Below investment-grade bonds generated solid first-quarter gains. Following the fourth-quarter sell-off, which markedly improved valuations, asset flows into the asset class perked up in early 2015. High yield investor sentiment appeared to vacillate with stock market and oil price volatility to a degree. The U.S. economic recovery seems to be on relatively firm footing and should benefit from stable growth driven by labor market strength and reduced fiscal headwinds. U.S. inflation remains contained, helped by low energy prices, and the Federal Reserve is on course to begin monetary tightening later this year, which we view as indicative of growing confidence in the economy.
The Credit Opportunities Fund returned 1.46% in the quarter compared with 2.65% for the Barclays U.S. High-Yield Ba/B 2% Issuer Capped Bond Index. The Since Inception (04/29/2014) total return was −5.25% as of March 31, 2015. The fund's expense ratio was 2.63% as of the fiscal year ended May 31, 2014.
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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 three-quarters of the fund's investments were in high yield bonds. Bank debt, the second-largest allocation, accounted for about 11% of the portfolio's total net assets. Our loan exposure provides interest rate protection given the floating rate coupons, and they yield about the same as BB rated 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 finding compelling values across a number of sectors that provide high yield and the prospect of capital appreciation.