3Q 2026 U.S. Opportunistic High Yield Commentary

In Q3 2026, the Polen Capital U.S. Opportunistic High Yield Composite produced a gross total return of -0.21% (-0.32% net), outperforming the ICE BofA U.S. High Yield Index (the “Index”) by 160 bps gross (149 bps net). Higher Treasury yields and renewed Middle East tensions weighed on high yield bonds during the third quarter, while leveraged loans outperformed as their floating-rate structure provided protection from rising rates.

How did the Polen U.S. Opportunistic High Yield strategy perform in 3Q 2026?

Relative performance benefited from the portfolio’s income advantage, as well as its shorter duration as U.S. Treasury yields increased during the period. In addition, contributions came from the portfolio’s holdings in the Basic Industry, Healthcare, and Media sectors, as well as holdings rated CCC3, CCC2, CCC1, and B2, all of which outperformed those of the benchmark.

Turning to detractors, the portfolio’s holdings rated B1, BB2, and BB3 were the largest detractors. From a sector perspective, the portfolio’s holdings in the Energy, Financial Services, and Leisure sectors, which lagged those of the benchmark, detracted from performance.

The top contributors to the portfolio’s total return were Angus Chemical Co., Medical Solutions Holdings Inc., and Eyecare Partners LLC. The largest relative detractors were Scientific Games Lottery, Dexko Global Inc., and Asurion LLC.

The performance data quoted represents past performance and does not guarantee future results. Current performance may be lower or higher. Periods over one year are annualized. The gross performance returns for the Polen Credit U.S. Opportunistic High Yield Composite set forth above are gross of all fees except for trading expenses, deal-related legal expenses, and withholding taxes. Net returns reflect the application of actual management and performance-based fees to gross returns. Returns of the Polen Credit U.S. Opportunistic High Yield Composite are provided as supplemental information and complement a GIPS Composite report, which accompanies the full commentary. The commentary is not intended to guarantee profitable outcomes. Any forward-looking statements are based on certain expectations and assumptions susceptible to changes in circumstances. Opinions and views expressed constitute the judgment of Polen Capital as of the date herein and may involve assumptions and estimates which are not guaranteed and are subject to change.

What happened in markets during the quarter?

High yield bonds finished the third quarter lower as September’s sell-off reversed August’s recovery. Higher Treasury yields and renewed Middle East tensions weighed on credit markets late in the quarter, while shifting expectations for Federal Reserve policy increased the sensitivity of fixed-rate bonds to rising rates. In September, the Federal Reserve raised its target range by 25 basis points to 3.75%–4.00%, citing elevated inflation.

Against this backdrop, the ICE BofA U.S. High Yield Index returned -1.81%, compared with a 2.45% gain in Q2, and its option-adjusted spread (OAS) widened 36 basis points from 276 to 312 basis points. Single B-rated bonds were more resilient, returning -1.30%, versus -1.86% for BB-rated bonds and -3.57% for CCC & Lower. By sector, Technology & Electronics and Financial Services led performance, while Telecommunications and Media lagged.

The Morningstar LSTA Leveraged Loan Index returned 1.95% during Q3, compared with 1.88% in the prior quarter, outperforming broad-based high yield bond indices as its floating-rate structure offered protection from rising Treasury yields. Loans generated positive returns in each month of the quarter, including September, when fixed-rate credit experienced its sharpest losses. Performance varied by credit quality, with B-rated loans gaining 2.53% and BB-rated loans returning 1.59%, while CCC-rated loans declined 2.64%. Information Technology, Materials and Health Care led sector performance, while Communication Services was the weakest-performing sector. The loan market's yield to a three-year takeout increased 66 basis points to 8.87% during the quarter, while its spread to a three-year takeout ended at 507 basis points, reflecting the impact of higher underlying interest rates rather than a comparable deterioration in credit spreads.

Primary market activity remained healthy despite increased volatility toward quarter-end, although issuance moderated from Q2. High yield bond issuance totaled $96.4 billion during the quarter, compared with $106.0 billion in Q2, including $48.3 billion excluding refinancing. Institutional leveraged loan issuance totaled approximately $188 billion, down from $214.6 billion in the prior quarter, with about $54 billion excluding refinancing and repricing. Refinancing continued to represent a substantial portion of new issuance across both markets as borrowers sought to address existing maturities. Gross CLO issuance totaled $132.2 billion during Q3, bringing year-to-date issuance to $359.6 billion. Continued refinancing activity and CLO demand helped support market liquidity despite the less favorable interest rate environment.

