, a neutral to downward earnings growth trend, and valuations tightening, we remain fully invested, but see more reasons to be cautious in our approach.

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, 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.

All information is based on Class I shares.

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.