Quarterly Update

May 2020

Charles Luke, Managing Director, Senior Portfolio Manager | May 2020

Absolute Credit Spread Changes

Opportunistic credit experienced a rapid deterioration in March, detaching from fundamentals

U.S. High Yield Bonds, Leveraged Loans and Structured credit are attractive, in our view

High yields offer a margin of safety against losses

Opportunistic credit experienced a rapid deterioration in liquidity over March but has made positive strides in April, supporting a rally across the global bond market. U.S. High Yield rates peaked at 11.7% before retreating to as low as 8.1%. Fueled by new facilities from the U.S. Federal Reserve that far exceed the response to the 2008 financial crisis,corporate credit is rebounding, with over $400 billion in new issuance. Investor demand has been a cornerstone of the quick turnaround and supportive of vulnerable sectors, such as energy, travel and restaurants. Yet, the market has only been open to the largest and highest-quality issuers, leaving many companies behind. While direct purchases of high-yield bonds by the Fed will provide a tailwind to the market and are likely to influence the lowest-rated tiers of global credit, we remain cautious based on program implementation delays and the downside risks associated with COVID-19.

COVID-19 risks continue to cloud the future path of a full credit recovery, including rating agency downgrades, liquidity concerns and unknown changes to consumer behavior, but we see attractive pockets within U.S. opportunistic credit. U.S. high-yield bonds and asset-backed securities (senior secured bank loans, securitized fixed income) offer good opportunities, in our view. Furthermore, based upon extensive historical analysis, 12-month forward returns after similar dislocations are generally positive, but not always predictive of a bottom. Our view is that high yields offer a margin of safety against anticipated defaults, and income levels are high enough to absorb losses. However, emerging market credit continues to struggle, and yield remains at 11%, after hitting a high of 14%, resulting from the uneven impacts of the coronavirus.

We are utilizing the market rebound to move up in quality by re-evaluating and, in many cases, shedding exposure to companies and global sovereign positions with limited liquidity and direct exposure to the impacts of COVID-19. Durable positions in well-managed companies with strong balance sheets, less reliance on global supply chains and the ability to access credit offer the best opportunities.

Key Points

Opportunistic credit experienced a rapid deterioration in March, detaching from fundamentals

U.S. High Yield Bonds, Leveraged Loans and Structured credit are attractive, in our view

High yields offer a margin of safety against losses

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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.

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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.

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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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