Below investment-grade credit generated second-quarter gains and outperformed investment-grade bonds. High yield corporate bonds benefited from their relatively low sensitivity to interest rate changes, solid fundamental underpinnings, and the improving U.S. and European economies. Oil prices steadied at higher levels than at the beginning of the year, providing support for the energy industry. Bonds from oil-related issuers account for a large proportion of the high yield market. Bank loans, which are low-duration asset classes (duration is a measure of a portfolio's sensitivity to interest rate changes), generated above-average income and also outperformed investment-grade bonds.
The Credit Opportunities Fund returned 1.59% in the quarter compared with −0.01% for the Barclays U.S. High-Yield Ba/B 2% Issuer Capped Bond Index. For the 12 months ended June 30, 2015, the fund returned −5.61% versus 0.72% for the Barclays U.S. High-Yield Ba/B 2% Issuer Capped Bond Index. The fund's 1-year and Since Inception (04/29/2014) average annual total returns were −5.61% and −3.21%, respectively, as of June 30, 2015. The fund's expense ratio was 2.63% as of its 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 category, industry, or regional characteristics. At the end of the quarter, slightly more than four-fifths of the fund's investments were in high yield bonds. Bank debt, the second-largest allocation, accounted for approximately 10% of the portfolio's total net assets. Our loan exposure provides yields that are 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.
The U.S. economy appears to be strengthening, which has supported the domestic high yield market, and European economic growth seems to be improving thanks in part to the European Central Bank's aggressive quantitative easing program, which benefited European high yield bonds. We are pleased to report that we see improving fundamentals supporting the vast majority of our holdings. Companies in the high yield market, including some energy producers, have improved their balance sheets and increased their cash reserves over the past five years. Because maturities have been extended, there is not a significant amount of debt coming due over the next few years, which supports our belief that defaults will remain at moderate levels. We are mindful that defaults in the energy and mining segments of the market could rise if oil and commodity prices decline further or remain low for an extended period. Security selection will remain the key to generating outperformance.