Active Edge

Allocation Considerations in a Changing Interest Rate Environment

As we embark upon a new year, a new U.S. president, and a new Fed rate-cutting cycle, I suspect that many investors will find themselves contemplating their allocations in the coming weeks. At Harbor, we consider ourselves aggregators of thought and best practices in the marketplace – a direct result of our thorough investment partner selection process. Given this philosophy, I believe that now, more than ever, passive investing (whether it be by sitting in cash or in passive instruments) may prove detrimental to investors seeking attractive long-term returns. Here are the questions we believe need answering in this transitionary time:

Questions for consideration:

1. Is there still a record amount of cash on the sidelines?
2. How much excess cash could be put to work?
3. Have investors been rewarded by their move into cash?
4. What happens to bond yields when the Fed starts cutting?
5. Should I be holding cash at the beginning of a rate-cutting cycle?
6. Do cash and bonds outperform inflation over the long run?
7. Which sectors are fixed income investors allocating to today?
8. How are investors accessing the bond market today?
9. Are active fixed income management fees worth it?
10. What qualities do you find tend to differentiate successful fixed income managers?
11. I’ve recently read more in the press about the rise of quants in fixed income. Is this a thing?
12. Do I need to reconsider the diversifying role I expect bonds to play in my portfolio?

Q: Is there still a record amount of cash on the sidelines?

A: Yes (although there is a “but” that we’ll address in question two). As the Federal Reserve raised interest rates, short-term treasuries (and vehicles that hold them, like money market funds) were suddenly earning you similar or higher rates than some longer-term or lower-credit quality bonds. Why take duration or credit risk if you could earn as much as 5% at one point in one of the safest U.S. investments? The answer for many investors was – we won’t.

So, investors piled into money markets at unprecedented rates, first as a safety trade during COVID, then again as rates rose in 2022, driving total net assets to an all-time high as of September 30, 2024 – $6.4 trillion.

Source: Morningstar Direct. U.S. Money Market Funds is the sum of total net assets in USD, Millions across prime, taxable & non-taxable vehicles as of 9/30/2024. U.S. 3-Month Treasury Bill Yield sourced from FactSet.

Past rate-cutting cycles do show a pattern of net inflow levels plateauing before net outflows, so there is typically some lag between Fed cutting and investors reacting to lower cash yields as they assess cut and market performance expectations. The plateau in the level of new cash investments (aka fewer net new dollars lowered by an increase of outflows or new dollars going elsewhere) typically occurs shortly after the Fed’s first cut – within three-to-six months on average.

The lag time between the first cut and outflows varied across history given different macro and market environments, with a range from the first 10 months to within two years after the Fed’s first cut.

Ultimately, investors need time to react to changes and expectations before we see flow trends emerge at the total net asset level. Despite the continued rise in assets heading into the first cut, we may still see outflows should rates continue to fall and if market strength persists.

So, if history were to repeat itself, how much cash could be on the table to invest elsewhere? Well, that’s the “but” I mentioned that I get to in the next section.

Q: How much excess cash could be put to work?

A: When you see the headline of “Record $6.4 Trillion in Cash on the Sidelines,” don’t be fooled into thinking this entire wave of money will be invested. Investors tend to hold cash on the sidelines – but if history is any guide, there’s potentially $616B - $1.2T in excess to reallocate today.

In truth, there are a few ways to tackle this question. If we approach it from a money market total asset lens, as we did in the prior chart, and if history is any indication, once investors started consistently pulling out, cash was reduced by about 20% of its total net assets over the next 24 months. If history repeated itself exactly (though it likely won’t), that would imply $1.2 trillion of money market funds could be redeployed to more yield-seeking areas of the market.

If you try to answer the same question by instead using the total balance of money market funds as a percentage of the total of all funds in Morningstar, then portfolios are still overweight about 2% compared to long-term average cash allocations. In using this calculation, we estimate there is about $616 billion on the sidelines that could fund new stock or bond allocations.

That’s anywhere from $616 billion - $1.2 trillion potentially ready to allocate elsewhere. Both estimates are still big numbers – but not as eye catching as the “Record $6.4 Trillion of Cash on the Sidelines” headlines would have you believe.

Source: Morningstar Direct. U.S. Money Market % Market Share is the weight of total net assets in USD, Millions as a % of all other Morningstar US Category total net assets as of 9/30/2024. Long-Term Average (9/30/2014-9/30/2024) calculated monthly.

