| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| 5.78% | 1.93% | 1.71% |
The Touchstone Ares Credit Opportunities Fund underperformed its benchmark during the second quarter of 2026, primarily due to credit selection within the single-B and CCC-rated cohorts, partially offset by positive contributions from off-benchmark allocations to investment grade-rated bonds and collateralized loan obligation securities. The Fund maintained a broad risk-neutral posture throughout the quarter, reflecting supportive macroeconomic and corporate fundamentals alongside historically tight credit spreads. Allocations by asset class changed little, though the Fund modestly increased its investment in business development company equities trading at material discounts to book value. The Fund's overweight duration positioning contributed positively as shifting interest rate expectations favored longer-duration fixed income securities. Looking ahead, the manager believes leveraged credit markets enter the second half of 2026 on stable footing, supported by improving macroeconomic conditions including 2.0% to 2.5% GDP growth, a healthy labor market, and declining recession probabilities. The manager expects a coupon clip environment in which income generation remains the primary driver of returns, while maintaining disciplined credit selection and utilizing off-benchmark sectors to enhance portfolio yield.
The Touchstone Ares Credit Opportunities Fund maintains a risk-neutral positioning in leveraged credit markets, balancing supportive macroeconomic fundamentals and stable market technicals against historically tight credit spreads that leave limited margin for error.
The manager believes leveraged credit markets enter the second half of 2026 on stable footing, supported by improving macroeconomic conditions including 2.0% to 2.5% GDP growth, a healthy labor market, stable long-term inflation expectations, and declining recession probabilities. The manager expects a 'coupon clip' environment in which income generation remains the primary driver of returns, while periods of macroeconomic volatility may create opportunities for active management to generate incremental value through security selection. The manager will remain disciplined in credit selection while continuing to utilize off-benchmark sectors to enhance portfolio yield.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Jul 29 2026 | 2026 Q2 | - | AI, credit, duration, fixed income, high yield, Leveraged Loans, rates | - | The Touchstone Ares Credit Opportunities Fund maintains risk-neutral positioning in leveraged credit markets, balancing supportive macroeconomic fundamentals against historically tight credit spreads. The Fund underperformed its benchmark in Q2 2026 due to credit selection in single-B and CCC-rated cohorts. The manager expects a coupon clip environment ahead, with income generation as the primary return driver while remaining disciplined in credit selection. |
| May 4 2026 | 2026 Q1 | - | CLO, credit, Fed policy, high yield, rates, volatility | - | Ares Credit Opportunities outperformed in Q1 2026 through high yield security selection despite CLO equity weakness. Fund maintains neutral risk posture amid Fed policy uncertainty and tight valuations. Cautiously constructive outlook expects performance driven by active management across credit sectors with opportunistic deployment during market dislocations. |
| Jan 31 2026 | 2025 Q4 | TARBX, TARSX, TMACX, TMARX, TMAYX | CLO, credit, fixed income, high yield, loans, risk management | - | Ares Credit Opportunities Fund maintains risk-neutral positioning amid tight credit spreads, reducing CCC exposure while increasing single B allocations. Despite Q4 underperformance from CLO volatility and high yield credit events, the manager expects stable 2026 conditions with coupon clip returns and alpha from off-benchmark sectors as M&A activity increases supply. |
| Nov 4 2025 | 2025 Q3 | - | CLO, credit, Fed, high yield, rates, Spreads | - | Ares Credit Opportunities underperformed in Q3 due to off-benchmark CLO and equity allocations, but maintains neutral risk posture amid tight spreads. The fund's 82% high yield allocation and duration overweight should benefit from expected Fed rate cuts. Management focuses on relative value and credit selection as single name dispersion increases in tight spread environment. |
| Jul 29 2025 | 2025 Q2 | - | CLO, credit, Fed, high yield, loans, rates, Spreads | - | Ares Credit Opportunities Fund underperformed in Q3 due to off-benchmark CLO and equity allocations amid tight credit spreads. The Fed's September rate cut supports the outlook for high yield bonds. With spreads at post-crisis tights and single name dispersion rising, active credit selection becomes increasingly important for generating alpha. |
| Mar 31 2025 | 2025 Q1 | - | CLO, credit, duration, high yield, tariffs, volatility | - | Ares Credit Opportunities rotated from loans to high yield bonds amid rate volatility, increasing duration to overweight while reducing cyclical exposure. Tariff uncertainty drove market stress but created opportunities. Strong borrower fundamentals and elevated cash position the fund to capitalize on dislocations as rate expectations recalibrate. |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2026 Q2 |
Credit StressDefault rates in both high yield bond and syndicated loan markets remained below their long-term averages during the quarter. Credit spreads remained near historically tight levels, leaving limited margin for error. The Fund maintained risk-neutral positioning given supportive fundamentals alongside tight spreads. |
Default Rates Credit Spreads High Yield Leveraged Loans |
AISector dispersion remained elevated, driven largely by perceived AI risks and opportunities. High yield issuance increased from the prior quarter, driven primarily by refinancing activity and increased AI-related capital expenditures. Demand remained strongest for higher-quality issuers and industries perceived to have lower AI-related risk. |
