The AMG GW&K Core Bond ESG Fund experienced a notable downturn in the first quarter of 2026, with its Class N shares posting a return of -0.45%. This performance significantly lagged its benchmark, the Bloomberg U.S. Aggregate Bond Index, which recorded a more modest decline of -0.05% over the same period. The primary factors contributing to this underperformance were strategic missteps in security selection within corporate credit, specifically in the technology and consumer industries. Additionally, the fund's tactical decision to favor corporate bonds while reducing exposure to Treasuries proved disadvantageous as credit spreads widened across the market.

Despite these challenges, the fund did find some minor relief from its overweight position in the securitized sector. However, this benefit was ultimately overshadowed by specific allocations within that sector, particularly an excessive weighting in higher coupon agency-fixed rate mortgage-backed securities (MBS), which failed to meet performance expectations. These combined elements highlight the complexities and inherent risks associated with active management in a fluctuating market environment, underscoring the delicate balance required to navigate various fixed-income segments effectively.

Performance Breakdown and Market Influences

The AMG GW&K Core Bond ESG Fund's Class N shares faced a challenging first quarter in 2026, delivering a return of -0.45%, which trailed the Bloomberg U.S. Aggregate Bond Index's -0.05% return. A key driver of this underperformance was the fund's security selection in corporate credit, particularly in the technology and consumer sectors, where specific holdings did not perform as anticipated. Compounding this issue was the fund's asset allocation strategy, which involved an overweight to corporate bonds and an underweight to Treasuries. This positioning became a headwind as credit spreads widened, negatively impacting the value of corporate bond holdings.

While the fund benefited marginally from its overweight allocation to the securitized sector, this positive impact was largely nullified by adverse outcomes within that very sector. Specifically, the fund's increased exposure to higher coupon agency-fixed rate mortgage-backed securities (MBS) resulted in underperformance, dampening overall returns. These results underscore the critical importance of both granular security selection and broad asset allocation decisions in determining a bond fund's success, particularly in periods of market volatility and shifting credit dynamics.

Strategic Positioning and Future Outlook

In response to prevailing market conditions and the fund's recent performance, the AMG GW&K Core Bond ESG Fund continues to employ an active management approach. The current strategy maintains positions in corporate bonds and high-quality securitized products, reflecting a belief in the supportive fundamentals of these assets. The management team aims to capitalize on these fundamentals, provided that the global economic landscape remains relatively stable and is not significantly disrupted by unforeseen geopolitical shocks. This forward-looking stance indicates a commitment to leveraging active allocation for potential gains.

However, the fund acknowledges several key risks that could affect its near-term performance. Persistent fears regarding liquidity in the private credit market could create instability. Elevated geopolitical tensions, which can introduce widespread uncertainty, and sustained high oil prices, capable of impacting inflation and economic growth, are also identified as potential challenges. These factors could contribute to increased market volatility and put downward pressure on fixed-income spreads, making it more difficult for the fund to achieve its performance objectives and highlighting the need for vigilance and adaptability in its investment strategy.