The iMGP High Income Fund rose 1.28% in the first quarter, trailing the Bloomberg Aggregate Bond Index (the Agg), which was up 2.78%, but beating high-yield bonds (BofA Merrill Lynch US High-Yield Cash Pay Index), which rose 0.97%. The fund performed in line with its Morningstar Nontraditional Bond category peer group’s 1.24% gain.

Past performance does not guarantee future results.  Index performance is not illustrative of fund performance.  An investment cannot be made directly in an index. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. To obtain the performance of the funds as of the most recently completed calendar month, please visit www.imgpfunds.com. Investment performance reflects fee waivers in effect. In the absence of such waivers, total return would be reduced.

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Quarterly Review

Performance of Managers

During the quarter, two of the three subadvisors produced positive returns. Guggenheim was up 1.77% and BBH gained 1.42%. Neuberger Berman was down 0.05%. (All sub-advisor returns are net of the management fees that each sub-advisor charges the fund.)

Manager Commentaries

Brown Brothers Harriman

The first quarter of 2025 may have been the calm before the storm. Treasury rates declined across the yield curve as concerns about muted growth prospects emerged due to indications the U.S. government planned to introduce protectionist trade policies. These concerns impacted investor predictions for forward-looking Fed interest-rate decisions, indicating one additional Fed rate cut was expected and bringing the tally of expectations to four cuts by year end. The next Fed decision is scheduled for May 7th, and investors predict no change to the federal funds rate at that meeting.

The Bloomberg U.S. Aggregate Index returned 2.8% during the first quarter as interest rates declined and credit spreads widened modestly from a low base. Riskier market segments underperformed high-quality bonds. The Bloomberg U.S. Corporate High Yield Index returned 1.0%, and the S&P 500 Index fell 4.3%. All major credit segments of the Bloomberg U.S. Aggregate Index had negative excess returns during the quarter.

The sleeve gained during the quarter due to contributions from the portfolio’s duration profile and favorable selection results more than offsetting negative sector and rating effects. The portfolio’s sector and rating emphases detracted from results, primarily due to exposures within holdings of loans. Selection was additive to performance during the quarter, as the portfolio experienced contributions from its holdings of loans despite the negative sector and rating effects. Holdings of loans to technology companies, electric utilities, and industrial companies were additive to selection during the quarter. Holdings of high-yield corporate bonds of technology companies and collateralized fund obligations also enhanced selection results. Positions in CLOs, loans to media entertainment companies, and investment-grade corporate bonds of chemical companies, specialty finance companies, and electric utilities had negative selection effects during the quarter.

We found numerous opportunities for the portfolio that met our valuation and credit criteria during the quarter. Some key ones to point out are positions in corporate bonds issued by a chemicals company, a loan to an outdoors retailer, and corporate bonds of a building materials company. At the end of the quarter, the portfolio’s duration was 2.1 years, high-yield and non-rated investments stood at 40.0% of the portfolio’s market weight, the option adjusted spread was 328 basis points, with a yield to maturity of 7.6%.

Credit issuance remained robust during the quarter, with issuers refinancing short maturities amid low credit spreads, muted volatility, and strong demand. High-grade corporate bond issuance increased 19% while high yield issuance (bonds plus loans) was flat year over year. ABS issuance was flat, but non-traditional ABS volumes increased 10% from 2024’s pace. CMBS volumes jumped 139% off a lower base year over year. Net issuance was modest but positive in all credit sectors.

With spreads wider and positive net issuance, opportunities are emerging in pockets of the market. The percentage of credits that screened as a “buy” increased to 11% from 4% for investment-grade corporate bonds and to 38% from 16% for high-yield corporate bonds. The percentage of loans screening as a “buy” decreased though to 45% from 58%. Within the investment-grade corporate credit market, interest-rate sensitive sectors like life insurance, finance companies, and banks continue to screen attractively, while opportunities are also emerging in consumer cyclical companies. Tariff pressures should have a greater effect on more leveraged businesses in the high yield market, which drove credit spreads towards more appropriate ranges.  Away from credits in mainstream indexes, spreads in some ABS subsectors increased towards their long-term averages. Most nontraditional ABS continue to screen attractively in our valuation framework and offer appealing yield prospects. Data center ABS spreads widened from very low levels as concerns over long-term data center demand arose from AI efficiency improvements and potential tariffs. CMBS spreads in select opportunities remain disconnected from their credit profiles, as property-level dynamics remain imperative for performance.

