July 12, 2023 Unexpected Resilience Download PDF Tom Carney, CFA Vice President, Co-Head of Fixed Income, Portfolio Manager × x Tom Carney, CFA Vice President, Co-Head of Fixed Income, Portfolio Manager Core Plus Income Fund (Since July 2014) Nebraska Tax-Free Income Fund (Since January 1996) Short Duration Income Fund (Since January 1996) Ultra Short Government Fund (Since January 1996) Investment industry experience since 1982 Tom joined Weitz Investment Management in 1995 as an equity trader. He was promoted to co-portfolio manager in 1996 and to portfolio manager in 1999. Prior to joining the firm, Tom held several positions at Chiles, Heider & Co., Inc. Previously, he was a municipal securities professional with Smith Barney. Tom has a bachelor's in finance from the University of Nebraska Omaha. Close Nolan P. Anderson Vice President, Co-Head of Fixed Income, Portfolio Manager × x Nolan P. Anderson Vice President, Co-Head of Fixed Income, Portfolio Manager Core Plus Income Fund (Since July 2014) Short Duration Income Fund (Since July 2017) Ultra Short Government Fund (Since December 2016) Conservative Allocation Fund (Since July 2021) Investment industry experience since 2004 Nolan joined Weitz Investment Management in 2011 as a fixed income research analyst. In 2014, he was promoted to portfolio manager. Prior to joining the firm, Nolan performed financial modeling and due diligence on leveraged buyout transactions for Wells Fargo Bank. Previously, he worked for Woodmen of the World Life Insurance Society. Nolan has a bachelor's in real estate and land use economics, and an MBA from the University of Nebraska Omaha. Close Investors, particularly fixed income, went into the second quarter on high alert for a recession and thinking the Fed could soon be cutting short-term interest rates, or at least pausing its yearlong tightening cycle to combat inflationary pressures. Historically inverted yield curves (difference between 3-month T-bill and 10-year Treasury bonds), tightening lending standards, and dramatic bank collapses had many peering through their investment ‹telescope.' It was reminiscent of Marvin the Martian of Looney Tune fame exclaiming “Where's the Ka-Boom? There's supposed to be earth shattering Ka-Boom!” The bank failures alone (three of the top five in U.S. history) led many to wonder “who's next?” However, by quarter-end, no more bank failures emerged, there was still no economic downturn in sight, employment remained strong, and inflation had cooled (although far from the Fed's goal of 2%). Overall, the U.S. economy exhibited resiliency in the second quarter, leading to mostly strong stock market performance and higher U.S. Treasury interest rates (graph below) with mostly negative fixed-income returns. Zooming in on U.S. fixed income markets, the table below provides return data for select Bloomberg U.S. bond indexes for the second quarter. The lower duration profiles in our Core Plus and Short Duration Funds, our flexible approach, and overall investment process allowed us to generate positive results in an otherwise challenging return environment. Our Ultra Short Government Fund also produced strong results as it benefited from the increased short-term rate environment. For details regarding individual fund performance and analysis, see our funds' quarterly commentaries. The Federal Reserve delivered its tenth consecutive interest rate hike to the federal funds rate in May — and then paused at its meeting in June, resulting in a 5.00-5.25% target rate at quarter-end. In the minutes released from the June 2023 meeting, the Fed's projections (known as the ‹dot plots') showed a year-end 2023 estimate for the funds rate above 5.0%, with two-thirds of the committee members estimating at least 5.50% (and one committee member estimating at 6%). Given that monetary policy impacts the economy with a lag, market participants continue to believe that the Fed is close to the end of its tightening cycle and may need to begin cutting interest rates by the end of this year, with more meaningful cuts in 2024. While we want to be aware of what the Fed and the market are saying at any given point in time, we understand that these projections/predictions are about as useful as the meteorologist's weather forecast. However, we would not be disappointed to have rates remain at/near current levels as reinvestment opportunities, both nominal (e.g., 2-year Treasuries) and real / after inflation (e.g., 5-year real yield curves), haven't been this compelling in over 15 years. Corporate credit spreads narrowed/declined modestly in the quarter, reflecting the economic resiliency we mentioned above. The table below reflects the changes during the quarter in credit spread (incremental return, reflected in basis points — investors require rates above those of comparable U.S. Treasuries as compensation for credit risk) for the broad investment grade corporate (ICE BofA US Corporate) and high yield bond (ICE BofA US High Yield) indexes. The table also shows the changes in effective yield for the indexes. While overall spread levels moved lower in the quarter, the effective yields increased due to the rise in U.S. Treasury rates. What is Mr. Market telling us now? To echo Howard Marks of Oaktree Capital Management, the current