High yield bonds posted third-quarter losses as nearly every sector in the high yield universe declined. The steepest sell-off was in the energy and metals and mining sectors, which together represent about 20% of the high yield market. In aggregate, higher-quality below investment-grade bonds held up better than lower-quality issues. The default rate rose to 2.3% in the period from 1.9% at the end of June but remained well below the long-term average of 3.9%, based on J.P. Morgan data. A modest $60 billion of new high yield bonds came to market in the quarter, with strategic merger and acquisition activity accounting for about 70% of the volume. Bank loans, which are low-duration asset classes (duration is a measure of a portfolio's sensitivity to interest rate changes), held up better than high yield bonds.
The Credit Opportunities Fund returned −6.05% in the quarter compared with −4.83% for the Barclays U.S. High-Yield 2% Issuer Capped Bond Index. For the 12 months ended September 30, 2015, the fund returned −7.92% versus −3.40% for the Barclays U.S. High-Yield 2% Issuer Capped Bond Index. The fund's 1-year and Since Inception (04/29/2014) average annual total returns were −7.92% and −6.84%, respectively, as of September 30, 2015. The fund's expense ratio was 1.89% as of its fiscal year ended May 31, 2015.
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.
Over the quarter, the fund rotated up the quality curve, decreasing its allocation to CCC rated bonds and increasing exposure to bank loans, which totaled 12% at the end of the period. Our loan exposure provides yields that are about the same as BB rated high yield bonds and dampens portfolio volatility. We favor and have overweight allocations in the services, utilities, and cable industries, while we are significantly underweight in the energy, health care, and metals and mining segments. We maintained a below-benchmark duration, which stood at approximately 3.3 years at the end of the quarter.
The U.S. economy is showing signs of improving economic growth, which should help to support the domestic high yield market. However, heightened concerns about slowing growth in China and uncertainty about the timing of the Federal Reserve's first interest rate hike since 2006 created considerable volatility in equities and the high yield market. Although defaults could rise in the energy and coal segments, we do not foresee a broad-based meltdown in the high yield asset class. As always, our focus is on delivering high current income while seeking to contain the volatility inherent in this riskier area of the bond market.