Strategic Income Fund (HFAAX, HFABX, HFACX, HFAIX)

The Fund seeks to achieve total return through current income and capital appreciation. The Fund invests in securities across a variety of fixed income sectors including international investment grade corporate and government debt, international high yield debt, emerging market debt, US government and corporate debt. The Fund may also invest in dividend-paying international equities. The Fund is managed by Jenna Barnard and John Pattullo.

• Quarterly Factsheet

 

Dividend information

Ex date	3/27/12			NASDAQ Symbol	Per Share Dividend
Record date	3/26/12		Class A	HFAAX	0.033942
Reinvest date	3/27/12		Class B	HFABX	0.028254
Payable date	3/27/12		Class C	HFACX	0.028107
			Class I	HFAIX	0.034383

Why invest in this fund?

• An opportunistic portfolio with exposure to different sectors within the global fixed income universe
• A multi-manager approach that combines bottom up security selection with a strategic asset allocation process
• An experienced portfolio management team

   

Fund facts (as of 3/31/12)

Inception date:	9/30/03
Minimum initial investment:	$500
Benchmark:	50% ML Global HY / 50% ML Global Corp Index (USD-hedged)
Total number of holdings:	50
Dividend frequency:	Monthly
% of holdings in top 10:	40.5
Morningstar rating (as of 4/30/12)1

¹ Morningstar category: Multisector Bond, Number of funds in category: 194. The overall Morningstar Rating for the Fund is derived from a weighted average of the risk-adjusted performance figure associated with its 3- and 5- year Morningstar Rating metrics.

 

Portfolio management

John Pattullo
Head of Retail Fixed Income

• Read biography 

Jenna Barnard, CFA 
Director of Retail Fixed Income

• Read biography 

 

 

Top ten holdings %
(as of 4/30/12)

US Treasury (US)	13.1
ITV (UK)	3.4
Daily Mail & General Trust (UK)	3.4
UPC (Netherlands)	3.2
Iron Mountain (US)	3.1
Legal & General (UK)	3.0
Constellation Brands (US)	2.9
Service Corp International (US)	2.9
Virigin Media (UK)	2.5
UnityMedia (Germany)	2.4

Country classifications are based on a company's legal domicile rather than the underlying exposure of its business.

• Full holdings list

Performance

Relative performance as of 3/31/12

Inception date 9/30/03.

Lipper Inc. is an independent mutual fund rating service that ranks funds in various fund categories by making comparative calculations using total returns. Lipper returns do not take into effect sales charges. Rankings are for Class A shares only: other share classes may vary.

Expense ratios are not guaranteed numbers and may fluctuate. Gross and net expense ratios are presented as a percentage of average net assets. The gross expense ratio is stated in the current prospectus and is based on the Fund's then most recent previous fiscal year. The net expense ratio is unaudited and is based on annualized fiscal year-to-date results from 1/01/12 to 3/31/12. The ratio may differ from that presented in the Fund's prospectus.

Effective 11/30/10, the Strategic Income Fund will not accept new or additional investments in Class B shares (HFABX).

For periods prior to 5/31/11, Class I share rates of return are based on Class A shares at NAV.

The Strategic Income Fund may invest in high yield, lower rated (junk) bonds which involve a greater degree of risk than investment grade bonds in return for higher yield potential. As such, securities rated below investment grade generally entail greater credit, market, issuer and liquidity risk than investment grade securities. Moreover, the Fund is subject to interest rate risk which is the risk that debt securities in the Fund’s portfolio will decline in value because of increases in market interest rates. The Fund may borrow money which may adversely affect the return to shareholders of the Fund, also known as leverage risk.

Credit quality ratings are primarily sourced from Standard & Poor's (the "S&P") but in the event that the S&P has not assigned a rating the Fund will use Moody's or Fitch. If these ratings are in conflict the most conservative rating will be used. If none of the major rating agencies have assigned a rating the Fund will asign a rating of NR (non-rated security). The ratings represent their (S&P, Moody's, Fitch) opinions as to the quality of securities they rate. Ratings are relative and subjective and are not absolute standards of quality.

Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. Performance results with sales charges reflect the deduction of the maximum front end sales charge and/or the deduction of the applicable contingent deferred sales charge (CDSC). Class A shares are subject to a maximum front end sales charge of 4.75%. Class B shares are subject to a CDSC, which declines from 5% the first year to 0% at the beginning of the seventh year. Class C shares may be subject to a CDSC of up to 1% on certain redemptions made within 12 months of purchase. Performance presented at NAV which does not include these sales charges would be lower if these charges were reflected. The Fund’s annual operating expenses will likely vary from year to year. It is important for you to understand that a decline in the Fund’s average net assets during the current fiscal year due to recent market volatility or other factors could cause the Fund’s expense ratios for the Fund’s current fiscal year to be higher than the expense information presented. Returns greater than one year are annualized. Index returns provided by Lipper, Inc. Net Asset Value (NAV) is the value of one share of the Fund excluding any sales charge.

Returns included the reinvestment of dividends and capital gains. Performance results reflect expense subsidies and waivers in effect during the periods shown. Absent these waivers, results would have been less favorable for certain periods.

As of 3/31/10, the Fund changed its benchmark from the Barclays Capital Global Aggregate Bond (ex US MBS) Index to the Bank of America Merrill Lynch Global High Yield Index (50%) and the bank of America Merrill Lynch Global Corporate Index (50%) (USD-hedged).  The Fund believes the newly blended index more accurately reflects its investment strategy and holdings and is now more appropriate for the Fund.

The Bank of America Merrill Lynch Global High Yield Index (USD-hedged) tracks the performance in US dollars on a hedged basis of Canadian Dollar, British sterling, US dollar and euro denominated developed market below investment grade corporate debt publicly issued in the major US or eurobond markets. The Bank of America Merrill Lynch Global Corporate Index (USD-hedged) tracks the performance in US dollars on a hedged basis of developed market investment grade corporate debt publicly issued in the major US and eurobond markets.

Fund overview

This Fund seeks total return through current income and capital appreciation. The Fund invests in securities across a variety of fixed income sectors including international investment grade corporate and government debt, international high yield debt, emerging market debt, US government and corporate debt. The Fund may also invest in dividend-paying international equities. The Fund is managed by John Pattullo and Jenna Barnard. 

Quarterly update

The exceptionally strong performance of credit markets in the first quarter of 2012 was a dramatic turnaround from the second half of 2011. The primary catalyst for this market rebound appeared to be the announcement from the European Central Bank (ECB) in December that they would offer unlimited amounts of three year money for the European banking system.  In addition to removing the threat of bank failures, it appeared to kick-off a virtuous circle of domestic banks buying their own country's government bonds enabling a heavy quarter of peripheral sovereign bond issuance to be absorbed with minimal stress.   Corporate news-flow in America continued positively as the economy showed some signs of growing momentum especially regarding employment growth. This positive American growth outlook and European crisis containment continued through most of the first quarter but by late March cracks in both stories were beginning to appear. Weak economic data from both Continents during the month of March combined with the Spanish government's reduced commitment to fiscal retrenchment highlighted that the liquidity boost provided by the ECB was no fundamental solution to the European crisis and much work on solvency remained to be done. In contrast, core government bond markets proved relatively dull during the period.

Fund performance

The Fund (Class A shares at NAV) underperformed its benchmark, returning against returned by the 50% ML Global High Yield Index (USD hedged) /50% ML Global Broad Market Corp Index (USD hedged).

Investment activity

During the quarter the Fund added to its investment grade holdings through both a combination of secondary market purchases (e.g. Global Switch, WPP and British Telecom) and new issues with two particularly attractive deals from BAA (7.125% coupon) and RWE (7% coupon). In high yield the focus remained on relatively noncyclical business with the purchase of Odeon (Europe) and Regal (USA) cinemas. In contrast to the wider market the Fund continued to reduce down its holdings in financial bonds with the sale of Axa, Aviva and Investec during a strong quarter for the performance of financial bonds.  This reflected a belief that the European crisis was not over and that growth momentum looked likely to peak in 2nd quarter 2012 making this a particularly vulnerable time for another risk-off phase.   We continue to expand the use of derivatives  - interest rate futures were used to expand duration (interest rate sensitivity).  Post quarter end, we started using credit derivative indexes to reduce risk.

Outlook

Although we are concerned about European growth dynamics and future market volatility, it is worth stressing that the outlook for defaults within the portfolio remains relatively benign in our view. Default rates globally remain at a very low levels and we envisage only a modest pick-up in these levels due to the considerable work that companies have done in refinancing debt and the relative lack of aggressive issuance in recent years. Given recent back office enhancements we will look to use credit derivatives to add and subtract risk efficiently to the benefit of shareholders going forward.

Prospectus/SAI

Strategic Income Fund