Perspective

2023 Economic Outlook

We believe that US economic growth will moderate to near zero in 2023, with unemployment climbing toward 5% by late 2023 or early 2024. US consumers, who already have reduced their savings rate from 9% in 2019 to 2.3% in mid-2022 amidst the worst inflationary outburst in 40 years, could continue to pare back their expenditures in 2023. Consumer spending retrenchment has the potential to exacerbate the impending economic slowdown in 2023 and beyond.

Inflation Expectations

After peaking at 9.1% in Q2 2022, CPI has declined to 6.5% due to a combination of factors including lower energy costs, a reduction in used car prices, and loosening of supply related bottlenecks. Fed chairman, Jerome Powell, reiterated the Fed’s absolute commitment to reduce inflation to 2% and ruled out any leeway on that target. After misjudging earlier inflationary pressures as transitory, Powell will want to prevent another policy mistake and thus will be hesitant to cease tightening too early or to revert to an easing stance upon the first sight of disinflation or economic slowdown. We expect the fed funds target rate to top out at 5.00% by the middle of 2023 and stay there until the end of the year. We don’t expect the Fed to start easing rates upon the first sign of recessionary pressure, but we think it will be under consideration by the end of the year if the economy is recessionary at that point. We expect the yield curve to remain inverted for at least the first half of the year, with the 2-year ranging between 3.75% and 4.50% and the 10-year between 3.25% and 4.00%.

Credit Markets

2022 was one of the most difficult years for fixed income markets ever. Lower credits widened more than higher credits, resulting in credit curve steepening across rating categories. The Investment Grade (IG) Corporate Index saw 48bp of spread widening, while the High Yield (HY) Corporate Index widened by 189bp. Given our view of a slowdown in corporate earnings growth in 2023, we expect spreads on both IG Corporates and HY bonds to widen from current levels, with further credit curve steepening across rating categories. As default levels potentially increase from current historically low levels, we believe IG Corporates could widen as much as 50bp while HY bonds could widen another 100-150bp. However, we do believe that high overall yields, limited supply, and a light maturity schedule in 2023 will mitigate further corporate spread widening. Leveraged loans, which make up the collateral for CLO securities, could experience greater headwinds from rising rates due to their floating rate exposure in 2023, which will result in wider spreads by 150-175bp.

Structured Credit Outlook for 2023

In 2022, structured credit sectors still outperformed corporates of similar credit quality on a total return basis, due to higher yield and lower duration. Entering 2023, given higher yields resulting from 2022’s spread widening, structured credit sectors are even better positioned than last year to outperform corporates, particularly on a duration-adjusted basis. The table below shows the change in credit spreads for corporates and structured credit sectors from the beginning of 2022 to the beginning of 2023. Note that every structured credit sector has widened more over the past year than has corporates of the same rating.

Current Spreads:

	Corporate	Structured Credit	ABS	CLO	CMBS	RMBS
IG (>=BBB)	132	283	254	322	389	279
HY (<=BB)	459	616	621	989	-	700
AAA	60	121	99	183	217	105
AA	78	267	239	253	330	268
A	115	311	265	341	428	314
BBB	173	448	413	510	581	429
BB	300	558	467	989	-	550
B	500	-	-	-	-	-

1 Year Ago Spreads:

	Corporate	Structured Credit	ABS	CLO	CMBS	RMBS
IG (>=BBB)	93	130	95	202	178	133
HY (<=BB)	278	407	277	676	-	512
AAA	53	51	35	108	94	49
AA	62	140	70	164	150	145
A	77	149	112	211	190	142
BBB	120	209	163	325	280	194
BB	206	358	277	676	-	322
B	348	-	-	-	-	-

Difference:

	Corporate	Structured Credit	ABS	CLO	CMBS	RMBS
IG (>=BBB)	39	153	159	120	211	147
HY (<=BB)	181	209	344	313	-	188
AAA	7	70	65	75	123	57
AA	16	128	169	89	180	123
A	38	162	153	130	239	171
BBB	53	240	251	185	301	235
BB	94	199	199	313	-	228
B	152	-	-	-	-	-

Source: Orange, JP Morgan Markets, Bank of America, Bloomberg.

