U.S. high yield bonds posted solid first-quarter gains, thanks in large part to a strong rebound that began in mid-February and accelerated in March. Factors contributing to the high yield market's near-record March gain included dovish commentary from Fed Chair Janet Yellen, moderating concerns about a U.S. recession, and strong performance from commodities and commodity-related segments. The European high yield market also rallied as the European Central Bank expanded its monetary policy initiatives in March to a greater extent than was expected, and China allayed investor concerns about global growth at the G20 meeting. Although the default rate increased, cash flows into the high yield asset class and a revival in risk appetite helped generate strong gains for below investment-grade bonds.
The Credit Opportunities Fund returned 2.30% in the quarter compared with 3.35% for the Barclays U.S. High-Yield 2% Issuer Capped Bond Index. For the 12 months ended March 31, 2016, the fund returned −5.93% versus −3.66% 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 −5.93% and −5.81%, respectively, as of March 31, 2016. The fund's expense ratio was 1.89% as of its fiscal year ended May 31, 2015.
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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 into higher-quality bonds, mostly through the energy sector, where we added fallen angels (investment-grade bonds that have been downgraded to high yield status), which benefited portfolio performance. Even with our selective additions, the portfolio remained underweight to the energy sector and, to a lesser extent, in metals and mining, relative to its benchmark index. We increased our bank loan allocation as we uncovered value in the asset class. Several factors benefit bank loans, including their seniority in the capital structure, their low sensitivity to rising interest rates, and the composition of the asset class (less commodities exposure). We favor and have overweight allocations in cable operators and utilities.
The U.S. economy is showing signs of improving economic growth, which should help support the domestic high yield market. However, heightened concern about global growth has created considerable volatility in equities and the high yield market. Compared with this time last year, our opportunity set appears to be more abundant given the recent market dislocation, but diligent credit analysis and risk assessment remain imperative. Our underweight to the energy and metals and mining segments should be beneficial as commodity-related sectors have been volatile. Your fund's positioning and liquidity management remain at the forefront of our risk management practices. As always, we aim to deliver attractive total returns and high current income over time while seeking to cushion the volatility inherent in this market.