City National Rochdale High Yield Alternative Strategies Master Fund, LLC
Notes to Financial Statements
September 30, 2019 (Unaudited)
City National Rochdale High Yield Alternative Strategies Master Fund LLC (the "Master Fund") is a closed-end, non-diversified management investment company that was organized as a limited liability company under the laws of the State of Delaware on September 11, 2006, and serves as a master fund in a master feeder structure. City National Rochdale High Yield Alternative Strategies Fund LLC and City National Rochdale High Yield Alternative Strategies Fund TEI LLC (the “Feeder Funds”) serve as the feeder funds in the master feeder structure. Interests in the Master Fund are issued solely in private placement transactions that do not involve any "public offering" within the meaning of Section 4(a)(2) of the Securities Act of 1933, as amended (the "1933 Act"). Investments in the Master Fund may be made only by U.S. and foreign investment companies, common or commingled trust funds, organizations or trusts described in Sections 401(a) or 501(a) of the Internal Revenue Code of 1986, as amended, or similar organizations or entities that are "accredited investors" within the meaning of Regulation D under the 1933 Act. The Master Fund is an investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”).
City National Rochdale, LLC (the “Manager” or "Adviser") is the investment adviser to the Master Fund. City National Rochdale, LLC is a subsidiary of City National Bank, and each are wholly-owned subsidiaries of RBC USA Holdco Corporation, a wholly-owned indirect subsidiary of Royal Bank of Canada.
The Master Fund seeks to achieve its objective by investing substantially all of its assets in the securities of privately placed investment vehicles, typically referred to as hedge funds ("Investment Funds”) that pursue a variety of high yield income generating strategies.
The Master Fund’s investment objective is to generate income from investments in higher yielding investments with lower credit quality and higher volatility than investment grade fixed income securities. “Lower credit quality” in this objective means investments rated below BBB, and “higher volatility” means the fluctuations in principal will be greater than the fluctuations in price associated with investment grade fixed income securities. Under normal circumstances, at least 80% of the Master Fund's total assets will be invested either directly, or indirectly in Investment Funds, which invest in a variety of high yield income generating investments. The Investment Funds themselves are non-income producing.
City National Rochdale High Yield Alternative Strategies Master Fund, LLC
Notes to Financial Statements
September 30, 2019 (Unaudited)
| 2. | Significant Accounting Policies |
The following is a summary of significant accounting policies followed by the Master Fund.
Basis of Presentation and Use of Estimates
The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). The Fund is an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, “Financial Services-Investment Companies”. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Investments Valuation
Investments in Investment Funds are stated and recorded at fair value, as determined in good faith by the Fair Value Committee in accordance with US GAAP using the net asset value (“NAV”) as reported by the management of each respective Investment Fund. FASB guidance provides for the use of NAV as a “practical expedient” for estimating fair value of alternative investments which (a) do not have a readily determinable fair value, and (b) either have the attributes of an investment company or prepare their financial statements consistent with the measurement principles of an investment company. Such values generally represent the Master Fund's proportionate share of the net assets of the Investment Funds as reported by the Investment Fund managers. Accordingly, the value of the investments in Investment Funds is generally increased by additional contributions to the Investment Funds and the Master Fund's share of net earnings from the Investment Funds, and decreased by distributions from the Investment Funds and the Master Fund's share of net losses from the Investment Funds.
City National Rochdale High Yield Alternative Strategies Master Fund, LLC
Notes to Financial Statements
September 30, 2019 (Unaudited)
| 2 | .Significant Accounting Policies (continued) |
Investment Valuations (continued)
The Adviser reviews the details of the reported information obtained from the Investment Fund managers and considers: (i) the measurement date of the NAVs provided, (ii) the basis of accounting, and (iii) in instances where the basis of accounting is other than fair value, fair valuation information provided by the Investment Fund managers. The Adviser may make adjustments to the NAVs of various Investment Funds to obtain the best estimate of fair value, which is consistent with the measurement principles of an investment company. Any determinations made by the Adviser will be reviewed and approved by the Fair Value Committee, which has been designated by the Board to make all necessary fair value determinations.
The Master Fund has not maintained any positions in derivative instruments or directly engaged in hedging activities.
