1Q 2020— Taxable Fixed Income

Jamie Mullen
Senior Portfolio Manager

The Navigator® Taxable Fixed Income strategy finished the first quarter down with a mid-single digit decline, slightly trailing its benchmark. The first quarter was a challenging quarter for the taxable market, as extreme volatility stemming from the coronavirus pandemic and a resulting economic slowdown pushed valuations down across all sectors.

Since the inception of the taxable fixed income strategy, we have maintained exposure to the high yield sector. As we headed into the end of 2019, we were cognizant of the tight spreads in investment grade and high yield bonds. Our high yield exposure was down, and our cash levels were a little elevated after a positive 2019. In March, investment grade bond spreads widened, and high yield bonds sold-off sharply, resulting in negative returns.

Taxable Outlook

We have a seasoned portfolio team that has traded through many different economic cycles and has witnessed many financial and economic crises dating back to the early 1980s. The Fed has responded with all its might to resolve this crisis with its traditional tools used back in 2008. However, there is no history of snuffing out an economy and trying to restart it at some future date, and the Fed’s response may not have the same probabilistic outcome as in the past. We will have to see on that front.

The portfolio has some exposure to the Consumer and Energy sectors that we will look to adjust as we move into the summer. We believe the heat of the summer and reduced infection rate should restart some economic activity and calm fears while reducing volatility. During this time frame, we will be able to adjust and move forward as we analyze our portfolio. We have already taken steps such as increasing credit quality purchasing newer issuers in the single A or better ratings category.

We experienced a similar period of underperformance after the 2016 election as people worried about rising rates and a newly elected President, who was comfortable with high interest rate borrowing often utilized in the balance sheets of many of his businesses. We re-positioned the portfolio and performance rebounded strongly in the ensuing months after the 2016 election. With our tactical management style, we are hopeful for a similar outcome.

The views expressed are those of the author(s) and do not necessarily reflect the views of Clark Capital Management Group. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. There is no guarantee of the future performance of any Clark Capital investments portfolio. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, other investments or to adopt any investment strategy or strategies. For educational use only. This information is not intended to serve as investment advice. This material is not intended to be relied upon as a forecast or research. The investment or strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Past performance does not guarantee future results.

The S&P 500 measures the performance of the 500 leading companies in leading industries of the U.S. economy, capturing 75% of U.S. equities.

Bloomberg Barclays U.S. Aggregate Bond Index: The index is unmanaged and measures the performance of the investment grade, U.S. dollar denominated, fixed-rate taxable bond market, including Treasuries and government-related and corporate securities that have a remaining maturity of at least one year.

The Bloomberg Barclays 5 Year Municipal Bond Index is a capitalization weighted bond index created by Bloomberg Barclays intended to be representative of major municipal bonds of all quality ratings with an average maturity of approximately five years.

The CBOE Volatility Index, known by its ticker symbol VIX, is a popular measure of the stock market’s expectation of volatility implied by S&P 500 index options.

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in market value of an investment), credit, payment, call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase). . Non-investment grade debt securities (high-yield/junk
bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

The 10 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 10 year. The 10 year treasury yield is included on the longer end of the yield curve. Many analysts
will use the 10 year yield as the “risk free” rate when valuing the markets or an individual security.

S&P Global Ratings issue credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects S&P Global Ratings’ view of the obligor’s capacity and willingness to meet its financial commitment as they come due, and this opinion may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.

This document may contain certain information that constitutes forward-looking statements which can be identified by the use of forward-looking terminology such as “may,” “expect,” “will,” “hope,” “forecast,” “intend,” “target,” “believe,”
and/or comparable terminology (or the negative thereof). Forward looking statements cannot be guaranteed. No assurance, representation, or warranty is made by any person that any of Clark Capital’s assumptions, expectations,
objectives, and/or goals will be achieved. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future.

Clark Capital Management Group, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security, sector or industry. There is no assurance that any securities, sectors or industries discussed herein will be included in an account’s portfolio. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

Clark Capital Management Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Clark Capital’s advisory services and fees can be found in its Form ADV which is available upon request. CCM-1129

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