The high-yield corporate bond market posted positive performance in the quarter. Following the interest rate-driven weakness of the previous quarter, the market rebounded as rates stabilized at new levels. Activity slowed as markets prepared for the scaling back of the U.S. Federal Reserves accommodative monetary policy. However, a strong new-issue calendar revealed a large amount of cash to be invested in high yield. The market was provided with an additional boost when the Fed announced that it would not immediately reduce its asset purchase program. The quarter ended with a cautious tone as U.S. budget negotiations and a potential government shutdown loomed.
The Funds return of 2.12% for the quarter was slightly behind the benchmark.
Lower-quality securities performed best during the quarter. In this vein, an overweight position in securities rated CCC and an underweight in BB securities enhanced the Funds relative performance. Overweight positions in supermarkets and brokerage, along with an underweight to wireless also contributed to returns. Detractors included an overweight position in retailers and underweights to metals and independent energy.
U.S. political developments are likely to be the greatest source of volatility in the coming weeks. The budget and debt ceiling debates along with the nomination of a new Fed chairman will top the headlines. We do not expect significant changes to Fed policy, which should provide support for financial assets. High-yield market fundamentals continue to be stable and the default rate for high yield remains low.
If you are an aggressive investor seeking high current income and the potential for capital appreciation for a portion of your assets, you may find this Fund provides an attractive complement to a well-diversified portfolio. It is best suited for long-term investors willing to assume the additional risks associated with investing in high yield securities including above-average share price fluctuations.
- Invest primarily in high-yielding, lower-rated corporate debt. Lower-rated debt is commonly referred to as "junk bonds."
- Take steps to properly manage downside risk by maintaining a broadly diversified portfolio.
- Rely on our extensive credit research capabilities in an effort to manage risk and minimize defaults.