Cavanal Hill Strategic Enhanced Yield Fund Quarterly Commentary

1Q 2024

Market Overview

Stickier inflation data, resilient economic activity, and the Federal Open Market Committee (FOMC) backpedaling on its dovish December tone, combined to drive negative returns for bonds this quarter. The shift in the macroeconomic backdrop was also reflected in market expectations for interest rate cuts, where the implied number of Federal Reserve rate cuts for 2024 fell from six to seven cuts at the end of 2023, to no more than three rate cuts in total, starting in the summer.

Today’s market pricing is now broadly in line with the Federal Reserve’s latest dot plot as published in March. All in all, U.S. fixed income markets are more fairly priced today than at the end of 2023 and appear well positioned to help cushion portfolio performance in the event of an adverse growth shock.

As was written in last quarter’s commentary, we believe it’s still possible to have a “Goldilocks” type of scenario, in which the economy continues to grow, the job market doesn’t soften significantly, and inflation subsides. However, inflation has proved to be quite stubborn in recent months and will likely cause the FOMC to hold rates higher for longer, as we’ve predicted for almost a year. The 10-year Treasury yield began the quarter at 3.88% and started to rise before as few reversals occurred. It ended the quarter higher at 4.20%, within an area we feel appropriate (a range of 4% to 4.50% in the near term).

Within credit, high yield outperformed investment grade thanks to its lower interest rate sensitivity and easier financial conditions. The U.S. dollar finished much higher this quarter as last quarter’s apparent pivot to looser policies was erased and reality returned to strengthen the currency. Yield spreads continued their relentless grind tighter, even as the quarter set a record for new corporate bond issuance.

Spreads on all sectors within the corporate landscape finished the quarter significantly tighter. Within the credit sub-sectors, industrials and utilities trailed financials as the financial sector’s higher yields were in favor as the yield cure rose. Shorter securities in both the Treasury and corporate space outperformed the broader index’s return.

Positioning the Fund

Portfolio composition is subject to change

We maintained the Fund on a shorter duration target against the index throughout the quarter. We did adjust to the market’s perception on the direction of interest rates, as the market’s assumption that rates would be cut throughout 2024 gave way to our position that rates would be held at these levels much longer. We maintained an overweight in the portfolio’s non-core sectors, especially in emerging market debt, which was a significant contributor to performance during the quarter.

Why should investors consider investing in this fund?

Bonds are now yielding well above the yields of the past few years. The Fund also enhances those returns by including solid issues in emerging market debt and high yield, with a careful monitoring of the credit and interest rate risks associated with these sectors. As rates stabilize, or start to decline, we expect capital appreciation will also be a factor supporting attractive returns.

Disclosures

An investor should consider a fund’s investment objectives, risks and charges and expenses carefully before investing or sending money This and other important information about an investment company can be found in the fund’s prospectus. To obtain a Cavanal Hill Funds prospectus or summary prospectus, please call 800-762-7085 or visit us at www.cavanalhillfunds.com. Please read it carefully before investing.

Cavanal Hill Investment Management, Inc. is an SEC registered investment adviser and a wholly-owned subsidiary of BOK Financial Corporation, a financial holding company (“BOKF”). BOKF, NA serves as the custodian for the Cavanal Hill Funds. Cavanal Hill Investment Management, Inc. provides investment advice, administration and other services for the Funds and receives a fee for providing such services as fully described in the prospectus. The Funds are distributed by Cavanal Hill Distributors, Inc. a registered Broker/Dealer, member FINRA and wholly-owned subsidiary of BOKF.

Commentary provided is for the indicated period and is designed to provide a fame of reference. It does not constitute investment advice. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. The opinions expressed herein reflect the judgment of the authors at this date and are subject to change without notice and are not a complete analysis of any sector, industry or security. This document contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the Cavanal Hill Funds, the securities and credit markets and the economy in general. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “plans,” “projects,” variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the value and potential future value or performance of any security, group of securities, type of security or market segment involve judgments as to expected events are inherently forward-looking statements. Management judgments relating to and discussion of the value and potential future value or performance of any security, group of securities, type of security, group of securities, type of security or market segment involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expressed, implied, or forecasted in such forward-looking statements. The potential realization of these forward-looking statements is subject to a number of limitations and risks, which are described in the Fund’s prospectuses, and investors or potential investors, are cautioned to review the Funds’ prospectuses and the description of such risks. Neither the Funds nor the Funds’ investment adviser, Cavanal Hill, undertake any obligation to update, amend, or clarify forward-looking statement, whether as a result of new information, future events or otherwise.

Investment Risks

Fixed income securities are subject to interest rate risks. The principal value of a bond falls when interest rates rise and rise when interest rates fall. During periods of rising interest rates, the value of a bond investment is at greater risk than during periods of stable or falling rates. Bond funds will tend to experience smaller fluctuations in value than stock funds. However, investors in any bond fund should anticipate fluctuations in prices, especially for longer-term issues and in environments of changing interest rates.

If you’d like additional information about this or any of the Cavanal Hill Funds, please contact Craig McQueen at 303.355.2799, CraigMcQueen@cavanalhill.com, or cavanalhillfunds.com.

Not FDIC Insured | May Lose Value | No Bank Guarantee

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