Sector Outlook

RMBS fundamentals remain strong. The combination of significant home price appreciation and low leverage has pushed housing equity to the highest percentage as a share of housing assets since the early 1980s. High homeowner equity will discourage borrowers from voluntarily defaulting in the event of home price declines, as was the case in 2008. In the longer run, a limited supply of homes, exacerbated by building restrictions, higher input costs and inadequate financing, will cause the supply-demand imbalance to continue to exert upward pressure on home prices. Another positive factor is that mortgage underwriting standards have tightened considerably since 2008.

CLO fundamentals at the top of the capital structure should hold up well, but increased defaults and ratings downgrades will impact lower rated mezzanine tranches in 2023. Lower corporate profits will put a stress on interest rate coverage ratios as Libor/SOFR rates rise to 5%. Lower collateral prices will cause interest to be diverted from equity and potentially BB/B mezzanine tranches. Higher rated mezzanine tranches (AA through BBB) should be able to withstand recession-triggered higher defaults and lower recoveries.

ABS fundamentals are likely to deteriorate, but we believe a recession is largely priced into current spread levels. Consumer ABS fundamentals are expected to weaken as consumption continues to outpace wage gains due to high inflation, rising interest rates and softening labor markets. While consumer credit card balances are rising at the fastest pace in 11 years (8.1% YOY as of October 2022), the consumer’s credit is relatively healthy as US household debt as a percentage of personal income and household debt service ratios are well below long-term averages. We expect a continuation of the credit deterioration in both subprime auto and unsecured consumer lending securitizations in terms of higher defaults, delinquencies, and lower recoveries. Consequently, we prefer more seasoned vintages across ABS consumer sectors such as subprime auto and unsecured consumer lending.

CMBS fundamentals are at the highest risk among structured credit sectors in 2023. Higher rates and high inflation have caused repricing across commercial real estate assets due to higher cap rates, higher expenses and uncertainties related to rental income. Office properties have the highest risk for asset repricing due to the longer-term work-from-home trend that has raised vacancy rates to the highest level (18.4%) since 2007 (REIS data), while rents have stayed relative flat since 2019. 2013-2014 vintages that are coming due in 2023 & 2024 have coupon rates from 4.5% to 5%, while the current conduit CMBS coupon rate is above 6%. Hence, refinancing risks are taking center stage and we might see increased maturity extensions, loan modifications (coupon and principal forbearance) and maturity defaults across the CMBS universe. We expect increased bifurcation between top tier properties, with strong sponsors that will not have any issues refinancing their loans, and lower tier properties, with weaker sponsors who are less likely to contribute equity to properties faced with higher financing costs.

Summary

JSVIX is designed to capitalize on, and outperform during, stressed markets. It is an active, security-selection-focused strategy that seeks to acquire undervalued bonds in all market environments. In addition, we seek to manage portfolio risk tactically. We de-risk the portfolio by going up in credit, reducing spread duration, and building liquidity when volatility is low and spreads are tight, rather than be fully invested or go down in credit to seek higher returns. During these periods we rely on opportunistic, active trading, featuring our ability to source, analyze, and acquire undervalued bonds at favorable prices. This positions the portfolio to help navigate and ultimately help capitalize on market dislocations in structured credit.

In 2023, we expect rates to remain range bound and credit spreads to remain volatile as the Fed completes its tightening cycle. As a result, we will maintain limited interest rate exposure and will concentrate our holdings in the highest rating tiers across all structured credit sectors, with very limited exposure to lower rated tranches in the CMBS and CLO market. We are able to take advantage of credit market dislocations very effectively due to our size and our active trading approach.

We expect outflows from fixed income funds to reverse in 2023 as the yield and liquidity of fixed income securities now presents relative value versus other asset classes. We expect asset allocators to shift assets to fixed income in 2023 as fixed income, and structured credit markets in particular, offer investors 7-9% returns for investment grade cashflows, something not seen in a generation. We believe that, as demand for fixed income increases, particularly in the absence of new issue supply due to higher yields, spreads will tighten, resulting in price return on top of higher yields. Finally, given where spreads are in structured credit relative to corporates of similar credit quality, we believe structured credit has significantly more potential for price upside.

12/31/2022	QTD	1-Year	3-Year	Since Inception (8/21/2018)
I Shares	-0.53%	-6.27%	3.85%	4.71%
Morningstar Multisector Bond Category	2.55%	-9.95%	-1.18%	0.99%
Bloomberg U.S. Aggregate Bond Index	1.87%	-13.01%	-2.71%	0.24%

Past performance does not guarantee future results and current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate, so that shares when redeemed may be worth more or less than their original cost. Investors cannot invest directly into an index. For performance information current to the most recent month-end, please call 888-814-8180.

