In the third quarter of 2025, the GW&K Core Bond ESG Fund showcased a noteworthy performance, eclipsing the Bloomberg Aggregate Bond Index. This success was predominantly fueled by the Fund's deliberate allocation towards spread products, with a particular emphasis on corporate fixed-income instruments. While apprehensions about political meddling in the Federal Reserve's policies persist, contributing to a pronounced yield curve, the prevailing market conditions offer a conducive environment for spread products, especially those with robust credit quality and securitized assets. The Fund has strategically adapted its portfolio to leverage these favorable dynamics.
The quarter commenced with encouraging signs from the labor market and robust economic growth indicators, which initially granted the Federal Reserve the latitude to maintain a patient stance on interest rate adjustments amidst inflation concerns. However, this momentum experienced a shift following a less-than-stellar employment report in July. This alteration in economic data prompted a re-evaluation of market expectations and the Federal Reserve's potential policy trajectory.
Despite these shifts, political maneuvers aimed at influencing or reshaping the Federal Reserve's operational independence have, thus far, not achieved their objectives. Nevertheless, market participants remain wary of potential policy interference, a sentiment that has contributed to the observed steepening of the yield curve. This ongoing vigilance underscores the market's sensitivity to both economic fundamentals and perceived political risks.
The combination of these factors—a resilient economic backdrop, albeit with some volatility, and a market that is pricing in political uncertainties—creates a compelling scenario for investments in spread products. Specifically, bonds from corporations with strong credit profiles and minimal default risk, as well as high-grade securitized products, are positioned to benefit. The GW&K Core Bond ESG Fund's strategic overweighting in these areas reflects a proactive approach to navigating the current financial landscape and capitalizing on identified opportunities.
The third quarter of 2025 highlights the GW&K Core Bond ESG Fund's successful investment strategy, which focused on a higher allocation to spread products, notably corporate bonds. This approach enabled the Fund to surpass the Bloomberg Aggregate Bond Index, demonstrating the efficacy of its positioning in an evolving economic and political climate. The market's reaction to potential Federal Reserve policy interference, evidenced by a steeper yield curve, further reinforced the Fund's decision to favor credit-sensitive assets.