Capital Expenditures Sector Dispersion Issuance | |
RatesThe Fund's overweight duration positioning within its fixed income allocation contributed positively during the quarter as shifting interest rate expectations and broader risk-off conditions favored longer-duration fixed income securities. Markets are pricing in one additional interest rate increase later this year, which investors are interpreting primarily as a reflection of continued economic resilience. |
Duration Interest Rates Fixed Income | |
| 2026 Q1 |
Credit StressHigh yield bonds and syndicated loans posted negative returns during the quarter with spread widening and price declines, particularly in lower-quality segments. CLO equity experienced notable mark-to-market volatility amid softer loan market conditions. |
High Yield Spreads CLO Volatility Credit |
RatesMarkets digested evolving macroeconomic conditions and shifting rate expectations with persistent inflation concerns and uncertainty around the Federal Reserve's policy path contributing to increased volatility. |
Fed Inflation Policy Rates Volatility | |
Private CreditThe fund maintained diversified allocation across high yield bonds, syndicated loans, and CLO securities. Performance was driven by security selection in high yield bonds while structured credit, particularly CLO equity, experienced weakness. |
CLO Syndicated Loans Structured Credit High Yield Allocation | |
| 2025 Q4 |
AIManager believes market's assessment of AI risk differs from their own, with approximately 60% of relative underperformance attributed to positions where AI impact concerns drove stock declines. Portfolio companies deemed AI-losers declined 15% despite 10% revenue growth and 15% EPS growth, representing valuation compression rather than fundamental deterioration. |
Artificial Intelligence Disruption Valuation Technology Software |
QualityFund exclusively invests in businesses with superior characteristics including high barriers to entry, sustainable competitive advantages, and durable growth prospects. Manager notes their focus on leading businesses in sectors has been foundation of strategy since inception, though this approach was out of favor in 2025 as investors sold higher-quality investments to buy riskier stocks. |
High Quality Competitive Advantages Margins Returns Barriers | |
Small CapsStrategy of owning competitively advantaged small and medium-sized businesses remained out of favor for most of the quarter. Fund observed improvement in early December as investors showed renewed enthusiasm for high-quality stocks that populate the portfolio, with significant divergence between consistent earnings growth and recent performance creating compelling valuations. |
Small Cap Growth Valuation Russell 2000 Outperformance | |
FinancialsFinancials represent 62.1% of net assets with mixed performance during the quarter. Arch Capital contributed positively with strong earnings and active capital management, while Kinsale Capital declined due to concerns about moderating growth amid cyclical slowdown for property and casualty insurance industry. |
Insurance Capital Management Specialty Finance Banking Returns | |
| 2025 Q3 |
Credit StressSingle name dispersion has increased as investors seek to shed risk and have higher sensitivity to idiosyncratic risk. The most notable example is auto supplier First Brands, which saw its term loan decline 60 points before filing for bankruptcy. Spreads remain at tight levels with little room for error for managers. |
Credit Selection Dispersion Bankruptcy Spreads Risk |
Private CreditThe fund maintains significant allocations to collateralized loan obligations (CLO) equity and syndicated loans. CLO origination remains steady while the fund's allocation to syndicated loans was additive during the quarter, outperforming both syndicated loan and high yield bond markets. |
CLO Syndicated Loans Origination Allocation | |
RatesThe Fed cut rates in September for the first time since December 2024, viewed as a risk management measure with further reductions expected before year-end. The fund's duration overweight is expected to prove beneficial as rates move lower. |
Fed Rate Cuts Duration Monetary Policy | |
| 2025 Q2 |
Credit StressSingle name dispersion has increased as investors seek to shed risk and have higher sensitivity to idiosyncratic risk. The most notable example is auto supplier First Brands, which saw its term loan decline 60 points before filing for bankruptcy. Spreads remain at tight levels, leading to little room for error for managers. |
Credit Selection Dispersion Bankruptcy Spreads Risk |
RatesThe Fed cut rates in September for the first time since December 2024, viewed as a risk management measure with further reductions expected before year-end. Rate expectations have been a headwind for syndicated loans but supportive for high yield bonds and fixed income broadly. |
Fed Rate Cuts Monetary Policy Duration Yields | |
| 2025 Q1 |
Credit StressCredit markets experienced widening spreads and increased volatility amid heightened uncertainty. The fund rotated from bank loans to high yield bonds to take advantage of longer duration bonds that sold off on rate volatility. Credit selection remained positive despite market challenges. |
High Yield Bank Loans Spreads Credit Selection Volatility |
RatesRising rate volatility drove portfolio positioning changes, with the fund increasing duration from underweight to overweight relative to benchmark. The MOVE Index reached new highs in March, reflecting Treasury market volatility that created opportunities in longer duration bonds. |
Duration Rate Volatility Treasury MOVE Index Yield Curve | |
Trade PolicyTariff implementation remains at the forefront with markets realizing this is not just a negotiation tactic but a wholesale revision of global trade. Global cyclicals bore the brunt of price weakness as trade rhetoric stoked fears of elevated inflation and lower growth. |
Tariffs Global Trade Cyclicals Inflation Trade Rhetoric |
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