Market Sector Update
- Lower-quality credits continue to perform better than those of higher quality, which is what we expect in a recovering economy.
- BB-rated credits have underperformed in the market, which we believe is related to investor concern about their ability to absorb an increase in Treasury rates.
- Default rates continue to remain low.
- Refinancing continues to be the primary source of new issuance.
- The portfolio strategy continues to be in what we consider “recovery mode” or a bias toward companies that would benefit – but are not reliant on – an improving economy. These companies do not need a lot of top-line growth and continue to perform in a slow economy.
- As always, we seek good risk/reward characteristics when making investment decisions, particularly related to companies that we believe the market does not understand or which generate outsized yield related to their price.
- At current yield levels rates will obviously begin to rise at some point, but we are not expecting them to move up dramatically. We believe the markets will likely begin raising rates before any Fed rate hikes.
- We believe price appreciation in the market is over. In the current environment we believe it is important to get as much yield as possible without over-extending. We expect the Fund to continue benefitting from its coupon structure.
- We believe default levels will continue to remain low, with companies facing lower interest expenses as current rate levels have encouraged refinancing at lower levels.
- Although Treasury rates may not rise significantly this year, investor fear of an increase in the 10-year Treasury will continue to weigh on higher-rated credits.
- Corporate balance sheets remain strong, which is important in the highyield space. As long as this remains the case, we expect defaults to remain low.
The opinions expressed in this commentary are those of the Fund's manager and are current through March 31, 2013. The manager’s views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results.
Risk Factors. As with any mutual fund, 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 high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. In addition to the risks typically associated with fixedincome securities, loan participations in which the Fund may invest carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loan participations may be unsecured or not fully collateralized, may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. 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.
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