Manager Commentary

As of December 31, 2013

Pax World High Yield Bond Fund’s return for the quarter ended December 31, 2013 was 3.09%, roughly in line with the 3.33% return of the Bank of America Merrill Lynch High Yield Bond - Cash Pay - BB-B (Constrained 2%) Index1 (the Index). For the year ended December 31, 2013,the Fund outperformed the Index with a 6.91% return compared to 6.29%.

The fourth quarter of 2013 was the strongest one for the high yield markets compared with the prior three quarters. We believe this was due mostly to the resolution of several issues that previously had created volatility and uncertainty in the high yield market. The most important included the announced intention of the U.S. Federal Reserve (the Fed) to taper quantitative easing2 (QE)-related bond purchases, Congress’s decision to put its partisan ways aside to reopen the government until January and extend the debt ceiling until February 15, 2014, and a negotiated peaceful resolution to threatened use of chemical weapons in Syria. After closing at 1.63% on May 1, 2013, the interest rate on the 10-year U.S. Treasury bond reached 2.88% on December 16, 2013, a 77% increase. The path to higher rates was marked by sometimes significant increases and decreases from day-to-day. After its December 18 meeting, the Federal Open Market Committee announced its decision to reduce bond purchases by $10 million in January 2014. Through year-end, the rate on the 10-year U.S. Treasury bond increased another 15 basis points.3

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The BofA Merrill Lynch U.S. High Yield - Cash Pay - BB-B (Constrained 2%) Index tracks the performance of BB- and B-rated fi xed income securities publicly issued in the major domestic or eurobond markets, with total index allocation to an individual issuer limited to 2%. One cannot invest directly in an index.

2Quantitative easing is monetary policy used by central banks to stimulate a national economy. Typically, central banks implement quantitative easing by buying financial assets from commercial banks and other private institutions, injecting a pre-determined quantity of money into the economy.

3A basis point is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security.

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