Quarterly Update

Tom Galvin, Chief Investment Officer | May 2020

True North

We have a dynamic, rigorous and fundamental methodology that combines our assessment of short-term risk and reward across asset classes with a longer-term viewpoint shaped by in-depth analysis of macroeconomic factors and our proprietary 4Ps framework

With markets in freefall and global economic activity being shut down on a scale not contemplated before, we began raising modest amounts of cash and utilizing our “doomsday” approach to equity portfolios

In time, we believe the phoenix will rise from the COVID-19 crisis. Until then, we are confident our investment process will keep our compass pointed to true north, and our clients will benefit from our long-term orientation

Often times investing is a relatively straightforward task. Fundamentals play out as expected, surprises come few and far between and market behavior appears consistent. Then there are times when the opposite is true, when uncertainty reigns and it can be tough making sense of a changing world. Times when, in the absence of a true north, investors often struggle to hold views with conviction, investment horizons shorten and emotions begin to cloud judgement.

As long-term investors providing solutions for long term investment goals, City National Rochdale utilizes a unique approach to the active management of financial assets. We have a dynamic, rigorous and fundamental methodology that combines our assessment of short-term risk and reward across asset classes with a longer-term viewpoint shaped by in-depth analysis of macroeconomic factors and our proprietary 4Ps framework. Collectively, this has enabled us to keep our asset allocation compass firmly set on true north.

None of this, though, means the path to our destination follows a straight line. Regular, periodic and at times violent turbulence in financial markets, changes in the magnitude and direction of economic growth, and black swan events all may temporarily throw off important dials on the dashboard of the investment plane we are piloting, requiring a course correction. This is to be expected when the true north we are seeking is long term in its orientation.

The foundation of City National Rochdale’s investment philosophy is our conviction that capital preservation is as important as capital appreciation. The way the compounding of money works is that if you can minimize drawdown periods, wealth creation is enhanced over longer term. However, we believe in prudent risk management, not market timing. When our speedometers are flashing green we want our foot on the accelerator, and when they are red we want to hit the brakes.

Coming into the crisis, we had a couple of things working in our favor. Our late-cycle playbook had already positioned both our equity and fixed-income strategies defensively with a focus on quality, durable assets and yield. Similarly, our decision to start dialing down risks in 2019 by selling exposures to non-U.S. developed markets and mid small cap stocks in the U.S. has been rewarded as these areas have meaningfully lagged in 2020 (see chart). Still, once the magnitude of the potential damage caused by the outbreak of COVID-19 became clearer we quickly determined that further risk reduction was necessary.

With markets in freefall and global economic activity being shut down on a scale not contemplated before, we began raising modest amounts of cash and utilizing our “doomsday” approach to equity portfolios. Short of decisive and quick action from policymakers, the risk of a meaningful, deep and permanent destruction of capital was too real to ignore. Fortunately, Washington did come together with a set of unprecedented fiscal and monetary measures, and the worst case outcome was avoided.

The market recovery since then has been nearly as dramatic as the decline. But has it been justified? Incoming data has certainly been as bad as feared, with roughly 33 million job losses over the past seven weeks. In the near term, the ranks of unemployed will continue to rise and the cash crunches many companies are facing will worsen. Yet, for the most part, investors are looking past the grim news, forecasting a rapid recovery as state economies open back up across the country.

The truth is that no one at this point really knows for sure what slope and shape the recovery will take. Businesses may be slowly re-opening their doors, but whether or not consumers will have the income and confidence to walk through them is yet to be determined. We anticipate some return in demand to occur initially, but not all at once, and not fully until significant progress is made in testing and tracing infections, the development of therapeutic drugs, or the creation of a vaccine.

Given this uncertainty, we have maintained our conservative positioning and modest cash levels, while putting in place a comprehensive plan of action. Our “Out of the Crisis” framework is based on specific market price levels and risk/reward targets for risk assets, as well as a rigorous assessment of indicators in four broad categories: COVID-19, ECONOMIC, EQUITY and BONDS. In essence, we will be solving a multivariate calculus formula that includes a decision tree, scorecards and a lot of subjective wisdom from the asset allocation team (see chart).

But these decisions are not done in a vacuum. While the arithmetic sum and the trending of key indicators might indicate an increase in our risk profile, we would override the score and not increase risk if the confidence levels of our economic and profit cycle forecast deteriorate, if an unexpected banking crisis develops or if COVID-19 virulence worsens. Conversely, should a vaccine arrive sooner than expected, and with a sufficient availability of supply, we would likely raise our risk profile meaningfully regardless of the SPX price level.

For now, the many indicators we’re monitoring are, on balance, still signaling caution. Although the recent recovery in stock prices is certainly welcomed, equity markets appear to have overshot fundamentals, with valuations now at levels higher than pre-crisis. At the same time, the COVID-19 shutdown has prompted an unprecedented number of U.S. companies to suspend earnings guidance. Visibility of business conditions has never been hazier.

In our minds, all this suggest there is volatility still to come for equities and potential for more downside. Indeed, history has shown that the first bear market rally is rarely the last. To commit cash back into the financial markets will require for us a majority of the indicators we monitor to turn positive, including continued signs of falling COVID-19 infections, a better understanding of the reopening process for the economy and greater clarity on the impact to corporate profits. We will also be watching for further easing of credit stress and financial indicators, and for persistent fiscal and monetary support from officials.

Navigating financial markets in coming months will be no straightforward task. When you find yourself in uncharted territory, having a fixed point of reference can make all the difference between making a dangerous wrong turn and staying on course to reach your financial goals. In time, we believe the phoenix will rise from the COVID -19 crisis. Until then, we are confident our investment process will keep our compass pointed to true north, and our clients will benefit from our long-term orientation.

Key Points

We have a dynamic, rigorous and fundamental methodology that combines our assessment of short-term risk and reward across asset classes with a longer-term viewpoint shaped by in-depth analysis of macroeconomic factors and our proprietary 4Ps framework

With markets in freefall and global economic activity being shut down on a scale not contemplated before, we began raising modest amounts of cash and utilizing our “doomsday” approach to equity portfolios

In time, we believe the phoenix will rise from the COVID-19 crisis. Until then, we are confident our investment process will keep our compass pointed to true north, and our clients will benefit from our long-term orientation

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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 Bloomberg Barclays U.S. High Yield Index is an unmanaged index considered representative of non-investment-grade bonds.

The Bloomberg Barclays U.S. Corporate Index is an unmanaged index that is comprised of issues that meet the following criteria: at least $150 million par value outstanding, maximum credit rating of Ba1 (including defaulted issues), and at least 1 year to maturity.

The Bloomberg Barclays Municipal Bond Total Return Index is a total return performance benchmark for municipal bonds that are backed by insurers with Aaa/AAA ratings and have maturities of at least one year.

The JP Morgan High Yield Index is designed to deliver high level of income from a portfolio of below investment grade securities. Indices are unmanaged and one cannot invest directly in an index.

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