January 11, 2024 Navigating a Bond Market of Unknowns Download PDF There's an old quote typically attributed to the American humorist Mark Twain that reads “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.” If ever there was a sentiment to perfectly sum up today's bond market — that's it. Today's “knowns” are tomorrow's “unknowns” In the final months of 2023 and into the start of a new year, it seemed to many a foregone conclusion that the Fed would cut interest rates in a formulaic manner. That may very well prove to be the case. But historical data would suggest that it is anything but an absolute certainty. For starters, let's look below at the Fed's “dot plots” from September and December of 2023 — specifically at the Federal Open Market Committee's predictions for the federal funds rate in 2023 and 2024. Each dot represents an FOMC participant's assessment of the appropriate monetary policy for each given timeframe. Over the course of just three months, the majority of members revised their assessments for both time periods. In September, ten FOMC members thought the fed funds rate would still be above 5% by the end of 2024. Now only three have that view (and one foresees the fed funds rate dropping below 4% in 2024). While altering a prediction is no shock, this clearly suggests that the narrative can and will change along with near-term data, all of which is far from certain. For more evidence that investors should be leery of making decisions based on macroeconomic predictions, one need only look back at news headlines from late 2022 into 2023. At the time — a recession was all but certain for 2023. CNBC — July 12, 2022: 70% of Americans think a recession is coming: Here's what they are doing to prepare Forbes — August 10, 2022: A Recession Is Coming, And It Looks Familiar Fortune — September 21, 2022: Prepare for a 'long and ugly' recession, says Dr. Doom, the economist who predicted the 2008 crash Fortune — October 4, 2022: Around 90% of CEOs believe a recession is coming. Half of them are already planning for layoffs Marketwatch — October 18, 2022: A recession is coming soon, CEOs and economists warn. Here's why they're gloomy CNN — January 2, 2023: One third of world economy expected to be in recession in 2023, says IMF chief Reuters — January 11, 2023: World Bank warns global economy could tip into recession in 2023 Of course, the Fed hasn't achieved its soft landing yet, and the calls for an impending recession may prove to be right — just later than originally expected. And if there is a recession, how deep will it be and how long will it last? These are just a few factors that can be difficult to predict with any degree of certainty. Why the Fed may not cut rates as aggressively as expected in 2024 Historically, the Fed has rarely cut rates in times of economic strength. In fact, over the past 71 years, the Fed has embarked on a series of rate cuts just four times when the year-over-year change in the consumer price index (CPI) was outpacing the U.S. unemployment rate. In each of those cases, the cuts were accompanied by a recession. As of November 2023, CPI is at 4.0%, and the unemployment rate is 3.7%. If the current trend holds, the Fed would be parting from historical trends to usher in an easing cycle. In addition, even if the Fed does cut rates or if the bond market experiences an uptick in volatility — the impact on longer-term outcomes may be limited. Consider the rate volatility we experienced during 2023, juxtaposed with what transpired with the 10-year treasury yield over the course of the year. How We're Navigating the Unknowns We believe that there is no such thing as absolute certainty when it comes to making predictions on the economy or monetary policy. We also believe that credit investing is asymmetric in nature. Therefore, based on today's market conditions and the current opportunity set, we favor shorter-duration investments in the form of asset-backed securities (ABS), collateralized loan obligations (CLOs), and agency mortgage-backed securities (MBS). Additionally, within the Weitz Core Plus Income Fund (WCPBX), we are maintaining liquidity in the form of U.S. Treasuries that will allow us to take necessary actions/reactions to changes in near-term expectations and overall market conditions. This conservative investing mindset manifests itself in WCPBX's upside/downside capture relative to the Bloomberg U.S. Aggregate Bond Index. (An upside capture ratio over 100 occurs when the Fund has outperformed the index during periods of positive index returns, and a downside capture of less than 100 occurs when the Fund has outperformed the index during periods of negative returns.) In each time period, our downside capture is notably lower than that of its Morningstar peer group. In summary, the Fed may move to cut rates aggressively in 2024 — or it may not. The economy may avoid a recession for now — or it may not. What matters for bond investors is the ability to react and navigate relative to market conditions. /sitefiles/live/documents/Navigating a Bond Market Unknowns_Weitz (Jan 2024).pdf Average Annual Total Returns (%) as of 12.31.2023 YTD 1 YR 3 YR 5 YR Since Inception* Core Plus Income Fund - Institutional (WCPBX) 7.05 7.05 -0.62 3.10 3.05 Bloomberg U.S. Aggregate Bond Index 5.53 5.53 -3.31 1.10 1.53 Morningstar Intermediate Core-Plus Bond Category 6.19 6.19 -3.00 1.47 1.65 *07/31/2014 Morningstar Ranking as of 12.31.2023 Category: Intermediate Core-Plus Bond 1 YR 3 YR 5 YR Percentile Ranking 22 3 3 Ranking/number of funds in category 121 / 632 11 / 568 7 / 536 Morningstar Rankings are based on total returns FACT SHEET FUND DETAILS Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Please click here for the most recent month-end performance. Investment results reflect applicable fees and expenses and assume all distributions are reinvested but do not reflect the deduction of taxes an investor would pay on distributions or share redemptions. Net and Gross Expense Ratios are as of the Fund's most recent prospectus. Certain Funds have entered into fee waiver and/or expense reimbursement arrangements with the Investment Advisor. In these cases, the Advisor has contractually agreed to waive a portion of the Advisor's fee and reimburse certain expenses (excluding taxes, interest, brokerage costs, acquired fund fees and expenses and extraordinary expenses) to limit the total annual fund operating expenses of the Class's average daily net assets through 07/31/2024. 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Morningstar rated the Core Plus Income Fund Institutional and Investor Class shares 5 and 5 stars, among 568 and 536 Intermediate Core Plus-Bond funds for the 3- and 5-year periods ended 12/31/2023, respectively. 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.