Fair Value Measurements
The Master Fund follows fair valuation accounting standards which establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value, and a discussion of changes in valuation techniques and related inputs during the year. These standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy is organized into three levels based upon the assumptions (referred to as “inputs”) used in pricing the asset or liability. These standards state that “observable inputs” reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources, and “unobservable inputs” reflect an entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. These inputs are summarized in the three broad levels listed below:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the Master Fund has the ability to access.
Level 2 - Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.
City National Rochdale High Yield Alternative Strategies Master Fund, LLC
Notes to Financial Statements
September 30, 2019 (Unaudited)
| 2. | Significant Accounting Policies (continued) |
Fair Value Measurements (continued)
Level 3 - Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Master Fund’s own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best information available.
Investments measured using the NAV as a practical expedient are not classified within the fair value hierarchy.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. See Note 3 – Investments.
Investment Income Recognition
Purchases and sales of securities are recorded on a trade-date basis. Realized gains and losses on Investment Funds are recognized using the specific identification method. Interest income is recorded on the accrual basis and dividends are recorded on the ex-dividend date. Realized and unrealized gains and losses are included in the determination of income.
Fund Expenses
The expenses of the Master Fund include, but are not limited to, the following: legal fees; accounting and auditing fees; custodial fees; management fees; costs of computing the Master Fund's NAV; costs of insurance; registration expenses; due diligence expenses; travel and related expenses; expenses of meetings of the Board and officers; all expenses with respect to communications to members; and other types of expenses as may be approved from time to time by the Board.
Income Taxes
The Master Fund’s tax year end is December 31. The Master Fund is treated as a partnership for Federal income tax purposes. Each member is responsible for the tax liability or benefit relating to such member’s distributive share of taxable income or loss. Accordingly, no provision for Federal income taxes is reflected in the accompanying financial statements.
The Master Fund has adopted authoritative guidance on uncertain tax positions. The Master Fund recognizes the effect of tax positions when they are more likely than not of being sustained. Management is not aware of any exposure to uncertain tax positions that could require accrual or which could affect the Master Fund’s liquidity or future cash flows. As of September 30, 2019, the Master Fund’s tax years 2017 through 2019 remain open and subject to examination by relevant taxing authorities.
City National Rochdale High Yield Alternative Strategies Master Fund, LLC
Notes to Financial Statements
September 30, 2019 (Unaudited)
| 2. | Significant Accounting Policies (continued) |
Subsequent Events
The Master Fund has adopted financial reporting rules regarding subsequent events, which require an entity to recognize in its financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet. Management has evaluated the Master Fund’s related events and transactions through the date the financial statements were available to be issued and determined that there were no significant subsequent events that would require adjustment to or additional disclosure in these financial statements.
Capital Accounts
Net profits or net losses of the Master Fund for each month are allocated to the capital accounts of each investor (each, a “Member”) as of the last day of each month in accordance with Members' respective investment percentages of the Master Fund. Net profits or net losses are measured as the net change in the value of the net assets of the Master Fund during a fiscal period, before giving effect to any repurchases of interests in the Master Fund, and excluding the amount of any items to be allocated to the capital accounts of the Members of the Master Fund, other than in accordance with the Members' respective investment percentages.
Prior to the end of each quarter, the Master Fund receives Member contributions with an effective subscription date of the first day of the following month.
The Master Fund, in turn, makes contributions to certain Investment Funds, which have effective subscription dates of the first day of the following month. These amounts are reported as "contributions received in advance" and "investments made in advance", respectively.
City National Rochdale High Yield Alternative Strategies Master Fund, LLC
Notes to Financial Statements
September 30, 2019 (Unaudited)
The following are the classes of investments grouped by the fair value hierarchy for those investments measured at fair value on a recurring basis at September 30, 2019:
| | | Quoted Prices in Active Markets for Identical Assets | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | | | | |
Description | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total | |
| | | | | | | | | | | | | |
Alternative Investment Funds ^ | | $ | - | | | $ | - | | | $ | - | | | $ | 25,756,228 | |
Short-Term Investment - Money Market Fund | | | 1,208,485 | | | | - | | | | - | | | | 1,208,485 | |
| Total Investments | | $ | 1,208,485 | | | $ | - | | | $ | - | | | $ | 26,964,713 | |
| | | | | | | | | | | | | | | | | |
^ Alternative Investment Funds were valued using the practical expedient and have not been classified in the fair value hierarchy.
