Quarterly Update

May 2020

Gregory S. Kaplan, Director of Fixed Income, Managing Director | May 2020

High Volatility Creates Opportunity

Extraordinary events and illiquidity drove returns in first quarter of 2020

Federal Reserve intervention has removed systemic risk from most markets

Opportunities exist in markets that have overshot

Fixed income markets in the first quarter of 2020, and March specifically, were marked with superlatives in many regards. Unprecedented volatility, all-time lows in U.S. Treasury yields and massive outflows from credit-oriented mutual funds and ETFs punctuated the decline in stocks and other risk assets. To demonstrate the magnitude, consider that the 10-year AAA Municipal yield moved 207 basis points from its YTD low on March 9 to its YTD high only two weeks later versus a smaller 143 basis points move over a longer nine-month period during the Great Financial Crisis (GFC). By the end of March, the Bloomberg Barclays Municipal Bond Total Return Index was down 3.63% for the month and -0.63% for the quarter. At the same time, the U.S. Treasury index benefited from the massive flight to quality and returned 8.2% for the quarter.

Returns in March were driven in large part by illiquidity as panicked investors sold indiscriminately and fled to cash. Investment-grade corporate credit spreads almost trebled to 373 basis points, a level not seen since May 2009. Similarly, the five-year municipal yield relative to the matching U.S. Treasury hit 649% on March 23, a level well in excess of the prior 239% peak seen in December of 2008 (see chart).

Swift and decisive action by the Fed helped improve liquidity and resulted in the shortest bear market in history. Markets have responded well and can be seen in the retracement of credit spreads (see chart), the drop in pricing for credit default swaps (credit insurance), improvement in various liquidity measures, and a sharp increase in new issuance for both investment-grade and high-yield bonds.

Our multiyear focus on the “late-cycle playbook” positioned us well entering the current COVID-19 crisis. We had been upgrading credit quality across all fixed-income asset types in anticipation for an eventual turn in the business cycle. Looking forward we expect benchmark Treasury yields to stay low and see good opportunities in both investment-grade corporate and municipal markets, as well as U.S. high yield, senior secured loans and structured credit where yields have overshot expected default rates. Navigating the near-term recession favors active management of security and sector selection that will outperform in the challenging months and years ahead.

Key Points

Extraordinary events and illiquidity drove returns in first quarter of 2020

Federal Reserve intervention has removed systemic risk from most markets

Opportunities exist in markets that have overshot

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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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