Q2 Market Review

The second quarter of 2026 showed that U.S. financial markets can remain strong even during periods of uncertainty. Concerns surrounding the conflict with Iran created significant market anxiety toward the end of March, but investor confidence improved as prospects for a resolution increased and fears of lasting inflation eased. 

As a result, stock markets performed exceptionally well during the quarter. The S&P 500 delivered one of its strongest quarterly returns of the past decade. Gains were not limited to large companies, as smaller companies also participated in the rally, with the Russell 2000 Index outperforming the S&P 500. 

Bond markets generated modest positive returns. Rising interest rates continued to create challenges for bond investors, as the yield on the 10-year U.S. Treasury moved slightly higher. However, healthy corporate fundamentals helped support bond prices, allowing investment-grade and high-yield corporate bonds to post gains. Overall, bond returns remain constrained by ongoing concerns about inflation and government spending, while strong corporate earnings continue to support credit markets. 

U.S. convertible bonds delivered strong returns during the quarter. The asset class benefited from its exposure to smaller companies, which performed particularly well. In addition, many convertible bonds have become more closely tied to the performance of their underlying stocks as equity prices have risen. This is a typical characteristic of convertible bonds during strong stock market environments. 

We also continue to see a healthy supply of new convertible bond offerings. Companies are issuing convertibles to refinance existing debt, fund acquisitions, and support growth initiatives. Year-to-date issuance of U.S. listed convertible securities has reached approximately $63 billion, marking the strongest quarterly issuance on record. This growth is expanding the convertible bond market and creating a larger pool of investment opportunities. 

The WAM convertible bond investment approach continues to focus on quality and protecting capital while maintaining the ability to participate in market upside. During the second quarter, this approach helped generate returns that exceeded those of broad bond market benchmarks. Security selection was a positive contributor to performance during the quarter. With interest rates and credit conditions relatively stable, the portfolio benefited from its exposure to convertibles with greater participation in rising stock markets, helping it outperform the broader bond market.

Outlook

We remain optimistic about the outlook for convertible bonds throughout the remainder of 2026. 

At the same time, many fundamentals remain supportive. Corporate balance sheets are generally strong, and corporate earnings continue to exceed expectations. Despite numerous geopolitical challenges, markets have remained resilient.

Predicting market outcomes is never easy, and today’s environment is no exception. However, convertible bonds are often well suited for periods of uncertainty. Their ability to participate in rising stock markets while also offering some downside protection can make them an attractive investment option. We believe these characteristics position the asset class well to remain competitive during the second half of 2026.

Sincerely,

IMPORTANT DISCLOSURES

Past Performance is not indicative of future returns. 

Q2 2026 COMMENTARY Investments in convertible securities are subject to the risks associated with both fixed-income securities and common stocks. All fixed-income securities are subject to two types or risk: credit risk and interest rate risk. Lower rated fixed-income securities are subject to greater risk of loss of income and principal than higher-rated securities. When the general level of interest rates goes up, the prices of most fixed-income securities go down. When the general level of interest rates goes down, the prices of most fixed income securities go up. In general, stock and other equity security values fluctuate, and sometimes widely fluctuate, in response to activities specific to the company as well as general market, economic and political conditions. 

Index Linked Notes (“ILNs”), are complex structured products which involve derivatives. Investors should not invest in ILNs unless they fully understand and are willing to assume the risks associated with the product. Some of the risks associated with ILNs are credit risk, interest rate risk, volatility risk, economic factors, liquidity risk, and risk of loss. For a complete assessment of the risks associated with ILNs, an investor can review the prospectus and other related documentation for a particular trade, which fully describes all terms, conditions and risks. Investors should analyze ILNs based on their individual circumstances, considering such factors as investment objectives, tolerance for risk, and liquidity needs. 

The information in this presentation is for discussion purposes only. The reader should not rely on this information for investment purposes. An investment in ILNs involves a risk of loss and may not be suitable for all investors. 

This presentation is meant for broad discussion purposes only and is not intended as a recommendation to buy or sell any security. The reader should not rely on this information for investment purposes. An investment in convertible securities involves a risk of loss. The value of an investment in convertible securities may decrease as well as increase. 

Index Descriptions: 
Indexes do not include management fees, transaction costs or other expenses. You cannot invest directly in an index. 

The S&P 500 Total Return is an unmanaged composite of 500 large capitalization companies. This index is widely used by professional investors as a performance benchmark for large-cap stocks. 

The Russell 2000 Index includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The index measures the performance of the small-cap segment of the U.S. equity universe and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.