Valuations are not yet broadly attractive, and caution is still warranted in several areas of the market. Agency MBS valuations remain broadly unattractive as spreads compressed further, with no cohort of the 15- or 30-year MBS market screening as a “buy” candidate. Negative excess returns remain possible for most of the investment-grade corporate bond universe. Less than half of the high yield corporate bond and loan markets screen attractively, highlighting the importance of a selective approach. Spreads on CLO debt widened from very narrow levels to below-average levels. Emerging-market credits remain unappealing to us due to concerns over creditor rights in most countries and its impact on their durability, compounded with the uncertainties that tariffs may impose on supply chains. We believe non-agency RMBS remains plagued by poor issuance trends, unattractive valuations, and weak fundamentals.

Valuations reflect a growing belief that the U.S. economy is slowing. GDP estimates declined and suggested a recession is possible. Changing global tariff policies have weighed on business and consumer sentiment while also driving concerns about inflation.

Credit performance of business loans has been strong, although recent tariff policies may challenge future credit performance. Defaults trended lower, while recoveries improved. U.S. business bankruptcies remain low, and business loans held at banks are performing well. There has been an increase in pay-in-kind (PIK) interest for loans held in some private credit structures. We are monitoring the increase in PIK loans closely to distinguish between unique borrower business models versus inabilities to service debt.

U.S. consumer debt dynamics suggest a weaker, but not currently worrisome, outlook. Delinquency rates and charge-offs are rising toward normalized levels even as the continued pause on student loan payments remains. However, conditions for ABS structures and banks with exposure to consumer loans are manageable.  This section of the market remains able to withstand losses without risk of impairment, while performance should be more resilient in ABS issuers with tight underwriting standards.

Commercial real estate credit performance paints a mixed picture. Delinquency rates are rising across sectors, but there has been a recent, notable improvement in the delinquency rate of SASB office properties. There is mounting evidence that property-level differentiation is driving better CMBS outcomes. For example, Return to Office dynamics may be stronger in some markets than others, consistent with our observations and multiple data sources. The market has been open for issuers seeking to refinance, and deals backed by higher quality properties are well received in the market. Weakening office market values had limited impact on banks’ commercial real estate loan portfolios to date, suggesting risks of contagion are limited.  BBH has historically owned minimal SASB office exposure in portfolios given our credit selectivity and poor value.

Uncertainty over tariffs is already having a recessionary impact on business activity and could pressure the performance of many industries and companies. We remain steadfast in our approach, focusing on identifying durable credits – those that can withstand the worst environments faced by their issuer’s industries – at attractive yields. We do this by evaluating individual opportunities bottom-up and not allowing top-down sentiments to alter the application of this approach. We believe this decision-making structure serves our clients well in all environments, whether markets calm and complacent are volatile and uncertain, as they are today.

Guggenheim Investments

Following the announcement of sharply higher tariffs, we now see very low U.S. GDP growth in 2025. While there is a pause for negotiations, the baseline 10% rate still represents a sharp shock to U.S. trade policy, while rates in excess of 100% on China could bring bilateral trade to a halt. Prior to these tariff escalations, we had already anticipated some slowing in the economy as Q1 data came in weak and policy uncertainty was elevated. Consumer spending should slow as higher prices on tariffed goods leave less room for spending elsewhere, and consumers are likely to retrench and save more as they deal with the highly uncertain environment. Renewed declines in the stock market risk a negative wealth effect, particularly for high income consumers who have been the main engine of spending growth. Business investment was already weak and is likely to be frozen as companies wait to see how trade policy evolves and deal with supply chain disruptions. Use of revenues generated by tariffs to pursue greater tax cuts could provide some cushion to the economy, but those tax cuts may be too slow to get enacted or not targeted enough to low-income consumers who are most impacted by tariffs.

Recession odds have materially increased and are near 50%. Additional trade partner retaliation or even sharper tightening in financial conditions could make a recession more likely. Core inflation is likely to rise above 3% this year and could be closer to 4% if maximum reciprocal tariffs are reinstated. We anticipate that this inflation will fade quickly in 2026 as the economy slows. A risk to this view is if inflation expectations rise or inflation broadens out to services prices. The Federal Reserve is likely to face challenges to both sides of its mandate this year. But given the sizable jump in inflation, the Fed will be cautious in responding to the expected economic slowdown, waiting to ease until labor market weakness shows up in the data. We expect that means 2-3 rate cuts in 2025, before the pace of cuts speeds up in 2026 as inflation recedes, ultimately taking the policy rate below 3%. A more rapid economic slowdown could accelerate the pace of cuts in 2025. A risk to our view is if measures of longer-term inflation expectations broadly rise, which could increase the weight the FOMC places on defending its inflation mandate.

