26 | 2023 Investment Outlook | December 12, 2022 What We Are Doing ƒ We have reduced exposure to cyclicals and segments exhibiting unattractive asymmetric risk/return characteristics. We prefer defensive sectors trading wide of historical norms. For example, the health care sector’s average spread typically trades at around 40 basis points (bps) tighter than the ICE BofA U.S. High Yield Index average, but the sector traded 158 bps wider on November 30, 2022. ƒ We are maintaining a bias toward higher-quality credits and issuers with durable free cash flow—particularly within high-margin, service-based segments that benefit from strong recurring revenue. ƒ Finally, we stand ready to add risk in a disciplined manner when spreads exceed defined thresholds. “Taking a disciplined approach to incrementally adding risk when credit spreads surpass defined thresholds will be key for high yield in 2023.” The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment. Past performance is no guarantee of future results. See Disclosure section for index definitions. Risk Considerations: Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of non-payment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer’s ability to make principal and interest payments. An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. As interest rates rise, the value of certain income investments is likely to decline. Investments rated below investment grade (typically referred to as “junk”) are generally subject to greater price volatility and illiquidity than higher rated investments.