The fourth quarter was a challenging period for below investment-grade securities. After a long absence, volatility reared its head across financial markets, taking high yield bonds lower. A steady drumbeat of disappointing news (including geopolitical tensions, concerns around the pace of economic activity in China and Europe, and plunging oil prices) conspired to fatigue investors in sub-investment-grade debt. Economic indicators are signaling continued gains for the U.S. economy, but the divergence between high yield bond and equity market performance during the quarter was striking.
The Credit Opportunities Fund returned −4.91% in the quarter compared with −0.29% for the Barclays U.S. High-Yield Ba/B 2% Issuer Capped Bond Index. The Since Inception (04/29/2014) total return was −6.62% as of December 31, 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 selection, regardless of credit quality, industry, or regional characteristics. At the end of the quarter, slightly more than two-thirds of the fund's investments were in high yield bonds. Bank debt, the second-largest allocation, and short-term holdings together accounted for about one-quarter of the portfolio's total net assets. Our bank debt exposure has allowed us to generate high current income with less interest rate risk than high yield bonds. The balance of the portfolio consisted of modest allocations to convertible bonds, equities, and derivatives. We maintained a relatively short duration of approximately three years during the quarter. (Duration measures a fund's sensitivity to changes in interest rates.)
High yield bonds and bank loans generate high income with less interest rate sensitivity relative to most alternative fixed income sectors. With these characteristics and given recent market weakness, these asset classes represent compelling investment options. The majority of company fundamentals remain solid, as evidenced by a historically low default rate. Moderate U.S. economic growth and low interest rates also contribute to the attractiveness of high yield issuers. Market corrections can create opportunities, and we are selectively finding compelling values across a number of sectors that provide high yields and prospects for capital appreciation.