The following table presents additional information for investments measured using the NAV practical expedient:
Alternative Investment Funds | | Fair Value at September 30, 2019 | | | Unfunded Commitments | | | Redemption Frequency | | | Redemption Notice Period | |
| | | | | | | | | | | | | |
| Structured Credit – CLO | | $ | 4,505,776 | | | | - | | | | * | | | | * | |
| Structured Credit – CLO | | | 13,850,086 | | | | - | | | Quarterly | | | | 90 | |
| Structured Credit – CLO | | | 6,849,962 | | | | - | | | | **
|
| | | **
|
|
| Liquidating Positions | | | 550,404 | | | | - | | | | ***
|
| | | ***
|
|
| Total | | $ | 25,756,228 | | | $ | - | | | | | | | | | |
* This investment is long-term and illiquid.
** SEIX CLO Management LP has a five year re-investment period and a subsequent wind down. This investment is long-term and illiquid.
*** A side pocket investment has been established for GoldenTree Partners LP. This investment is long-term and illiquid.
City National Rochdale High Yield Alternative Strategies Master Fund, LLC
Notes to Financial Statements
September 30, 2019 (Unaudited)
| 4. | Commitments and Other Related Party Transactions |
Management Fees
Under the supervision of the Master Fund’s Board and pursuant to an investment management agreement (“Investment Management Agreement”), the Manager, an investment adviser registered under the Investment Advisers Act of 1940, as amended, serves as the investment manager for the Master Fund. The Manager is authorized, subject to the approval of the Master Fund’s Board, to retain one or more other organizations, including its affiliates, to provide any or all of the services required to be provided by the Manager to the Master Fund or to assist in providing those services.
The Master Fund paid the Manager an investment management fee at an annual rate equal to 0.75% of the Master Fund’s net assets, computed at each month-end, including assets attributable to the Manager (or its affiliates) and before giving effect to any repurchases by the Master Fund of Member interests. The investment management fee is accrued monthly and paid to the Manager out of the Master Fund’s assets.
Administration Fee
U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services (“the Administrator”) acts as the administrator for the Master Fund and the Feeder Funds (collectively, the “Funds”) under an administration agreement. The Administrator prepares various federal and state regulatory filings, reports and returns for the Funds; prepares reports and materials to be supplied to the Members of the Feeder Funds; monitors the activities of the Funds’ custodian, transfer agent and accountants; coordinates the preparation and payment of the Funds’ expenses and reviews the Funds’ expense accruals. For its services, the Administrator receives a monthly fee from the Master Fund at an annual rate of 0.12% for the first $150 million, 0.10% for the next $150 million and 0.08% thereafter of average net assets, with a minimum annual fee of $100,000.
Expense Reimbursement
The Manager has contractually agreed to limit the current operating expenses of each of the Feeder Funds, including the operating expenses allocated to each of the Feeder Funds by the Master Fund, to an annual rate, expressed as a percentage of each Fund’s average annual net assets, of 1.75%. To the extent that the Manager reimburses or absorbs fees and expenses, it may seek payment of such amounts for three years after the year in which the expenses were reimbursed or absorbed. A Feeder Fund will make no such payment, however, if its total annual operating expenses exceed the expense limits in effect at the time the expenses are to be reimbursed or at the time such payments are proposed.
City National Rochdale High Yield Alternative Strategies Master Fund, LLC
Notes to Financial Statements
September 30, 2019 (Unaudited)
| 4. | Commitments and Other Related Party Transactions (continued) |
The following is a schedule of when fees may be recouped by the Manager with respect to the Feeder Funds:
City National Rochdale High Yield Alternative Strategies Fund LLC | | | City National Rochdale High Yield Alternative Strategies Fund TEI LLC | | Expiration | |
$ | 33,547 47,504 47,947 38,596 | | | $ | 38,225 57,605 50,826 40,510 | | March 31, 2020 March 31, 2021 March 31, 2022 March 31, 2023 | |
$ | 167,594 | | | $ | 187,166 | | | |
| | | | | | | | | |
No accrual has been made for such contingent liability because of the uncertainty of the reimbursement from the Feeder Funds.
| 5. | Investment Risks and Uncertainties |
Alternative investments consist of non-traditional, not readily marketable investments, some of which may be structured as offshore limited partnerships, venture capital funds, hedge funds, private equity funds and common trust funds. The underlying investments of such funds, whether invested in stock or other securities, are generally not currently traded in a public market and typically are subject to restrictions on resale. Values determined by investment managers and general partners of underlying securities that are thinly traded or not traded in an active market may be based on historical cost, appraisals, a review of the investees’ financial results, financial condition and prospects, together with comparisons to similar companies for which quoted market prices are available, or other estimates that require varying degrees of judgment.
