Q1 2026 Fund Commentary

Commentary and opinions are provided by J.P. Morgan Investment Management Inc..

Market commentary

The first quarter of 2026 was volatile as markets were shaped by several cross-currents. Tariff uncertainty returned after a legal challenge to the use of emergency powers, with the U.S. administration implementing a flat tariff on all imports in response. Geopolitical tensions heightened with war in the Middle East significantly disrupting oil and gas supply.

Global bonds declined as markets focused more on upside inflation risks than downside risks to economic growth. Government bond yields rose across major markets during the quarter. As a net energy exporter, the U.S. was more insulated from the spike in energy prices than its European and Asian counterparts. The U.S. labour market showed signs of cooling, with employment declining in February. At its March meeting, the Federal Open Market Committee left the federal funds rate unchanged but maintained its outlook for one rate cut this year.

In Europe, the European Central Bank (ECB) left it policy interest rates unchanged but signalled the possibility of rate increases because of rising inflation expectations. In the U.K., the energy shock left the economy vulnerable to rising inflation risks, and the Bank of England (BoE) struck a hawkish tone. In Japan, the Bank of Japan left the door open to near-term interest-rate increases, indicating greater concern about upside inflation risks than downside economic growth risks from the energy shock.

Performance

An underweight position in eurozone duration contributed to the Fund’s performance amid the broad-based duration sell-off during the quarter, as the sub-advisor had held this positioning because of expansionary fiscal policy. An overweight position in agency mortgage-backed securities also contributed to performance.

Positioning for sub-trend growth, including overweight duration and yield curve steepening trades, detracted from the Fund’s performance as the geopolitical shock in March drove concerns about stagflation and reversed prior market pricing. Overweight positioning in U.K. and Australian duration, along with a preference for curve steepening, also detracted from performance as markets repriced the front end of government bond curves higher to factor in elevated inflation. Exposure to investment-grade corporate bonds and emerging market hard currency detracted from performance in February and March as credit spreads widened amid heightened geopolitical tensions.

Portfolio activity

The sub-advisor established an underweight position in Japanese duration because of attractive valuation. The sub-advisor increased the Fund’s overweight position in Australian duration. The sub-advisor reduced the Fund’s exposure to spread sectors while maintaining a preference for high-quality credit.

Outlook

In the sub-advisor’s view, the geopolitical and energy-market shock has shifted the balance of risks. Higher energy prices may act as a drag on households and businesses, leaving limited room for the global economy to absorb a prolonged disruption. The sub-advisor believes central bank monetary policy remains nuanced, with the U.S. Federal Reserve Board on hold and the ECB and BoE indicating that their next move could be an interest-rate increase amid inflation concerns.

The sub-advisor has de-risked by reducing the Fund’s exposure to sectors that haven’t responded to the recent spike in geopolitical risks, while maintaining a constructive stance on duration where the market sell-off has created value. Among spread sectors, exposure to emerging market hard currency has been scaled back, while a preference for high-quality credit remains.