Performance Commentary

During the first quarter, ULST outperformed its benchmark largely due to its overweight allocation to duration and investment grade corporate credit. During the quarter, the Fed continued to increase the Fed Funds rates in the context of a strong labor market, high, but moderating, inflation, and two US bank failures, all of which led to a decrease in short-term interest rates and mixed results in short-term investment-grade credit spreads. For example, the yield on the December 2023 Fed Funds Futures contract (a proxy for very short-term interest rates) decreased by 24 basis points (bps) during the quarter, producing positive price returns; Bloomberg Floating Rate Note Index (FRN) spreads widened by 5 bps during the quarter, producing negative price returns plus carry; the FRN credit curve steepened modestly, with BBB FRN spreads unchanged versus AAA and 6 bps wider versus AA FRNs, producing negative price returns plus carry; and the Bloomberg 1-3 Year Credit Index (1-3 Year Credit Index) widened 24 bps, producing negative price returns plus carry, versus the fund’s benchmark.¹

Gross Expense Ratio: 0.20% Net Expense Ratio: 0.20%

The gross expense ratio is the fund’s total annual operating expenses ratio. It is gross of any fee waivers or expense reimbursements. It can be found in the fund’s most recent prospectus.

Quarter in Review Commentary

During the first quarter, the US economy continued to generate solid job growth and high, but moderating, inflation. In reaction to this combination of tight labor markets and high inflation, the Fed continued to increase Fed Funds with two more 25 bps rate hikes during the quarter — the second rate hike occurred after the announced failure of two US regional banks, Silicon Valley Bank and Signature Bank. These rate hike announcements were overshadowed by the failure of those two US regional banks, which led to a decrease in short-term interest rates during the quarter and mixed results in credit spreads. For example, during the quarter, the yield on the above-mentioned December 2023 Fed Funds Futures contract decreased by 24 bps, the FRN Index spread widened 5 bps, the 1-3 Year Credit Index spread widened 24 bps, the Bloomberg US Credit Index spread widened by 8 bps, and the Bloomberg US High Yield Index spread tightened by 14 bps.² In terms of Fed monetary policy, the Fed Funds rate is now at a range of 4.75%–5.00% and the Fed’s balance sheet increased by roughly $150 billion during the quarter, which came from a spike in emergency loans to the banking system from the Fed, while the Fed’s “Plans for Reducing the Size of the Federal Reserve’s Balance Sheet,” announced May 4, 2022, remained in full effect for the quarter. The following chart that the market believes that the Fed Funds Rate will be in the range of 4.25% - 4.50% at the end of 2023, suggesting two 25 bps rate cuts from the current range.

Portfolio Positioning and Outlook Commentary

Our fundamental active fixed income investment process has three components: structural, cyclical, and tactical. Our analysis of structural economic growth trends, which includes demographic trends, the trend growth rate of the labor force, and the trend growth rate of productivity, suggest to us a US trend real growth rate of roughly 2.0%. As a result, our structural analysis suggests that interest rates will remain historically low. One of the questions that’s being asked is whether inflation will be structurally higher due to recent global geopolitical dis-harmony, which would structurally increase nominal interest rates. Our view is that it is too early to conclude structurally higher inflation and that we’ll be watching for signs of deglobalization in the coming quarters.

Our analysis of cyclical trends focuses on economic activity momentum as well as policies that can serve to either extend or contract the economic cycle. Economic activity momentum, as reflected in ISM manufacturing and services PMI surveys of business conditions, suggests that US growth momentum is clearly slowing. As mentioned above, the labor market is cyclically tight and inflation is high, but moderating. Based upon the readings of unemployment and inflation over the quarter, the Fed has achieved the maximum employment component of its dual mandate and continues to confront a significant inflation problem, which is why the Fed keeps raising the Fed Funds rate well into restrictive territory, despite the announcement of two US bank failures, which we see as a risk to economic growth and financial conditions in 2023. The current makeup of the US Congress suggests little support from fiscal policy in 2023 and 2024. High mortgage and auto loan rates are having an impact on activity in the consumer space and the expectation is that there’ll be a continued slowing demand for these large expenditure goods. Given the overall tightening of financial conditions and concerns about an economic slowdown, our expectations for private sector investment are modest at best.

Given that monetary policy is in restrictive territory, i.e. late cycle monetary policy, we are positioned above the fund’s strategic duration risk target of 0.50. The fund’s duration exposure closed the quarter at 0.60 years, an increase of 0.35 years quarter-over-quarter. Regarding our asset allocation strategy, as shown in the chart below, we’re maintaining a conservative asset allocation exposure, with a higher than strategic target allocation to government securities and cash, and a lower than strategic target allocation to spread product. Our credit allocation,to BBB-rated credit is at 29.7%, as shown in the chart below, which is above our long-term strategic exposure for this strategy, but importantly, due to repositioning, the Fund’s BBB spread duration has declined from 0.32 years to 0.25 years quarter-over-quarter , which is in line with the Fund’s strategic exposure for this strategy, according to that metric. The strategy has a 2.5% allocation to BB-rated credit (which is an allocation used primarily for the optimal management of fallen angels). Asset allocation shifts during the quarter were limited to a moderately higher exposure to industrials and a moderately lower exposure to government securities. The Fed’s achievement of restrictive monetary policy, in response to cyclically tight labor markets and high inflation, and classic signals of recession, such as the curve inversion of 3-month T-Bills and the 10-year Treasury note, are likely to serve as headwinds to the economy and financial conditions into 2023. Given this outlook, we expect to remain above our strategic risk target for duration and below our strategic risk target for credit risk for the fund in the near term, which should leave the fund well positioned for opportunities in 2023.