High Yield Municipal Bond Fund Commentary

Fund Commentary 3Q22

HIGH INCOME MUNICIPAL BOND FUND

MARKET REVIEW

The municipal market, as represented by the Bloomberg Municipal Bond Index, returned -3.46% during the third quarter of 2022. Returns for July, August and September were +2.64%, -2.19%, and -3.84%, respectively.

In July, municipal yields generally fell, and the municipal market rallied, generating its best monthly performance since 2020, as some investors perceived a dovish-leaning tone from the Federal Reserve (Fed) and Treasury yields declined. However, numerous communications by members of the Fed in August and into September reiterated their focus on price stability, expressed the need for further tightening and indicated that they did not expect interest rate cuts in 2023. As such, market participants reverted their attention back to uncertainties around inflation as well as tighter monetary policy and the yield curve shifted upwards, particularly in the latter half of the quarter.

Overall, the municipal yield curve flattened over the third quarter with rates rising across the curve. Of note, the municipal curve still remains upward sloping and the 10-year to 20-year section of the curve steepened over the period. Given the upward shift of the yield curve, short-dated bonds outperformed bonds progressively farther out on the curve.

Regarding sector performance, the more defensive Electric sector led over the quarter, with longer duration sectors such as Health Care and Housing underperforming with the continued overall rise in rates. In regard to Health Care, the sector has experienced some fundamental headwinds over the period due to rising cost pressures and labor shortages.

In terms of credit quality, while outperforming in July, the BBB-rated tier fared the worst over the quarter, partly as a function of the credit tier's longer duration relative to other investment grade segments. The AA-rated credit tier led the higher quality range, closely followed by the AAA-rated and A-rated credit tiers. The high yield segment of the municipal bond market, as represented by the Bloomberg High Yield Municipal Bond Index, returned -4.83% over the quarter.

According to Lipper data, municipal bond funds experienced the year's first consecutive weeks of inflows in July. While municipal bond funds reverted back to outflows by early August, the volume of these negative weekly flows were relatively smaller than what was seen earlier in the year. Outflows continued through the end of the quarter and increased in size as September progressed. By the end of quarter, year-to-date negative net flows reached approximately $91.5 billion, the highest calendar year outflow on record since the inception of the data set in 1992.

In terms of supply, municipal issuance came in lower in the third quarter, compared to the same period in 2021. Year-to-date taxexempt supply of $250bn is marginally less than the same period of the prior year, while YTD taxable supply has fallen significantly since 2021, as per JPM.

According to Bloomberg, year-to-date par value of defaults and distressed issuers in the municipal market have fallen meaningfully compared to the same period in 2021. The defaults that have occurred have been relatively concentrated in select sectors, such as Senior Living and Project Finance.

PORTFOLIO REVIEW

The Fund returned -5.38%, reflecting performance at the net asset value (NAV) of class A Shares with all distributions reinvested, for the quarter ended September 30, 2022. The Fund's secondary benchmark, an 85%/15% blend1 of the Bloomberg High Yield Municipal Bond Index and the Bloomberg Municipal Bond Index, returned -4.62% during the same period.

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Fund Commentary 3Q22

Performance commentary is based on the Fund's secondary benchmark which maintains roughly 15% in investment grade bonds.

Security selection was the primary driver of underperformance over the period, mainly driven by selection with the Health Care sector. As spreads generally widened within the sector and various Hospital systems experienced fundamental headwinds due to cost pressures and labor shortages over the quarter, selection of various Hospital credits detracted from relative performance.

The Fund's duration and yield curve positioning modestly contributed to relative returns. Municipal yields rose significantly over the latter half of the third quarter, particularly in September, on the back of rising Treasury yields and continuing inflation concerns. While the Fund's slightly longer duration relative to the benchmark detracted from performance over the period, most of this detraction was offset by the Fund's modest short position in Treasury futures, which contributed to performance with the rise in rates. Yield curve positioning benefitted performance, as an overweight to the 10-year key rate and underweight to the 2-year key rate led to a positive impact given a flattening yield curve.