Default activity moderated during the quarter, with payment defaults and distressed transactions totaling $9.6 billion across high yield bonds and leveraged loans, down from $18.3 billion in Q2. At quarter-end, trailing-twelve-month par-weighted default rates, including distressed exchanges, stood at 2.68% for high yield bonds and 2.08% for leveraged loans, below their respective 25-year averages of 3.2% and 2.9%. While aggregate default rates remained relatively contained, weaker performance among lower-rated credits reflected continued pressure on more highly leveraged borrowers.

J.P. Morgan forecasts default rates of 2.25% for both high yield bonds and leveraged loans in 2026, increasing to 2.75% and 4.50%, respectively, in 2027, as refinancing pressures and weaker borrower fundamentals are expected to contribute to greater credit stress.

Sources: ICE, Credit Suisse, J.P. Morgan. Portfolio information provided is based on a representative account of the Polen U.S. Opportunistic High Yield Composite. The representative account is an account within the Polen Credit U.S. Opportunistic High Yield Composite that Polen Credit has deemed the most representative of the accounts managed by Polen Capital pursuing the investment strategy.

What is the team’s outlook?

The macroeconomic backdrop grew more complex during the third quarter as September in particular tested investor resolve. Risk-off sentiment was driven by renewed inflation fears, rising Treasury yields, and volatile oil prices as September’s weakness effectively wiped-out year-to-date gains in the high yield market. The Federal Reserve remains a central focus as market expectations for the path of policy continue to shift with each new data point. Even so, the underlying inflation picture is more balanced than the headlines seemingly suggest. Easing price pressure in housing costs, building products, and software has offset commodity-driven inflation, with overall inflation beginning to moderate. Polen Credit expects rates to stabilize into year end, though the team is watching Fed communication and incoming data closely. Geopolitical risk remains a persistent source of volatility, with ongoing headlines from the Middle East and Russia/Ukraine. Investors are also weighing the upcoming U.S. midterm elections, including the possibility of a change in congressional control and the policy gridlock that could follow.

Credit spreads have widened across both high yield bonds and leveraged loans since the start of the year. High yield spreads have more recently moved above 300 basis points, widening from the historical tights experienced for much of the year but, notably, still below long-term averages. With low default activity in high yield and moderate in loans, Polen Credit does not anticipate extreme spread moves in either direction for the remainder of the year.

The more meaningful story continues to unfold beneath the surface, where the dispersion amongst rating subsets of the leveraged credit markets has become considerably more pronounced. Year-to-date, BB-rated high yield returns have now dipped below zero, while single-B returns remain modestly positive at 1.2%. Meanwhile, CCC-rated high yield has declined nearly 4.0% (distressed bonds among the weakest segments of the market), with leveraged loans experiencing a similar pattern. The BB/CCC spread ratio sits at recent highs, underscoring the limited appetite to rotate down in quality from credit investors. So far this year, quality has clearly been rewarded, a theme the team does not see abating throughout the remainder of 2026.

The primary market has experienced a similar bifurcation amongst rating quality between issuers coming to market. For larger, higher-quality issuers, capital markets have been open. Recent months brought two of the largest bond deals on record, from SoftBank and Paramount Skydance. In addition, AI-related financing remains a major source of supply: data center issuance remains a significant category for BB-rated and B-rated bonds, and larger AI chip financings have begun to tap the leverage loan market. Polen Credit expects energy infrastructure supporting the AI buildout to add further supply to both markets in the coming months. Sentiment toward AI-linked credits has also swung quickly between optimism and caution, typically dependent on policy headlines from Washington or company-specific announcements. Meanwhile, refinancing activity continues to be robust, particularly for higher-quality issuers; however, new LBO and dividend recapitalization activity has been far scarcer as sponsors continue to struggle to find exit opportunities on prolonged hold periods for investments dating back to the zero-rate environment, themes Polen Credit expects to carry forward.

Looking ahead, the team remains cautious but constructive. September's drawdown, an uncertain Fed path, and persistent geopolitical risk call for discipline, particularly among lower-rated issuers whose path to refinancing has narrowed. Still, fundamentals across much of the leveraged credit market remain sound and defaults remain contained. With yields near 17-month highs, the market offers more attractive all-in yield and income than at the start of 2026. However, Polen Credit believes that index-level figures tell only part of the story. Today's environment is rewarding differentiation between durable business models and deteriorating credit profiles. Meanwhile, the team’s approach remains unchanged: Polen Credit relies on bottom-up fundamental research, rigorous risk management, and conviction in issuers it believes can navigate various market conditions. The team believes this kind of market, marked by volatility, dispersion and selectivity, is one in which active credit management can deliver meaningful long-term value for its clients.

Who manages the Polen U.S. Opportunistic High Yield strategy?

The Polen U.S. Opportunistic High Yield strategy is managed by Ben Santonelli, Portfolio Manager, who has 22 years of industry experience, and John Sherman, Portfolio Manager, who has 22 years of industry experience.