Manager Commentary

View Q1 Market Commentary

As of March 31, 2009

How did the Fund perform for the period?
The Pax World High Yield Bond Fund returned 8.97% for the period, outperforming the 5.26% return of the benchmark Merrill Lynch High Yield Master I Index1 and the 3.46% return of the Lipper High Current Yield Bond Funds Index2.

What factors contributed to the Fund’s performance during the quarter?
The Fund’s outperformance was mostly due to bond selection in health care, retail and consumer staples, and by being underweight, relative to the benchmark, in the poorly-performing banking industry.

Can you discuss any significant changes in the Fund’s positioning throughout the period?
Strong fund inflows during the quarter were first directed to existing holdings. In addition, we added some new names to the portfolio in sectors that we believe will hold their value. These included telecommunication companies Qwest Communications (1.3%*) and Digicel (1.2%*). We also initiated a position in Mobile Mini (1.3%*), a company that uses retrofitted ship containers to rent temporary storage space. We believe that Mobile Mini has strong cash flow and liquidity and offered attractive yields.

Which bonds contributed positively to performance?
Our top three contributors for the quarter were Advanced Medical Optics*, Nordic Telephone (1.4%*) and FTI Consulting (1.6%*). Advanced Medical Optics was acquired by Abbot Labs during the quarter and the bonds appreciated substantially. Nordic Telephone also performed well during the quarter as management succeeded in their strategy to grow broadband subscriptions, limit wire line losses and contain costs. As FTI Consulting proved in the past, its differentiated operating segments help to stabilize earnings during a downturn. Although FTI’s merger and acquisition activity was extremely slow during the quarter, its bankruptcy practice experienced strong demand and the company’s earnings continued to meet expectations.

Which bonds detracted from performance?
Neiman Marcus (0.5%*) had the most negative impact on performance for the period as the dramatic drop-off in spending by the high-end consumer surprised both the retailer and the market. The company was punished as sales and margins fell more than anticipated. Mexican companies Desarrolladora Homex (1.2%*) and Maxcom Telecommunications (0.6%*) also performed poorly, mostly due to the economic slowdown in Mexico. Homebuilder Homex struggled due to industry concerns despite what we believe to be excellent liquidity and an efficient business model. Although Mexican telecom companies overall had positive performance, much of Maxcom’s growth traditionally stemmed from telecom needs of new residential development in Mexico which has experienced a significant slowdown. The company has now realigned its focus to build profitability from the current customer base through new product offerings and attractive pricing.

What is your market outlook, particularly with respect to how it will impact your Fund?
My outlook for the high-yield market remains unchanged from last quarter: We expect continued volatility in the next several quarters as the market and the public digest the myriad of governmental programs that are being implemented. The high-yield market has rallied nicely from last quarter, which was a very testing quarter for the high-yield bond market. Spreads, which represent the level of risk in the market—widening spreads typically signify increasing risk—tightened approximately 200 basis points3 this quarter. I believe this has much to do with Treasury Secretary Geithner’s detailing of his recovery plan, which had been viewed as rather vague and was not, in my opinion, well-tolerated by the markets. In addition, I believe that continued action and willingness by the U.S. government to take necessary steps to stabilize not only the U.S. but global markets as well will bode well for spreads.

By continuing to closely monitor the Fund’s holdings, focusing on ample liquidity and cash flow, we believe we remain well-positioned in the current economic environment. I expect continued volatility throughout the first half of the year, particularly as first quarter earnings are reported and as big economic headlines appear. That being said, I still believe that the high-yield space offers especially attractive investment opportunities due to its lower correlation with other asset classes and more defensive nature during recessionary periods.

*Portfolio holdings as of 3/31/09. Holdings are subject to change. Advanced Medical Optics is currently not held by the Fund.

An investment in the fund involves risk, including loss of principal. Performance data quoted represents past performance, which does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. To obtain performance for the most recent month-end, click here. For standardized performance, click here.

By investing in high yield bonds you generally will be subjected to greater price volatility based on fluctuations in issuer and credit quality. When investing in bonds, you are subject, but not limited to, the same interest rate, inflation and credit risks associated with the underlying bonds owned by the Fund.

Total annual High Yield Bond Fund operating expenses, gross of any fee waivers or reimbursements, are 1.19% for the Individual Class shares and 0.94% for the Institutional Class shares. Total annual High Yield Bond Fund operating expenses, net of any fee waivers or reimbursements, are 0.99% for the Individual Class shares and 0.74% for the Institutional Class shares. The High Yield Bond Fund’s investment adviser has contractually agreed to reduce the High Yield Bond Fund’s management fee to 0.50% until at least December 31, 2011. In addition, the investment adviser has contractually agreed to reimburse the High Yield Bond Fund to the extent its “Other Expenses” (excluding Acquired Fund Fees and Expenses) exceed 0.24% of the average daily net assets of the High Yield Bond Fund. This reimbursement arrangement will remain in effect until at least December 31, 2012.

1The Merrill Lynch High Yield Master I Index tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market. One cannot invest directly in any index.

2The Lipper High Current Yield Funds Index tracks the results of the 30 largest mutual funds in the Lipper High Current Yield Fund Average. The Lipper High Current yield Fund Average is a total return performance average of mutual funds tracked by lipper, Inc. that aim at high (relative) current yield from fixed income securities, have no quality or maturity restrictions and tend to invest in lower grade debt issues. The Lipper High Current Yield Fund Index is not what is typically considered an “index” because it tracks the performance of other mutual funds rather than changes in the value of a group of securities, a securities index or some other traditional economic indicator.

3Basis point is defined as one one-hundredth of a percent, used in measuring yield differences among bonds.