August 2017 Update
- Escalating geopolitical tensions between the US and North Korea and concerns about US legislative progress led to a spike in volatility in August, while global economic data remained strong
- The People’s Bank of China decreased the midpoint of the US dollar-Chinese renminbi trading band to below 6.70 for first time since September 2016. Most other major central banks left their policy rates unchanged; however, central bankers in Europe and New Zealand pushed back against currency strength.
- Most global government yields fell as geopolitical tensions led to a flight to quality, benefitting perceived safe-haven assets. Australian yields were an outlier, as economic data surprised to the upside.
- The performance of the US dollar was mixed. European currencies were the primary gainers, led by the Swedish krona. Among the G101 currencies, the New Zealand dollar declined the most versus the greenback, after the Reserve Bank of New Zealand’s governor said a weaker currency was necessary to achieve the bank’s inflation target.
- World Bond returns were positive over the course of the month, as both global government core exposure and opportunistic sources of return added to performance
- In global government core exposure, both our core rates and core currency (FX) positions were positive contributors to performance. In global government core rates, the positions benefitted from a general directional move downwards in interest rates amidst a flight to quality. In FX, an allocation to the Norwegian krone was beneficial as the currency appreciated on continued improvement in inflation, supported by the recent improvement in commodity prices.
- Macro-driven duration2 strategies marginally contributed. Our overweight to Canadian duration, based on our view that markets are too optimistic about policy normalization in select commodity-linked economies, was beneficial. Most global government bond yields moved lower on geopolitical concerns.
- Macro-driven currency strategies also contributed. Our overweight to European currencies (the Swedish krona, Norwegian krone, and Swiss franc), based on our view that the central banks of small open economies around Europe will engage with the cyclical upturn and reduce their assessment of downside risk, drove positive performance, as European currencies rallied on a continuation of positive economic data releases.
- Credit strategies were positive on a total return basis, as the move lower in interest rates was able to offset some modest spread widening stemming from increased geopolitical tensions
- In opportunistic emerging-market strategies, a tactical underweight to the Turkish lira detracted as most emerging-market currencies gained versus the greenback due to reduced probability of fiscal reforms in the US.
Expenses3 % (Class A) Net Op. Exp.: 1.05% Gross Op. Exp.: 1.11%
Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of the investment will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For more current performance information to the most recent month-ended, click here.
Portfolio Positioning & Market Outlook
- Portfolio duration increased to 2.86 years at month end due to a decrease in active short positions. We continued to maintain a conservative duration posture, as valuations on government bonds continue to look rich. We have been decreasing our USD hedge ratio, but the overall level remains high as a reversal in recent inflation softness and a pickup in wage pressures could trigger support for the US dollar.
- Geopolitical risks and disinflationary trends are offsetting policy normalization forces in the interest rate markets. We have a tactical long bias in duration.
- The upside case for US growth prospects is capped given the reduced probability of fiscal easing. We are reducing our overweight to the US dollar.
- A change in the European Central Bank’s (ECB’s) policy stance should also free up other central banks (in Sweden and Norway) that have been effectively shadowing the ECB. We are overweight the Swedish krona and Norwegian krone versus the euro.
- The abatement of political risk in Europe and the strength of the European economy should support the performance of euro-denominated corporate credit. We are gradually adding to the portfolio’s European credit exposure with an emphasis on the banking sector.
Currency Exposure (%)
|As of 8/31/17||Fund||Benchmark4|
|New Zealand Dollar||-0.94||0.00|
A Word About Risk
All investments are subject to risk, including the possible loss of principal. There is no guarantee the Fund will achieve its stated objective. The Fund’s share price may fluctuate due to market risk and/or security selections that may underperform the market or relevant benchmarks. If the Fund’s strategy for allocating assets among different asset classes and/or portfolio management teams does not work as intended, the Fund may not achieve its objective or may underperform other funds with similar investment strategies. Fixed Income risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall; these risks are currently heightened because interest rates are at, or near, historical lows. Obligations of U.S. Government agencies are supported by varying degrees of credit but are generally not backed by the full faith and credit of the U.S. Government. Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Mortgage- and asset-backed securities’ risks include credit, interest-rate, prepayment, and extension risk. Derivatives may be riskier or more volatile than other types of investments because they are generally more sensitive to changes in market or economic conditions; risks include currency, leverage, liquidity, index, pricing, and counterparty risk. Foreign investments can be riskier and more volatile than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as political and economic developments in foreign countries and regions (e.g., “Brexit”). These risks are generally greater for investments in emerging markets. The Fund is non-diversified, so it may be more exposed to the risks associated with individual issuers than a diversified fund. Privately placed, restricted (Rule 144A) securities may be more difficult to sell and value than publicly traded securities, thus they may be potentially illiquid. The Fund may have high portfolio turnover, which could increase the Fund’s transaction costs and an investor’s tax liability.
1 The Group of Ten (G10) is made up of eleven industrial countries: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States.
2 Duration is a measure of the sensitivity of an asset or portfolio’s price to nominal interest rate movement.
3 Expenses stated as of the fund’s most recent prospectus. Net expenses reflect contractual expense reimbursements in instances when these reductions reduce the fund's gross expenses. Contractual reimbursements remain in effect until 2/28/18 and automatically renew for one-year terms unless terminated. Certain contractual reimbursements for Class R6 and Class F shares remain in effect until 2/28/18.
4 Benchmark is the Citigroup World Government Bond Index.
Citigroup World Government Bond Index is a market-capitalization weighted index consisting of government bond markets. Country eligibility is determined based on market capitalization and investability criteria. All issues have a remaining maturity of at least one year.
Bloomberg Barclays U.S. Aggregate Bond Index is composed of securities from the Bloomberg Barclays Government/Credit Bond Index, Mortgage-Backed Securities Index, Asset-Backed Securities Index, and Commercial Mortgage-Backed Securities Index.
Indices are unmanaged and not available for direct investment.