We have seen evidence that money markets’ share of total net assets is moving down from the October 2023 peak towards its longer-term average, with allocation percentages leveling off as fewer net dollars are going to cash. We believe the shift into the rate-cutting cycle and attractive stock and bond performance are driving this adjustment of investors’ portfolios and that expectations and implementations of rate cuts could continue driving this early trend.

Q: Have investors been rewarded by their move into cash?

A: Yes – in the short run; no – in the long run. Given that bond prices go down when rates go up, and that the Fed was raising interest rates in 2022 and 2023, it makes sense that short-term treasuries outperformed both longer-term and lower-credit quality bonds. However, for long-term investors, holding Treasury bills (T-Bills) in place of "riskier" bonds could put a heavy drag on your earnings and speed at which you reach your financial goals.

Source: Morningstar Direct. Performance data shown represents past performance and is no guarantee of future results.

Between the Fed’s first rate hike of its most recent cycle on March 15, 2022, and September 30, 2024, the Bloomberg US Agg Bond (proxy for bonds) only outperformed the U.S. Treasury 3-Month Bill (proxy for cash) in 35% of rolling three-month periods, 26% of rolling six-month periods, and 10% of rolling one-year periods.

That said, a longer-term view tells a different story (after all – that’s only representative of a two-and-a-half-year period), as bonds outperformed cash between 64% to 94% of the time over rolling three-month, six-month, one-year, three-year, and five-year periods from July 1981 to September 2024. Thus, we deduce that over time, you have a much higher probability of experiencing consistent outperformance in bonds over cash.

Q: What happens to bond yields when the Fed starts cutting?

A: Generally, the two move in tandem downwards. Surprisingly, though, that’s not what we’ve seen happening so far this easing cycle.

Historically speaking, you can see in the following chart that after the Fed cuts rates, the 10-year note also tends to fall over the subsequent 20-50 days. Thus far in the current rate-cutting cycle, however, the 10-year has decided to buck the trend and rise instead of fall. That said, you can see after the 2001 and 1995 cuts, yields also initially rose before eventually falling.

One potential driver of this current dynamic could be that inflation expectations are rising – a factor that could put a pause on any further rate cuts. We also have a new government regime to wrap our minds around in terms of potential market and economic implications.

We will be keeping an eye on the 10-year note as an important indicator of investor sentiment and market performance expectations as we navigate a new political era.

Source: Morningstar Direct and Federal Reserve Bank of St. Louis. Each day in the chart represents the yield change between that day and the day before the first Fed rate cut (Day 0). September 2024: (9/18/2024 – 10/31/2024). Performance data shown represents past performance and is no guarantee of future results.

Q: Should I be holding cash at the beginning of a rate-cutting cycle?

A: History suggests NO. As of September 2024, we sit at yet another “Month 0” of a Fed Reserve first rate cut. On average, investing in cash (instead of core bonds) after the Fed’s first rate cut translates to 15% in lost cumulative total return over the subsequent three-year period. Although this analysis includes periods where yields briefly rose before eventually falling, ultimately an investment in the Bloomberg US Agg Bond returned an average of 22% in the three years after the first cut compared to cash’s 7% return. A whopping 15% is a lot to leave on the table.

Source: Morningstar Direct. Each month in the chart represents the median monthly return across five prior cutting cycles, starting from Month 0 (or month of the first rate cut) through Month 36 (three years following that first rate cut) using monthly, total net returns. All indices are in USD and based on total returns. Performance data shown represents past performance and is no guarantee of future results.

Unsurprisingly, equities (represented by the S&P 500) historically performed the best in a three-year stretch following the Fed’s initial rate cut. That said, high-yield bonds (represented by the ICE BofA High Yield) delivered returns similar to their equity counterparts with the added perceived benefit of lower risk.

Q: Do cash and bonds outperform inflation over the long run?

A: Historically, yes. But bonds materially outperformed cash relative to inflation. Surprisingly, cash has historically outperformed inflation over the long term, as exhibited in the following chart, delivering a 1.3% inflation-adjusted (real) annualized return since July 1981. This surprised me, as I was always taught cash=trash in “Investment 101” class as an analyst. But, since 1981, simply holding T-bills (cash) beat inflation, netting a positive real return.

It should therefore come as little surprise that bonds’ inflation-adjusted outperformance handily beat that of cash covering the same period – delivering a 4.3% excess return versus inflation. This amounted to a 3% improvement upon the excess return provided by cash, offering a compelling advantage in terms of both nominal and real returns for those investors who opted for an investment in bonds over cash.

