Q2 2026 Fund Commentary

Commentary and opinions are provided by Brandywine Global Investment Management, LLC.

Market commentary

Investment-grade and high-yield spreads both narrowed and generated positive total returns as risk markets recovered from the conflict in the Middle East. High yield outperformed core fixed income as yields moved higher amid inflation concerns. Risk appetites improved on the back of the potential end of conflict in the Middle East and the reopening of the Strait of Hormuz, while the artificial intelligence (AI) obsolescence narrative from the first quarter faded. Lagging high-yield sectors from the first quarter, such as packaging and services, rebounded strongly, and lower-quality credits outperformed the higher-quality BB-rated cohort.

High-yield primary markets were healthy, with April issuance particularly strong, boosted by data centre-related debt, a growing influence in both investment-grade and high-yield credit markets. Gross high-yield issuance showed solid year-over-year growth, and net issuance continued its positive trend.

Performance

Security selection across services, retail and basic industry (construction) contributed to performance, tied to laggards from the first quarter that recovered as the AI obsolescence and higher-energy-price catalysts faded. A relative underweight duration position contributed to performance in a period when bond yields rose, as market participants priced in a rate hike by year-end. An overweight allocation to financial services also contributed to performance, as the sector was among the strongest performers in the quarter after underperforming in the first quarter.

ZipRecruiter Inc. (5.00%, 2030/01/15) contributed to performance. After falling in the first quarter because of fears around AI vulnerability and a potentially weaker labour market, sentiment improved and the management team bought back the debt at a discounted price, but above market indications. Atlanticus Holdings Corp. (9.75%, 2030/09/01) contributed to performance. The consumer credit finance business performed well alongside broader B-rated beta, and quarterly figures, notably consumer credit metrics, indicated an improving picture. Mativ Holdings Inc. (8.00%, 2029/10/01) contributed to performance because improved free cash flow and a refinancing amendment that pushed out maturities boosted the bond.

Security selection in telecommunications and gaming detracted from performance, tied to exposure within stressed credits facing idiosyncratic pressures, along with a lack of exposure to well-performing data centre-related names in telecommunications. An underweight to lower-quality B-rated and CCC-rated credit also detracted from performance, as both cohorts outperformed higher-quality credit. An underweight to hard-currency emerging market sovereign bonds, a portion of the market the Fund is structurally underweight, detracted from performance, as these bonds were the strongest performers in the quarter, led by Latin American issuers such as Argentina.

Cable One Inc. (1.125%, 2028/03/15) detracted from performance because the industry is facing a secular decline and the issuer missed on revenue, earnings and subscriber metrics. Cerdia Finanz (9.375%, 2031/10/03) detracted from performance because the acetate and filter business is under pressure from declining combustible cigarette volumes and shifting consumer preference toward smoke-free products. LCPR Senior Secured Financing DAC (6.75%, 2027/10/15) detracted from performance because third-party financing reduced existing first-lien creditor claims to fibre assets, raising the potential for further asset stripping.

Portfolio activity

The sub-advisor added KeHE Distributors LLC (9.00%, 2029/02/15) and KeHE Distributors LLC (7.125%, 2033/04/30), an employee-owned food distributor with improving metrics and a durable business model. The sub-advisor also added Jefferson Capital (8.25%, 2030/05/15), which offered yield in the 6.5% range for a BB-rated credit, wider than many peers. The sub-advisor increased higher-quality BB-rated health care exposure given the sector's more defensive nature, and increased allocations to more asset-heavy sectors such as capital goods and basic industry, which the sub-advisor expects to benefit from ongoing infrastructure growth tied to AI needs.

The sub-advisor sold ZipRecruiter Inc. (5.00%, 2030/01/15) after accepting the issuer's buyback, and sold Cerdia Finanz (9.375%, 2031/10/03) to derisk from B-rated credits at risk of restructuring. The sub-advisor reduced financial services and leisure exposure tied to issuer-led bond redemptions, and reduced B-rated-and-below exposure given increased dispersion and marginally higher default rates.

Outlook

In the sub-advisor's view, high-yield spreads may hold within their 260 to 460 basis point range of the past 36 months, with periods of volatility. The sub-advisor believes spreads could move toward the middle of that three-year range over time, although current yields provide cushion against incremental moves. The sub-advisor's preference is for higher-quality, front-paying credits on the margin. Spread tightening hasn't been uniform. Spreads for CCC-and-below credits remain above pre-conflict levels, and high-yield defaults continue to inch higher from historically low levels while recovery rates have fallen. In the sub-advisor's view, this isn't the time to reach for yield.