Quality allocation led to a slight positive impact, predominantly driven by the portfolio's overweight to A- and BBB-rated bonds and underweight to non-investment grade bonds. While the portfolio has meaningful below investment grade exposure, it also maintains a portion invested in higher rated bonds for diversification and liquidity purposes.

STRATEGY POSITIONING & OUTLOOK

Given the recent rate volatility, the team has been focused on bond structure, including coupon, call protection, and convexity profile, as this has been a primary driver of performance in the current environment. More specifically, we have been selling select bonds priced close to par and buying deep discount or premium bonds due to inherent asymmetry of risk and convexity dynamic. Similarly, we prefer longer call bonds to shorter call bonds because, while both call structures have similar downside, longer call bonds have superior upside potential.

We have shortened average maturity since the start of the year, but generally remain overweight longer maturity bonds compared to the benchmark due to relative value opportunities and a relatively steeper yield curve. Although this has detracted year to date, we feel this positioning will contribute to performance in the long term.

The Fund is overweight the IDR and Transportation sectors. The Industrial Development sector is a diversified sector covering many corporate issuers and has a strong liquidity profile given its larger buyer base. Furthermore, many issuers within the sector have strong balance sheets, which we believe will help withstand any potential economic contraction. We believe the Transportation sector will continue to benefit from pent-up consumer demand after limited travel during the pandemic. Additionally, many parts of the segment are deemed essential and have received significant Federal support over the last few years.

Although primarily invested in non-investment-grade bonds, the Fund is overweight `A' and `BBB' rated bonds, relative to its benchmark. The Fund has a higher quality positioning relative to the benchmark to provide diversification and enhance liquidity.

The fundamental backdrop of the municipal market continues to show strength. As of the end of July, year-to-date state tax revenues have increased over 18% compared to the same period in 2021 and out of the 47 states that reported revenue data, only Delaware showed a decrease in tax receipts over the period. Throughout 2022, numerous states experienced fiscal surpluses, increased pension contributions and even returned money to taxpayers. As such, upgrades in the municipal market continue to significantly outpace downgrades.

Given the historically strong starting point for municipal fundamentals, the credit backdrop may modestly decline over the next few quarters and would be impacted should tighter monetary policy reduce demand, while certain sectors would be affected more than others. Having said that, municipal fundamentals have shown resilience in past economic contractions with significantly lower default rates and stickier credit ratings due to a lesser downgrade trajectory relative to corporate bonds.

In terms of the technical backdrop, we do expect demand to recover. The month of July saw the year's first consecutive weeks of municipal fund inflows as rate volatility lessened. While the market returned to outflows by August, demand is expected to turn positive once Treasury yields stabilize. On the supply side, year-to-date issuance for 2022 has been slightly lower than the same 2

Fund Commentary 3Q22

period in 2021, but most of this stems from a significant drop in taxable supply. We expect this trend to continue, particularly if rate volatility continues, which may bring fewer refunding opportunities.

For perspective, below-investment grade yields closed the quarter at levels similar to what was seen during the pandemic-induced sell off, yields of BBB-rated bonds reached levels comparable to 2013 during the taper tantrum, A-rated bond yields are in line with levels seen in 2011 and higher quality, investment grade bonds are yielding similar to what was observed during the Great Financial Crisis.

Given the extreme rate moves experienced year to date and the relatively high level of municipal yields at the present time, total returns are likely to turn positive. The elevated yields seen in much of the market should provide more cushion against further rate rises before generating a loss relative to the beginning of the year.

We expect liquidity costs in the municipal market to remain elevated in the near term, particularly if rate volatility, tax loss selling, and fund outflows continue.

Credit Quality Distribution

AAA

1% 3%

AA

3% 9%

A

11% 3%

BBB

5%

19%

BB

23% 18%

B

6% 3%

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