The third-quarter market environment was challenging for below investment-grade securities. High yield bonds posted losses as favorable economic trends in the U.S. were overshadowed by technical weakness, concerns of potential asset price bubbles, and troubling macro developments in other parts of the world. Leveraged loans also struggled, and September marked the first negative monthly return for the asset class this year. As volatility spiked during the period, investors became increasingly risk averse and lower-rated bonds and loans underperformed high-quality credits. Many investors reduced their allocations to these riskier asset classes to lock in longer-term gains.
The Credit Opportunities Fund returned −3.70% in the quarter compared with −1.59% for the Barclays U.S. High-Yield Ba/B 2% Issuer Capped Bond Index. The Since Inception (04/29/2014) total return was −1.79% as of September 30, 2014. The fund's expense ratio was 2.63% as estimated on the fund's inception date, May 31, 2014.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
The Credit Opportunities Fund charges a 2%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
The fund's positions are entirely based on bottom-up credit selection, regardless of credit quality, industry, or regional characteristics. Our focus is on generating total return-income plus capital appreciation. At the end of the quarter, the bulk of the fund's investments were in high yield bonds. Domestic bonds, including short-term holdings, accounted for more than half of the portfolio's total net assets, non-U.S. fixed income securities totaled a bit more than 20% of assets, and the reminder was invested in bank loans, equities, and derivative securities. The portfolio had a relatively short duration of less than three years at the end of the quarter. (Duration measures a fund's sensitivity to changes in interest rates.)
In our view, high yield bonds and bank loans, which generate above-average income with below-average interest rate sensitivity, are the two most attractive asset classes in the fixed income universe because the fundamentals of the companies issuing these securities remain solid. Many companies in which we invest have fortified their balance sheets by issuing new debt at low rates, and demand for these higher-yielding asset classes in the current low-rate environment shows no sign of abating. We had been expecting a correction, but we do not believe the current weakness will persist. Our goal is to deliver attractive total return over time.