temperature of the market would seem to suggest that 'all is well' (National Lampoon's Animal House pun intended). Credit spreads and volatility (as measured by 1-month Treasury options) have moved lower since the banking crisis earlier in the year. And the stock market has powered higher for two straight quarters. Yet, there are some stress fractures beneath this otherwise benign setting. The rally in equities has not been broad, as the S&P 500, for example, has more than doubled the year-to-date return of the SPW (equal weighted S&P) and the small-cap Russell 2000 — illustrating how narrow the advance has been. In credit, even with index spreads near recent ‹tights'/lows, there has been significant dispersion in relative value (e.g., in office and other commercial real-estate related areas). While we are seemingly far from seeing any broad-based stress in corporate credit given the continued strength in aggregate fundamentals, there are some signs of cracks forming in the economy. According to Bloomberg, large bankruptcy filings (those with at least $50 million in liabilities) in the U.S. are approaching levels seen during the 2008 and 2020 recessions, as leveraged companies feel the bite of higher interest rates. While the U.S. may indeed avoid a recession, we don't believe investors are being adequately compensated in large portions of the corporate credit markets for the potential lagged effects of restrictive Fed policy, which has historically (over the last 70 years) led to a recession (approximately 80% of the time) and/or a financial crisis. As dour as this may sound, there are some silver linings. Today, high(er) quality assets/investments (U.S. Treasury, agency mortgage-backed, and other securitized assets) are presenting investors with nominal and real (after inflation) returns that haven't been seen in over 10 years. See our Core Plus Fund commentary for further discussion on agency mortgage-back securities. And we expect shorter-duration, high-quality securitized products (that finance the gamut of the U.S. economy) to meaningfully deliver higher coupon returns than comparable corporate bonds. This opportunity has been enhanced as the Fed and banks have meaningfully reduced their buying of mortgage-backed securities — leading to a domino effect, resulting in wider spreads, across the whole securitized products spectrum, particularly at the top of the capital structure. We believe our ability to cast a wider net across the fixed income landscape, particularly across securitized products that have meaningful structural enhancements, where higher income relative to benchmarks is available, is a meaningful advantage in today's environment. As we've mentioned before, caution is and will remain our calling card — but we continue to believe now is a good time for investors to consider adding to their fixed income allocation. /sitefiles/live/documents/FIInsights/2Q23 Fixed Income Insights.pdf The opinions expressed are those of Weitz Investment Management and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through 04/12/2023, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor's specific objectives, financial needs, risk tolerance and time horizon. Portfolio composition is subject to change at any time. Current and future portfolio holdings are subject to risk. Definitions: Investment Grade Bonds are those securities rated at least BBB- by one or more credit ratings agencies. Non-Investment Grade Bonds are those securities (commonly referred to as “high yield” or “junk” bonds) rated BB+ and below by one or more credit ratings agencies. Effective yield is the return on a bond that has its interest payments (or coupons) reinvested at the same rate by the bondholder. Effective yield is the total yield an investor receives, in contrast to the nominal yield—which is the stated interest rate of the bond's coupon. Option Adjusted Spread: A “spread” compares the interest rate on a particular bond against a “base line” bond (typically a U.S. Treasury bond). When a bond issuer (or bondholder) has the option to exercise a right (for example, if the issuer can call a bond before its stated maturity date), then the “Option Adjusted Spread” takes into account the possibility that this option might be exercised—so a bond's Option Adjusted Spread may be more (or less) than its regular spread. Consider these risks before investing: All investments involve risks, including possible loss of principal. Market risk includes political, regulatory, economic, social and health risks (including the risks presented by the spread of infectious diseases). Changing interest rates may have sudden and unpredictable effects in the markets and on the Fund's investments. The Fund may purchase lower-rated and unrated fixed-income securities, which involve an increased possibility that the issuers of these may not be able to make payments of interest and principal. See the Fund's prospectus for a further discussion of risks. Investors should consider carefully the investment objectives, risks, and charges and expenses of the Funds before investing. This and other important information is contained in the prospectus and summary prospectus, which may be obtained at weitzinvestments.com. Weitz Securities, Inc. is the distributor of the Weitz Funds.