So, if you believe as we do that higher inflation is sticking around, then cash may struggle to outpace inflation, and bonds could be crucial to maintaining purchasing power going forward. While holding some cash may be necessary for spending or planning purposes, history tells us that surplus cash should be put to use in more productive areas, like core bonds, for the long-term investor.

Source: Morningstar Direct & Federal Reserve Bank of St. Louis. 1Personal Consumption Expenditures: Chain-Type Price Index 2017=100, Seasonally Adjusted. Performance data shown represents past performance and is no guarantee of future results.

Q: Which sectors are fixed income investors allocating to today?

A: Based on Morningstar asset flow data, investors appear to have agreed it’s time to shift out of short-term treasuries and into longer-term treasuries and credit funds.

There has also been a move into multisector funds (almost entirely into active funds) – likely investors’ effort to let an active manager make those sector and rate decisions for them in such uncertain times (more on active later).

Source: Morningstar Direct using US taxable bond categories. Ratio % (Cumulative Monthly Net Flows Category/Category Total Net Assets as of 9/30/2024). Category Market Share %: (Category Total Net Assets 9/30/2024/All Taxable Bond Categories Shown Total Net Assets).

On a total net flow basis, bond funds experienced positive inflows for the year through September 2024. While we can’t say for sure that their gain is cash’s loss, we have seen the elevated level of flows into cash (as defined by short-term government bonds) temper.

Q: How are investors accessing the bond market today?

A: Mainly via ETFs. This is the first time in history that flows into bond ETFs have significantly surpassed flows into bond mutual funds.

Source: Morningstar Direct. See Important Information for details.

Not only that, but we see that relative to their respective size, investors in the taxable bonds space are leaning heavily in favor of active ETFs.

Despite ETFs amounting to only 28% of total net assets in taxable bond products, this represents a 19-percentage point increase from 10 years ago and 12-percentage point increase from the beginning of 2019. Importantly, net flows (70%), cumulative net flows (58%), and the ratio of cumulative net flows to total net assets (96%) shows dominance from ETFs as a vehicle preference in comparison to mutual funds.

Moreover, although active ETFs sit at only 4% of total net assets as of September 30, 2024, net flows since January 2019 drove their organic growth rate to 77%. We can now confidently state that bond ETFs are becoming the defacto way of accessing bond markets.

Source: Morningstar Direct. See Important Information for details.

Q: Are active fixed income management fees worth it?

A: I would argue yes – they are worth it. Even more so during uncertain and volatile periods like we find ourselves in today. Our analysis of Morningstar US Fixed Income active managers support our take and highlight some interesting trends.

Source: Morningstar Direct. All returns are total and net of fees (9/30/2014-9/30/2024). Hit Rate: % of active managers (as defined by Morningstar US Open-end & ETFs, ex MM, Feeder & FoFs, Not = to Index Fund, using all share classes in Morningstar) in Morningstar category outperforming their primary benchmark. All Fixed Income is the median of the four categories shown. Performance data shown represents past performance and is no guarantee of future results.

Over the longer term and in a more benign, “normal” rate environment, I’d argue that selection skill (how well you pick the right managers) was more important, given only about 50% of fixed income managers outperformed their primary benchmarks. This was especially true for high-yield and core bond managers, as only about 34% and 44%, respectively, outperformed over this benign rate environment.

However, over the last five years, we saw that increased rate and market volatility isn’t always a bad thing for active managers. Rather, active managers are historically able to navigate these periods well, as it typically creates more investment opportunities and price dislocations to exploit as market breadth widens.

Multisector funds represented the largest increase in hit rate from only 52% in the benign rate environment to 89% this year through September 30, 2024. As noted in earlier sections, flows followed this performance, perhaps in investors’ attempt to let someone else figure it all out, given those funds have more flexibility compared to other categories to invest where they see opportunities across more sectors and credit qualities. Similar logic applies to core plus, as those strategies offer more investment optionality than other categories, in our view.

That said, all categories other than high yield jumped more than 20 percentage points in 2024. High yield did jump 12 percentage points from 2014 through September 30, 2024, which is notable. But what we find more notable is that high-yield managers seem to struggle the most to outperform, making it a category where your manager selection skills are seemingly more impactful than others.

Q: What qualities do you find tend to differentiate successful fixed income managers?

A: Singles and occasional doubles – not home runs. We’ve identified some key characteristics we believe are indicative of successful active managers – they don’t reach for yield, they don’t take large duration bets, meaning they rely most heavily on bottom-up security selection over allocation choices in an effort to generate alpha.

