Market Sector Update
- Spreads between high-yield bonds and Treasuries continued to widen during the fourth quarter. The market was influenced by investor concern about declining oil prices and the potential impact on high-yield energy borrowers. We do not believe the market fundamentals supported this view.
- The high-yield sector selling pressure related to energy prices was further exacerbated during the quarter by uncertainty about the Federal Reserve’s (Fed’s) potential plans for raising its key interest rate in 2015 and lingering concerns in the minds of some investors about high-yield valuations.
- Our investment process is based on research of the individual opportunities. We seek good risk/reward characteristics, particularly related to companies that we believe the market does not understand or which generate outsize yield related to their price.
- We believe that credit selection is the basis for above-average performance through a credit cycle and believe it to be preferable versus attempting to time the market or place macro bets.
- We believe that the negative market sentiment we saw during the fourth quarter that pushed yields higher resulted in potentially more favorable risk/reward relationships.
- Generally, gross domestic product (GDP) growth is favorable for the highyield sector because a stronger economy can boost borrower income.
- We do not foresee a wave of defaults on the immediate horizon. If oil prices do remain exceptionally low for an extended period, we believe most of the energy-related defaults would not occur until late 2016 or early 2017. However, we do not currently expect this to occur.
- Contingent on how the energy situation unfolds, we may increase our energy exposure if favorable opportunities emerge. The Fund has been underweight energy.
- We believe the speculation about the Fed’s monetary policy deliberations will continue to be a potential source of volatility within the sector. However, it is also our view that, within fixed income, high-yield is the best-suited category to perform in a rising- rate environment.
The opinions expressed in this commentary are those of the Fund’s manager and are current through December 31, 2014. The manager’s views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Any securities or sectors mentioned are based on what the managers feel may be newsworthy and may or may not reflect holdings in this portfolio. It is not intended to represent that an investment in these securities or sectors was or will be profitable. Past performance is no guarantee of future results.
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