Spreads retuerned to their historical medians following the April 2nd tariff announcement, but investors should stay cautious as further downside risk remains with growth outlooks dimming. High quality fixed income posted solid returns even as spreads widened sharply. Investment-grade corporates outperformed the S&P 500 by 6.9% in the first quarter. We expect the 10-year Treasury yield to stay in our pre-established range of 3.75-4.75% but volatility is likely to remain high as markets assess trade, fiscal, and monetary policy changes. We are finding value in areas we consider to be of higher quality within sectors, more often represented by stable cash flows and structural security than by rating. Broadly speaking, fixed-income yields remain attractive. While corporate fundamentals are strong, we anticipate greater divergence among industries as some are more affected by potential tariffs. Active credit and sector selection is key.

Neuberger Berman

Equity Markets

The first quarter of 2025 delivered a turbulent ride for global equity markets, driven by President Trump’s sweeping global tariff policy announced on “Liberation Day.” US markets bore the brunt of this aggressive trade policy shift, with the S&P 500 Index declining 4.27%, marking its worst quarterly performance since Q3 2022, and the Nasdaq-100 plunging -8.07%. Growth-oriented sectors, particularly large-cap Information Technology stocks tied to artificial intelligence, faced sharp corrections as the disruptive DeepSeek breakthrough potentially lowered the cost of AI adoption, triggering valuation recalibrations. Defensive sectors such as Energy (+10.21%) and Utilities (+4.94%) provided a glimmer of stability, reflecting a strategic rotation toward safer investments amidst heightened uncertainty.

US Treasury Markets

Fixed-income markets provided a measure of calm amid the equity turbulence. U.S. Treasuries were largely viewed as a safe haven, delivering a 3.01% quarterly return for the Bloomberg US Treasury Index, as recession fears drove yields lower. Investment-grade bonds followed suit, posting a 2.78% gain (as measured by the Bloomberg US Aggregate Bond Index). Inflation-linked bonds outperformed nominal bonds, benefiting from falling real yields, while high-yield credit demonstrated resilience, ending the quarter up 1.00% (as measured by the Bloomberg High Yield Index) as tightening spreads reflected strong corporate fundamentals.

Option Implied Volatility Indexes

Volatility surged during the first quarter of 2025 as investors were caught in the crosscurrents of escalating tariff tensions, bold fiscal policy moves, and an increasingly uncertain economic outlook. The Cboe Volatility Index (VIX) spiked significantly, closing March at 22.28, up from 17.35 at year-end, before surging further to the low 50s in early April following “Liberation Day.” This marked one of the sharpest volatility resets in recent years, with the VIX rising by approximately 140% in just four days. Option markets, initially complacent, rapidly repriced risk as investors adjusted to the disruptive implications of steep tariffs and their potential long-term impact on global trade.

Despite the chaos, elevated implied volatility levels provided fertile ground for option strategies, which benefit from higher premiums. While the short-term mark-to-market impact of rising volatility was negative, we believe the repricing of risk has positioned these strategies to seek to capitalize on premium collection opportunities that approached 4-5% per month. Looking ahead, forecasts suggest that volatility may remain elevated in the mid-20s over the coming months, reflecting ongoing uncertainty tied to trade policy and geopolitical developments. This environment underscores the importance of strategies designed to navigate and leverage elevated risk pricing, offering a potential edge in increasingly volatile markets.

Outlook

A volatility regime change appears to be unfolding in global financial markets. With U.S. rates staying higher for longer and inflation/stagflation risks elevated compared to a year ago, equity markets are likely to confront a more uncertain economic outlook. Corporations, after decades of cheap capital, easing regulations, and favorable global trading conditions, now face challenges from increased technological competitiveness, growing competition for capital as bonds offer attractive yields, a significant pool of locked-up private capital, and geopolitical uncertainty exacerbated by sharp policy shifts and retaliatory threats. For investors willing to embrace this volatility—rather than fear it— we believe options strategies can provide efficient tools to derive value from market turbulence.

Strategy Allocations

The fund’s target allocations across the three managers are as follows: 40% each to Brown Brothers Harriman and Guggenheim Investments, and 20% to Neuberger Berman. We use the fund’s daily cash flows to bring each manager’s allocation toward their targeted allocation should differences in shorter-term relative performance cause divergences.

Sub-Advisor Portfolio Composition as of March 31, 2025