Core plus makes up about 25% of all fixed income category assets, so let’s dig in there.

Source: Morningstar Direct, Harbor Capital Advisors. See Important Information for details. Performance data shown represents past performance and is no guarantee of future results.

Notably, the “top performers” group did not take on higher market risk, as their beta aligned with both peers and the index. They also took on slightly less credit risk than peers (as defined by the high-yield portion of exposure) and about the same interest rate risk (as defined by effective duration) as both peers and the index. In other words, top performers did not take on any large, relative credit or rate bets to drive returns.

While the group experienced slightly lower volatility than peers and a bit more volatility than the index, we find that higher tracking error/standard deviation isn’t always a bad thing when accompanied by outperformance.

In other words, those higher tracking error/standard deviation figures likely stem from more variance to the upside than down, which is confirmed by a higher information ratio (or measure of risk-adjusted returns).

Source: Morningstar Direct. See Important Information for details. Performance data shown represents past performance and is no guarantee of future results.

So, without having to make large sector or rate bets, or taking on more relative portfolio risk, these managers were able to outperform both peers and the index across a range of return metrics. Our takeaway being that top-performing managers seem to take a disciplined approach, relying more on security selection skill to hit singles and sometimes doubles, instead of swinging for home runs with outsized portfolio bets.

Q: I’ve recently read more in the press about the rise of quants in fixed income. Is this a thing?

A: One of the fastest growing new trends in the fixed income market is the rise of systematic (or quantitative) fixed income investing. Over the last four years, assets under management (AUM) growth in systematic strategies has started to really outpace fundamental (bottom-up, discretionary) strategies.

First, let me take a step back and define systematic investing. Broadly speaking, it’s an investment approach that leverages advanced technology, increasing data availability, and human expertise to generate complex statistical models whose outputs aim to construct optimal portfolios.

However, we’re most interested in an active approach to the space – so not talking about your “smart betas” of the world that tilt to broad-based, widely utilized factors, but rather actively managed strategies using the firm’s own proprietary models and insights to find meaningful relationships between data and performance that can be applied to optimizing portfolio construction.

In our view, the U.S. fixed income universe is a perfect hunting ground here, as it’s quite large (about 15,000 securities) and has evolved in terms of data, vehicle, and trading availability. This makes the opportunity set prime for letting an active manager utilize a systematic approach to sort through such a large data set in the way they believe will result in the most alpha. We are especially bullish on the systematic opportunity within credit markets, such as high yield.

So, when you take the ability to use advanced technology to sort and extract actionable insights at speeds much faster than humans and combine that with active managers leveraging their own distinct scientific research and expertise to build those models, we believe the process helps position investors to earn an attractive premium in public credit investing.

Source: eVestment. Universe: All US fixed income, excluding cash management and cash enhancement products. Systematic (Quant) Funds: Universe screened for primary investment approach = “Quantitative”. Fundamental Funds: Universe screened for primary investment approach = “Fundamental”. Quarterly AUM in USD, Millions is sum of all strategy AUMs reported that period by approach. See Important Information for further details.

Q: Do I need to reconsider the diversifying role I expect bonds to play in my portfolio?

A: We believe bonds will diversify again. Bonds AND stocks being down was painful on portfolios, but it’s worth calling out that the 2022 drawdown was the first major equity selloff since inception of the Bloomberg US Aggregate Bond Index in 1980 where that happened. In fact, 2022 was also the only year where stocks and bonds both sold off in unison. It was driven by the unique combination of historically low interest rates as a starting point, combined with a historical inflation shock – a truly toxic combination for bonds.

Source: Morningstar Direct & Federal Reserve Bank of St. Louis. Index returns are total, net monthly. Major Drawdowns defined as periods where the S&P 500 fell <= -20% rounded to nearest tenth decimal place using monthly returns. S&P 500 Trough is the max cumulative loss from the index’s prior peak. See Important Information for details. Performance data shown represents past performance and is no guarantee of future results.

During past equity drawdowns, the Fed generally turned to cutting rates to buoy the economy. But in 2022, it was the opposite – the economy was strong and inflation ran hot. In an effort to cool the economy and combat inflation, the Fed hiked rates, but, as we know, bonds fall when rates rise. So, when equities fell, rates pushed bonds down right along with them.

Source: Morningstar Direct. S&P 500 Negative Calendar Year: Years between 1981-2023 with a negative total, net return calculated monthly between January 1st and December 31st of each year. Performance data shown represents past performance and is no guarantee of future results.