Source: Morningstar Direct. Performance data quoted above is historical.

The Fund’s management has contractually waived a portion of its management fees until March 31, 2023 for I, A, C and R6 Shares. The performance shown reflects the waivers without which the performance would have been lower. Total annual operating expenses before the expense reduction/reimbursement are 1.61%, 1.86%, 2.61% and 1.63% respectively; total annual operating expenses after the expense reduction/reimbursement are 1.51%, 1.76%, 2.51% and 1.14% respectively.¹ 2.00% is the maximum sales charge on purchases of A Shares.

Risks & Disclosures

Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund. This and other information is contained in the Fund’s prospectus, which can be obtained by calling 888-814-8180 and should be read carefully before investing. Additional Fund literature may be obtained by visiting www.EasterlyAM.com.

Past performance is not a guarantee nor a reliable indicator of future results. As with any investment, there are risks. There is no assurance that any portfolio will achieve its investment objective. Mutual funds involve risk, including possible loss of principal. The Easterly Funds are distributed by Ultimus Fund Distributors, LLC. Easterly Funds, LLC and Orange Investment Advisors, LLC are not affiliated with Ultimus Fund Distributors, LLC, member FINRA/SIPC. Certain associates of Easterly Funds, LLC are registered with FDX Capital LLC, member FINRA/SIPC.

¹ The Fund’s investment adviser has contractually agreed to reduce and/or absorb expenses until at least March 31, 2023 for I, A, C and R6 Shares, to ensure that net annual operating expenses of the fund will not exceed 1.48%, 1.73%, 2.48% and 1.11%, respectively, subject to possible recoupment from the Fund in future years.

There is no assurance that the portfolio will achieve its investment objective. A CLO is a trust typically collateralized by a pool of loans. A CBO is a trust which is often backed by a diversified pool of high risk, below investment grade fixed income securities. A CDO is a trust backed by other types of assets representing obligations of various parties. For CLOs, CBOs and other CDOs, the cash flows from the trust are split into two or more portions, called tranches. MBS and ABS have different risk characteristics than traditional debt securities. Although certain principals of the Sub-Adviser have managed U.S. registered mutual funds, the Sub-Adviser has not previously managed a U.S. registered mutual fund and has only recently registered as an investment adviser with the SEC.

MBS and ABS may be more sensitive to changes in interest rates and may result in prepayments which can include the possibility that securities with stated interest rates may have the principal prepaid earlier than expected, which may occur when interest rates decline. Rates of prepayment faster or slower than expected could reduce the Fund’s yield, increase the volatility of the Fund and/or cause a decline in NAV. With respect to the tranches, which are part of CLOs, CBOs, and CLOs, each tranche has an inverse risk-return relationship and varies in risk and yield that depending on economic factors such as changes interest rates can adversely affect the Fund.

Structured investments are formed by combining two or more financial instruments, including one or more derivatives. Structured investments may carry a high degree of risk and may not be suitable for many members of the public, as the risks associated with the financial instruments may be interconnected. As such, the extent of loss due to market movements can be substantial. Prior to engaging in structured investment Transactions, you should understand the inherent risks involved. In particular, the various risks associated with each financial instrument should be evaluated separately as well as taking the structured investment as a whole. Each structured investment has its own risk profile and given the unlimited number of possible combinations, it is not possible to detail in this Risk Disclosure Statement all the risks which may arise in any particular case.

Easterly Funds, LLC and Easterly Investment Partners, LLC both serve as the Advisors to the Easterly Fund family of mutual funds and related portfolios. Both Easterly Funds, LLC and Easterly Investment Partners, LLC are registered as investment advisers with the SEC. Mutual Funds are distributed by Ultimus Fund Distributors, LLC, member FINRA/SIPC. Although Easterly Funds, LLC and Easterly Investment Partners, LLC are registered investment advisers, registration itself does not imply and should not be interpreted to imply any particular level of skill or training.

THE OPINIONS STATED HEREIN ARE THAT OF THE AUTHOR AND ARE NOT REPRESENTATIVE OF THE COMPANY. NOTHING WRITTEN IN THIS COMMENTARY OR WHITE PAPER SHOULD BE CONSTRUED AS FACT, PREDICTION OF FUTURE PERFORMANCE OR RESULTS, OR A SOLICITATION TO INVEST IN ANY SECURITY.

16293954-UFD 01/24/2023