Strategic Enhanced Yield Fund Commentary

3Q 2023

Market Overview

Following a robust rally for stocks in the first half of 2023, the third quarter offered a reality check. A sell-off in global bond markets was partly to blame for the pressure on most risk assets, with the Bloomberg Global Aggregate Bond Index falling by -3.6% in the third quarter. U.S. markets were not spared any of this volatility as we saw action reminiscent of 2022, with notable negative returns for both fixed income and equity markets.

As bonds and stocks fell simultaneously, commodities were the notable outperformer, returning 4.7% over the quarter, echoing the same market dynamics of the previous year. The only sector with positive returns for the quarter was high yield, as it continued to be a strong outperformer on the year as well, mostly due to its shorter duration profile overall. The shape of the yield curve shifted significantly during the quarter as the long bond rose 84 basis points (0.84%) in a very bearish steepening fashion, which left investors with any long duration securities extremely exposed.

The short end of the yield curve, using the 2-year Treasury for representation, rose only 15 basis points (0.15%) during the quarter. The 10-year note began the quarter at 3.84% and spent the quarter marching higher in a direct but stair-step fashion, to finish at 4.57%. The U.S. dollar finished higher this quarter as it acted as a safe-haven against unstable market movements elsewhere.

Within the credit subsectors, industrials and utilities underperformed financials again this quarter as the financial sector has a much shorter duration than the other two. Longer securities in both the Treasury and corporate space suffered significantly versus shorter-dated maturities as the curve bearishly steepened all quarter long. The U.S. Treasury, government agency securities, high yield, emerging market debt (EMD) and corporate sectors outperformed the broader Bloomberg Barclays U.S. Aggregate Index’s return of -3.23% on the quarter. The non-dollar and mortgage-backed securities sectors underperformed the broader index’s return.

Positioning the Strategic Enhanced Yield Fund

Portfolio composition is subject to change.

As interest rates increased during the quarter, especially during September, we positioned the portfolio to a lower duration relative to the benchmark, as inflationary pressures continued to affect the economy. The U.S. investment grade corporate allocation remains stable. We are monitoring the high yield sector’s overall behavior in case default rates rise to new levels, in which case a further allocation reduction will be in order. Also, a slight reduction in the EMD corporate exposure is planned for the following quarter.

Notable Changes to the Portfolio

During the third quarter, the sector allocation changed significantly, with the U.S. government sectors reducing their weight by 10% and the EMD and high yield sectors on the receiving end. Higher coupon rates from these trades raise the income generated by the portfolio.

Why should investors consider investing in this Fund?

Interest rates continue to rise but now, not only the short maturities are being affected, making yields more attractive throughout the bond universe. Even if rates continue to rise, their effect on the economy will be felt, and we believe the prospect of a longer period of high rates followed by a potential rate reduction may yield investors attractive returns for several quarters in the future.


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 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 frame 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.

Short-term investment-grade bonds offer less risk and generally a lower rate of return than longer-term higher yielding bonds. High-yield bonds,“commonly referred to as junk bonds,” have a higher risk of default or other adverse credit events, but have the potential to pay higher earnings over investment-grade bonds. The higher risk of default, or the inability of the creditor to repay its debt, is the primary reason for the higher interest rates on high-yield bonds. International investing involves increased risk and volatility.

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