Q: Do I need to reconsider the diversifying role I expect bonds to play in my portfolio? (Continued)

A: Yes, we still believe bonds diversify, but 2022 was a reality check that it’s not the only form of equity diversification to consider, as the year highlighted the key role commodities can play in diversifying portfolio returns.

While we might expect to see stock-bond correlation continue to decrease as rates and inflation drop, 2022 revealed that low inflation and near-zero interest rates were a temporary gift of the great financial crisis era, and we need to adjust future performance expectations.

We believe that we have transitioned to a new regime marked by higher inflation and interest rates. Given that commodity prices are mainly supply and demand driven, they have historically been less sensitive to stock and bond market returns.

For example, if you had a hypothetical portfolio comprised of just stocks, bonds, and commodity indices, and wanted to evenly distribute the risk you're taking across all three, historically, you needed a high allocation to bonds to take on the same amount of risk as stocks or commodities. Over the past few years, however, the combination of higher rate volatility and positive correlation between stocks and bonds began deteriorating the diversification benefits of bonds (as evidenced in the following chart) – i.e., you no longer needed as much of an overweight in bonds to take on the same risk as stocks and commodities. Conversely, commodities’ diversification benefits improved, requiring you to own more in the portfolio.

In summary, although we believe bonds still play an important role, we also think we’ve entered a new market environment that requires thinking about diversifying in more ways than one!

Source: Bloomberg. As of 9/30/2024. Hypothetical for illustrative purposes only. Calculations based on 1-year lookback of weekly returns for the S&P 500 Index, Bloomberg Commodity Total Return Index (proxy for US Commodities), and Bloomberg US Treasury Total Return Index (proxy for US treasuries/bonds). See Important Information for more details. Performance data shown represents past performance and is no guarantee of future results.

Important Information

The views expressed herein may not be reflective of current opinions, are subject to change without prior notice. This material is for informational and illustrative purposes only. This material does not constitute investment advice and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy.

Investing entails risks and there can be no assurance that any investment will achieve profits or avoid incurring losses.

Stock and bond values fluctuate in price so the value of your investment can go down depending on market conditions. Investing in fixed income securities carries risks, including interest rate, credit, and inflation risks. Rising interest rates may reduce their value, and issuers may default, resulting in potential loss of principal and interest. Liquidity risk can also make it difficult to sell at favorable prices, and economic changes or issuer creditworthiness can impact their value. The value of commodities investments will generally be affected by overall market movements and factors specific to a particular industry or commodity including weather, embargoes, tariffs, or health, political, international and regulatory developments.

This material may contain forward-looking information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. INADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING.FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

© Morningstar 2024. All rights reserved. Use of this content requires expert knowledge. It is to be used by specialist institutions only. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.

Alpha refers to excess returns earned on an investment above the benchmark return when adjusted for risk.

Beta compares a stock or portfolio's volatility or systematic risk to the market.

Correlation is a statistic that measures the degree to which two securities move in relation to each other.

Credit risk is the possibility of a loss resulting from a borrower’s failure to repay a loan or meet contractual obligations.

Duration measures the sensitivity of a bond to changes in interest rates.

Factors are characteristics that can explain the risk and return performance of an asset.

Fundamental investing refers to the process of analyzing the underlying factors that contribute to the price of an investment.

Great Financial Crisis (GFC) refers to the economic downturn from 2007 to 2009 after the bursting of the U.S. housing bubble and the global financial crisis.

Information ratio measures portfolio returns beyond the returns of a benchmark, usually an index, compared to the volatility of those returns.

Intrinsic value is the perceived or calculated value of an asset, investment, or company and is used in fundamental analysis and the options markets.

Purchasing power is the value of a currency expressed in terms of the number of goods or services that one unit of money can buy.

Sharpe ratio divides a portfolio's excess returns by a measure of its volatility to assess risk-adjusted performance.

Smart beta emphasizes capturing investment factors or market inefficiencies in a rules-based and transparent way.

Standard deviation is a statistical measurement that looks at how far individual points in a dataset are dispersed from the mean of that set.

Systematic/quantitative investing uses mathematical models and algorithms to determine investment opportunities.

Tracking error is the difference in actual performance between a position (usually an entire portfolio) and its corresponding benchmark.

Treasury bills (T-bills) are a short-term U.S. government debt obligation backed by the U.S. Department of the Treasury. Terms range from four to 52 weeks.

