Q3 Market Review

Equity markets continued to move higher in the third quarter, albeit at a slower pace. Despite several headwinds, including inflation concerns, higher bond yields, and the ongoing war, the S&P 500 gained 2.3% during the quarter. Bonds, as measured by the Bloomberg Barclays Aggregate Index declined 3.5%.

Although Iran and the United States signed a Memorandum of Understanding in June, the conflict remained active throughout the quarter. Oil prices surged nearly 35% raising concerns about inflation. In addition, concerns regarding mounting U.S. government debt contributed to a selloff in the bond market, with the 10-year Treasury yield rising more than 75 basis points. To address inflation concerns, the Federal Reserve raised short-term interest rates 25 basis points and indicated that it expected to raise rates another 25 basis points by year-end.

Convertible bond returns were not spared in the fixed income selloff. Although we have intentionally maintained relatively low average maturity and duration, both short- and long-term rates moved higher during the quarter. The convertible universe also has meaningful exposure to small-cap stocks, and the Russell 2000 was down over 7% during the quarter. Our mutual fund and separately managed account strategies declined 50 to 105 basis points, performing worse than equities but better than bonds, reflecting the hybrid characteristics of convertible bonds.

Outlook

Many of the factors concerning market participants at the beginning of the quarter were still present at quarter-end. The Middle East conflict remains unresolved, US government debt levels continue to increase, and governments around the world are maintaining restrictive monetary policies in an effort to contain inflation.

These factors, together with U.S. midterm elections, provide several potential catalysts for increased volatility across both fixed income and equity markets. Convertible bonds, with their asymmetric returns, can provide safety in uncertain markets.

In this environment, convertibles may offer an attractive combination of income, equity participation, and downside protection. When markets perform well, convertible bonds can participate in the upside through their equity component. When markets decline, the bond component may help moderate overall portfolio volatility. Convertible bonds can also provide portfolio diversification benefits within a broader investment portfolio.

Sincerely,

IMPORTANT DISCLOSURES

Past Performance is not indicative of future returns. 

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.

This commentary 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.

Bloomberg Barclays US Aggregate Bond (Agg. Bond) is a market capitalization-weighted index often used to represent investment grade bonds being traded in United States. The index 
includes Treasuries, government agency bonds, mortgage-backed bonds, corporate bonds and a small amount of foreign bonds traded in U.S.

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.