Quarterly Update

Michael Taila, Managing Director, Co-Director, Fixed Income | Jan. 2022

Investment Grade Municipal Bonds Demonstrate Resiliency

Expect modestly positive total returns

Market volatility should create investor opportunities

Issuer credit quality is improving

Investment grade municipal (IGM) bonds closed the book on 2021 with more optimism as market gains in the final months boosted full-year total returns to about 1.5% (Bloomberg Barclays indices), delivering good relative outperformance versus most other fixed income cohorts.

Despite fluctuations in the rates market, IGM bonds benefitted from solid investor demand with robust fund flows. The improving economy contributed to shrinking credit spreads while talk of higher personal and corporate income tax rates bolstered the appeal of tax-exempt income. The technical factors influencing IGM bonds should carry over into 2022. However, some downside risks remain, with Fed lift-off anticipated in 2H2022 (or sooner). A more rapid and sustained rise in rates than expected could weigh on the municipal market. That said, municipal bonds tend to perform well during a rising rate environment. Although IGM bond performance may be more muted in 2022, investors should earn modestly positive total returns.

The municipal market will continue to focus on valuations. Relative value indicators such as the municipal/Treasury yield ratio ended 2021 near their historic lows, while credit spreads tightened significantly. Should IGM bonds track a more aggressive adjustment in Treasuries and demand weaken from slowing and/or periodic outflows, valuations should “cheapen” with ratios moving higher. Any dislocation in the municipal bond market has potential performance implications, but we see these events as opportunities for investors to capitalize on more attractive entry points.

Municipal credit conditions improved during 2021, with many state and local governments (SLGs) reporting strong revenue outperformance versus forecasts. Based on projections, many SLG balance sheets are healthy and poised to grow in FY 2022. Spending on infrastructure will increase over the next few years as money appropriated from the Infrastructure Investment and Jobs Act flows through various municipal sectors. Investments in physical projects should stimulate growth and be a net positive for municipal credit quality. We continue to monitor governance and policy decisions to ensure SLGs maintain budgetary balance, especially as we face headwinds from COVID-19 variants and likely changes in the political landscape in 2022.

Key Points

Expect modestly positive total returns

Market volatility should create investor opportunities

Issuer credit quality is improving

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Important Disclosures

Important Information

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 re-flect 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.

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 ex-penses.

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 securi-ties. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a high-er-quality rating.

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 height-ened 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 munici-pal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain inves-tors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in be-low-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 guar-antee 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.

Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

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.

This material is available to advisory and sub-advised clients, as well as financial professionals working with City National Rochdale, a registered investment advisor and a wholly-owned subsidiary of City National Bank. City National Bank provides investment man-agement services through its sub-advisory relationship with City National Rochdale.

Index Definitions

S&P 500 Index: The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an exact list of the top 500 U.S. companies by market cap because there are other criteria that the index includes.

Bloomberg Barclays US Aggregate Bond Index (LBUSTRUU): The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.

GT2 Govt, GT3 Govt, GT5 Govt, GT10 Govt, GT30 Govt: US Government Treasury Yields

DXY Index: The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.’s most significant trading partners.

Dow Jones U.S. Select Dividend Index DJDVP: The Dow Jones U.S. Select Dividend Index looks to target 100 dividend-paying stocks screened for factors that include the dividend growth rate, the dividend payout ratio, and the trading volume. The components are then weighted by the dividend yield.

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