Quarterly Fund Commentary
Mark G. Beischel, CFA
Market Sector Update
- The Federal Open Market Committee (FOMC) has indicated that recent events in domestic and international markets will likely produce a shallower normalization path for the policy rate than most are now projecting.
- The U.S. dollar weakened and credit spreads tightened with the seemingly coordinated monetary policy actions after summit meetings in Shanghai in late February. These meetings seem to have rekindled the carry trades and have potentially helped fuel a rally in emerging market currencies and credit.
- The U.S. 1Q growth forecasts continue to edge lower with downward revisions to real consumer spending and real equipment investment. The global manufacturing sector seems to be stabilizing.
- Inflation has recently picked up in the U.S., despite the strong dollar. It seems the FOMC will tolerate inflation being above the 2 percent target for a certain period of time.
- The European Central Bank (ECB) announced additional policy measures that include purchasing corporate credit. Negative Interest Rate Policy (NIRP) is being de-emphasized.
- Economic factors for both the corporate and household sectors in Japan seem to be deteriorating. The actions taken by the Bank of Japan (BOJ) in January were precautionary. Investors can look to more policy actions on the fiscal side.
- The Fund under-performed due to its 94 percent weighting in the U.S. dollar. Many currencies appreciated vs. the dollar over the quarter, with the market repricing a less aggressive FOMC. The Fund’s performance was also hurt by the relatively shorter effective duration vs. the index. Over the course of the quarter there was a dramatic decrease in the term structure of interest rates in the U.S., Europe, Japan, and the U.K.
- We continue to seek opportunities to reduce the volatility in the Fund. We remain focused on maintaining proper diversification for the Fund.
- We are maintaining a low duration strategy for the Fund as it allows us a higher degree of certainty involving those companies in which we can invest.
- We look for opportunities to make longterm investments in foreign currencies in certain emerging markets should they weaken vs. the U.S. dollar.
- We continue to hold a higher level of liquidity (patient capital) because of structural changes in the capital markets. We will be opportunistic in allocating that capital when dislocations in market arise.
- The U.S. economy is growing at a rate close to its underlying trend, or about 2.5 percent. Unfortunately it is not growing quickly enough to use up excess capacity that has accumulated since the beginning of the crisis several years ago.
- Given our expectation of slow growth in the developed world in 2016, we expect short-term interest rates to remain low as the U.S. Federal Reserve (Fed) keeps the policy rate low for an extended period of time.
- However, longer Treasury rates will be more volatile and subject to market emotions regarding fiscal and monetary policies. The expectation is for the FOMC to continue the normalization of rates but at a slower trajectory than the Fed’s guidance.
- The structural change in the financial market has led us to build up more liquidity (patient capital). Wall Street dealers' incentives to carry high inventory levels of corporate bonds have been reduced by higher capital requests, therefore making them more expensive to hold. As a result, market liquidity has been reduced and there are more opportunities for dislocations in corporate bonds going further.
- The U.S. continues to be a safe haven globally and will continue to attract funds from outside the U.S. In this scenario, there will be opportunities to make longterm investments in foreign currencies in certain emerging markets should they weaken vs. the U.S. dollar.
The opinions expressed in this commentary are those of the Fund’s managers and are current through March 31, 2016. The managers’ views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.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. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. 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. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans 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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