Quarterly Update

Garrett R. D'Alessandro, Chief Executive Officer | Jul. 2021

The Complexities of Responsible Investing

We believe Responsible Investing is a complex topic and are avoiding an over-simplification of the issues that can prove to be impractical.

Responsible Investing assets have grown to $35 trillion, increasing 540% since 20161. Over the past several years, Responsible Investing has gained significant attention from central banks, politicians, businesses and investment managers. While there is a wide variety of views on this topic and many interpretations of what makes for valid Responsible Investment decisions, it generally refers to the consideration of environmental, societal and governance (ESG) issues by an investment manager during the research process. Research approaches range from those that exclude companies that don’t meet an investor’s definition to more sophisticated approaches that integrate a breadth of factors into a holistic assessment of how each company is addressing its impact on environmental, societal and governance issues. This category of investing is forecast to grow 15% to $53 trillion by 20252.

We have heard a wide range of thoughts from clients related to the topic of Responsible Investing. While there is a degree of common understanding in some areas, there are other issues where there is little common ground. Beyond finding agreement on selecting issues and measuring impact, there are many different views about how one’s values should play a role in an investment portfolio. As an investment manager, our main focus is finding high-quality companies to invest in for the long term. We do need to assess trends that may impact the drivers of investment returns, such as economic growth and corporate profits.

ESG trends should be considered so we can make an assessment as to the impact of such trends on the companies we invest in. Our research process takes a fundamental approach to assessing these changes by seeking new opportunities or avoiding risks created by ESG factors. We do, though, balance these considerations with many drivers of investment risk and return.

We believe Responsible Investing is a complex topic and are avoiding an over-simplification of the issues that can prove to be impractical. Shifting attitudes toward ESG issues can lead to changing legal and regulatory environments, and companies incorporate into their strategic decisions how these shifts can impact their revenues and profits in the years ahead. We have to understand how each company is adjusting to these shifting trends that could impact their profits. It is good investment management to consider such risks and incorporate their potential impact into investment decision-making.

Such long-term secular shifts can bring about investment in new technologies and evolving consumer preferences, and we are focused on identifying companies positioned to benefit from such trends. This includes our research team seeking to identify companies with innovative technology and poised to capture the opportunity in a sustainable, profitable manner.

As a society we are constantly learning and adapting to change. As investors, it is prudent for us to be mindful of the changing environment and adapt our portfolios accordingly, but it is critical that we do so accounting for nuances and tradeoffs that present themselves, and understand that simple approaches may not always achieve the desired outcomes.

Key Points

We believe Responsible Investing is a complex topic and are avoiding an over-simplification of the issues that can prove to be impractical.

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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.

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.

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.

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.

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.

Sources

1Global Sustainable Investment Alliance

2Bloomberg Intelligence

3CNR Research

4US 10-Year Treasury, 9/30/2016-12/19/2016 & 1/4/2021-3/30/2021

5Bloomberg Barclays US Aggregate

6GT10 Govt – USGGBE10 Index (10-Year Treasury minus 10 Year TIPs Breakeven), 8/31/20 – 3/18/21

7GT10 Govt

8,9US High Yield (LF98TRUU), US Leveraged Loans (SPBDAL), BAML EM Corporate (EMHY)

10,11JPM 7/1/21 Default Report

12Bloomberg League Table for HY Corporate Credit

Index Definitions

The Bloomberg Barclays US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.

The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.

The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market.

The S&P/LSTA U.S. Leveraged Loan 100 Index is designed to reflect the performance of the largest facilities in the leveraged loan market.

EMHY tracks an index comprising USD denominated emerging markets high yield bonds.

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