Quarterly Update

Jan. 2020

Matthew Peron, Chief Investment Officer, Senior Managing Director | Jan. 2020

2020 Vision

As we turn the page to 2020, many of the positive developments that recently underpinned financial markets remain

Anticipate a return to more normal levels of market volatility typical of the later stages of the bull market

Our base case for the U.S. economy in 2020 continues to be slowing but sustainable growth

We continue to believe the best course of action is to build resilient portfolios of high-quality, durable assets

Even those with the rosiest of glasses would have been hard pressed to foresee 2019’s market performance. Dovish shifts from world central banks and progress in U.S.-China trade negotiations helped ease early-year investor concerns and propelled financial markets to outsized gains. The S&P 500 finished up 31.5%, the best annual performance in half a decade, with many major global indices also ending the year at or near record highs. Meanwhile, falling interest rates and declining credit spreads boosted returns on a wide range of fixed income asset classes.

As we turn the page to 2020, many of the positive developments that recently underpinned financial markets remain, including sustainable economic growth, benign inflation, and low interest rates. This leaves the stage set for further worthwhile gains in equity markets and select credit opportunities in fixed income. However, we advise clients to lower their expectations for portfolios going forward.

Although the ebbing of near-term recession concerns argues for staying invested in stocks, slower economic and low corporate profit growth mean returns should be more modest. Ongoing policy uncertainty and elevated geopolitical risks will also remain headwinds, particularly as the election season heats up, and anticipate a return to more normal levels of market volatility typical of the later stages of the bull market.

Our base case for the U.S. economy in 2020 continues to be slowing but sustainable growth, buttressed by a healthy household sector, and supports our continuing preference for U.S. equities. Overseas, economic growth remains more challenging. Though we expect the global economy to bottom out around the first quarter, the pace of this recovery will be relatively slow and spread unevenly across regions, with developed economies in particular still struggling against long-term structural headwinds.

The emergence of a limited trade agreement between the U.S. and China has helped drive the rally in stocks, easing fears of further escalation. Still, we caution against reading too much into the recent optimism. Consumer and business optimism wobbled last year not only due to direct costs of tariffs, but as a result of the unpredictable nature of the trade environment. The “Phase I” deal is clearly a step in the right direction, but we suspect most of the benefits have now been priced into the market, and as long as core issues remain unaddressed, uncertainty will likely continue to weigh over the outlook.

When looking back on 2019, the old market adage “don’t fight the Fed” has never been truer. Collectively, global central banks enacted 129 separate rate cuts last year. This synchronized policy easing was a key driver of financial markets, contributing to the fall in short- and long-term interest rates and benefiting equities and bond prices. Easier financial conditions will likely continue to support stock prices next year, but the central-bank stimuli and interest rate cuts that drove returns last year are unlikely to be repeated in 2020.

Now that the pendulum of investor sentiment appears to have swung back to a more optimistic position, we don’t anticipate the recent rally or reduction in volatility to continue indefinitely. Even the best markets need to catch their breath from time to time, and a consolidation period or another pullback wouldn’t be surprising in the months ahead.

Similarly, for fixed income investors, we expect returns to be in line with the current income offered on bonds, while price gains are likely to be limited. From current levels, yields are likely to move modestly higher, while there isn’t much room for credit spreads to fall further. Though we believe there are still spots clients can earn a relatively safe and above market yield, we look to collect coupons in credit instruments and are staying higher in quality, even if that means giving up some yield, as corporate credit looks priced for perfection.

Hindsight may be 20/20, but foresight isn’t, and although we continue to believe that there are rewards ahead for investors, there are also dangers. Our late-cycle playbook has served us well through the many highs and lows of the past two years, and we continue to believe the best course of action is to build resilient portfolios of high-quality, durable assets. By keeping our focus on dividend paying U.S. stocks, select credit areas, and alternatives, we have positioned our portfolios to help withstand late-cycle volatility and minimize risk, yet continue to participate in ongoing gains.

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Key Points

As we turn the page to 2020, many of the positive developments that recently underpinned financial markets remain

Anticipate a return to more normal levels of market volatility typical of the later stages of the bull market

Our base case for the U.S. economy in 2020 continues to be slowing but sustainable growth

We continue to believe the best course of action is to build resilient portfolios of high-quality, durable assets

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Important Disclosures

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change.

Concentrating assets in a particular industry, sector of the economy, or markets may increase volatility because the investment will be more susceptible to the impact of market, economic, regulatory, and other factors affecting that industry or sector compared with a more broadly diversified asset allocation.

Private investments often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information.

Alternative investments are speculative, entail substantial risks, offer limited or no liquidity, and are not suitable for all investors. These investments have limited transparency to the funds’ investments and may involve leverage which magnifies both losses and gains, including the risk of loss of the entire investment. Alternative investments have varying and lengthy lockup provisions. Please see the Offering Memorandum for more complete information regarding the Fund’s investment objectives, risks, fees, and other expenses.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors, as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

There are inherent risks with fixed-income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed-income securities and during periods when prevailing interest rates are low or negative. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in below-investment-grade debt securities, which are usually called “high yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell, and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance. Index Definitions

The Standard & Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

The Standard & Poor’s Small Cap 600 Index (S&P 600) measures the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.

The Shanghai Stock Exchange (SSE) composite is a market composite made up of all the A shares and B shares that trade on the Shanghai Stock Exchange.

The Dow Jones Select Dividend Index seeks to represent the top 100 U.S. stocks by dividend yield. The index is derived from the Dow Jones U.S. Index and generally consists of 100 dividend-paying stocks that have five-year non-negative Dividend Growth, five-year Dividend Payout Ratio of 60% or less, and three-month average daily trading volume of at least 200,000 shares.

Nasdaq 100 Index is an index composed of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange.

MSCI Emerging Markets Asia Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Asian emerging markets.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. As of June 2007, the MSCI EAFE Index consisted of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. As of September 2002, the MSCI Europe Index consisted of the following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

The S&P U.S. Treasury Bond Current 10-Year Index is a one-security index comprising the most recently issued 10-year U.S. Treasury note or bond.

S&P Leveraged Loan Indexes (S&P LL indexes) are capitalization-weighted syndicated loan indexes based upon market weightings, spreads, and interest payments. The S&P/LSTA Leveraged Loan 100 Index (LL100) dates back to 2002 and is a daily tradable index for the U.S. market that seeks to mirror the market-weighted performance of the largest institutional leveraged loans, as determined by criteria. Its ticker on Bloomberg is SPBDLLB.

The Barclays High Yield Municipal Index covers the high yield portion of the U.S.-dollar-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.

The Bloomberg Barclays U.S. Corporate High Yield Index is an unmanaged, U.S.-dollar-denominated, nonconvertible, non-investment-grade debt index. The index consists of domestic and corporate bonds rated Ba and below with a minimum outstanding amount of $150 million.

The Barclays Aggregate Bond Index is composed of U.S. government, mortgage-backed, asset-backed, and corporate fixed income securities with maturities of one year or more.

The Corporate Emerging Market Bond Index (CEMBI) is J.P. Morgan’s index of U.S.-dollar-denominated debt issued by emerging market corporations.

Brent Crude is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide. This grade is described as light because of its relatively low density, and sweet because of its sulfur content.

The Bloomberg Commodity Total Return Index, formerly known as Dow Jones-UBS Commodity Index Total Return (DJUBSTR), is composed of futures contracts and reflects the returns on a fully collateralized investment in the BCOM. This combines the returns of the BCOM with the returns on cash collateral invested in 13-week (three-month) U.S. Treasury Bills.

Indices are unmanaged and one cannot invest directly in an index.

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