US Treasury Forward Rate Curve represents market-implied future yields of on-the-run U.S. Treasury notes of different tenors.

Yields are the earnings generated and realized on an investment over a particular period of time, including the interest it earns or the dividends paid to investors.

Slide 9 Charts (US Taxable Bond Asset & Flows by Approach and Vehicle): Universe is all US Taxable Bond categories across both Electronically Traded Funds (ETFs) and Open-End Investment Funds (Mutual Funds) that are available in Morningstar Direct. Active is defined as funds not classified as an Index fund, while Passive are those that do qualify as an Index fund according to Morningstar Direct. Cumulative Net Flows are the cumulative sum of monthly net flows between 1/1/2024-9/30/2024 (Chart 1) and 1/1/2019-9/30/2024 (Chart 2), Total Net Assets are as of 9/30/2024 (Chart 1), Organic Growth Rate (%) is the ratio of Cumulative Net Flows/Total Net Assets by approach and vehicle over same time periods as Cumulative Net Flows. In Chart 1, % of Net Flows is the weight (%) of the stated vehicle & approach net flow on 9/30/2024 as a percent of all vehicle & approach net flows on 9/30/2024.

Slides 11 & 12 Charts (Core Plus Top Performers Risk/Return Metrics): Sources: Morningstar & FactSet. Universe: Morningstar US Open-end & ETFs, ex MM, Feeder & FoFs, Not = to Index Fund, using all share classes. Category: US Intermediate Core-Plus. Peer Group Top Performers*: Those active manager (as defined above as Not = to Index Fund) that had Information Ratios over trailing 1,3,5, & 10YRs > Category Average, earned positive Alpha over trailing 1,3,5, & 10 Yrs, and ranked in top 30th Percentile over trailing 10YRs. All characteristics & returns-based metrics using the median of the monthly, total net returns/allocation to High Yield %/average Effective Duration # of years. All relative metrics are vs Bloomberg US Agg Bond TR USD & all data measured over trailing 10YRs as of 8/31/2024.

Slide 13 Chart (Systematic vs Fundamental AUMs): eVestment defines a Fundamental approach as a method of evaluating a security to measure its intrinsic value. This may include analyzing past records of assets, earnings, sales, products, management, and markets to estimate whether the security is overvalued or undervalued. eVestment defines a Quantitative approach as a method of evaluating a security by seeking to predict its future behavior by using statistical modeling and research.

Slide 14 Chart (S&P 500 Major Drawdowns): S&P 500, Bloomberg US Agg Bond, & the Federal Funds Effective Rate calculated over (S&P 500 peak-trough). Personal Consumption Expenditures: Chain-Type Price Index 2017=100, Seasonally Adjusted calculated over (1Y Prior to S&P 500 Peak – Peak) to demonstrate inflation’s potential influence on subsequent rate and market movements.

Slide 15 Chart (Equal Risk-Weighted Portfolio: Stocks, Bonds, and Commodities): This is a hypothetical portfolio of indices: S&P 500, Bloomberg US Treasury Total Return, and Bloomberg Commodity Total Return. The portfolio takes the covariance matrix of rolling 52 week returns for the three indices and constructs an equal risk-weighted portfolio - risk being the contribution to the three-asset portfolio’s variance/standard deviation assuming the covariance matrix. It assumes nothing about expected returns. When treasuries’ weight in the chart is falling it indicates that for a given 1% allocation to treasuries, they are less diversifying and/or more volatile than previously which down weights them. You can decompose this explicitly and find that it’s both a more positive correlation to equities (less diversifying) and higher relative volatility contributing. The commodity weight increases because they are more diversifying for the portfolio.

The Bloomberg US Aggregate Bond Index is an unmanaged index of investment-grade fixed-rate debt issues with maturities of at least one year. The 3-Month Treasury bill is a short-term US government security with a constant maturity period of 3 months. Bloomberg US Government Index includes US dollar-denominated, fixed-rate, nominal US treasuries and US agency debentures. ICE BofA US High Yield Index is an unmanaged index that tracks the performance of below investment grade U.S. Dollar-denominated corporate bonds publicly issued in the U.S. domestic market. All bonds are U.S. dollar denominated and rated Split BBB and below. Bloomberg US Corp Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. The S&P 500 Index is an unmanaged index generally representative of the U.S. market for large capitalization equities. PCE Chained Index is a measure of the average price increase for personal consumption in the United States. These unmanaged indices do not reflect fees and expenses and are not available for direct investment.