Investments are carried at fair value provided by the respective alternative investment’s management. Because of the inherent uncertainty of valuations, the estimated fair values may differ significantly from the values that would have been used had a ready market for such investments existed or had such investments been liquidated, and those differences could be material.
City National Rochdale High Yield Alternative Strategies Master Fund, LLC
Notes to Financial Statements
September 30, 2019 (Unaudited)
| 6. | Concentration, Liquidity and Off-Balance Sheet Risk |
The Master Fund invests primarily in Investment Funds that are not registered under the 1940 Act and that invest in and actively trade securities and other financial instruments using different strategies and investment techniques, including leverage, which may involve significant risks. These Investment Funds may invest a high percentage of their assets in specific sectors of the market in order to achieve a potentially greater investment return. As a result, the Investment Funds may be more susceptible to economic, political, and regulatory developments in a particular sector of the market, positive or negative, and may experience increased volatility.
Various risks are also associated with an investment in the Master Fund, including risks relating to the multi-manager structure of the Master Fund, risks relating to compensation arrangements and risks relating to limited liquidity, as described below.
Redemption restrictions exist for Investment Funds whereby Investment Fund managers may suspend redemptions either in their sole discretion or for other reasons. Such reasons include the magnitude of redemptions requested, portfolio valuation issues or market conditions.
Redemptions are currently restricted for three Investment Funds with a fair value of $11,906,142 at September 30, 2019, as noted in the Schedule of Investments.
In the normal course of business, the Investment Funds in which the Master Fund invests trade various financial instruments and enter into various investment activities with off-balance sheet risk. These include, but are not limited to, short selling activities, writing option contracts, contracts for differences, and interest rate, credit default and total return equity swap contracts. The Master Fund's risk of loss in these Investment Funds is limited to the value of its own investments reported in the financial statements of the Master Fund. The Master Fund itself does not invest directly in securities with off-balance sheet risk.
| 7. | Investment Transactions |
For the six months ended September 30, 2019 (excluding short-term securities), the aggregate sales of investments were $1,872,402.
| City National Rochdale High Yield Alternative Strategies Master Fund LLC |
| |
| Financial Highlights |
| | | Six Months Ended | | | | | | | | | | | | | | | | |
| | | September 30,2019 | | | Year Ended | | | Year Ended | | | Year Ended | | | Year Ended | | | Year Ended | |
| | | (Unaudited) | | | March 31, 2019 | | | March 31, 2018 | | | March 31, 2017 | | | March 31, 2016 | | | March 31, 2015 | |
| | | | | | | | | | | | | | | | | | | |
| TOTAL RETURN - NET | | | 0.48 | %* | | | (0.50 | %) | | | 9.41 | % | | | 13.53 | % | | | (6.80 | %) | | | 3.39 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| RATIOS/SUPPLEMENTAL DATA | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net Assets, end of period ($000's) | | $ | 26,808 | | | $ | 29,084 | | | $ | 35,148 | | | $ | 38,378 | | | $ | 34,641 | | | $ | 36,798 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Turnover | | | 0.00 | % | | | 0.00 | % | | | 31.79 | % | | | 31.93 | % | | | 0.15 | % | | | 20.10 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Ratio of Net Investment | | | | | | | | | | | | | | | | | | | | | | | | |
Loss to Average Net Assets | | | (1.47 | %)** | | | (1.35 | %) | | | (1.42 | %) | | | (1.81 | %) | | | (2.01 | %) | | | (1.86 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Ratio of Expenses to | | | | | | | | | | | | | | | | | | | | | | | | |
Average Net Assets | | | 1.67 | %** | | | 1.52 | % | | | 1.53 | % | | | 1.86 | % | | | 2.02 | % | | | 1.86 | % |
| | * Not Annualized |
| | | | | | | | | | | | | | | |
| | ** Annualized |
| | | | | | | | | | | | | | | |
| | Total return is calculated for all Members taken as a whole and an individual Member's return may vary from these Master Fund returns based on the
timing of capital transactions. |
| | | | | | | | | | | | | | | |
| | Total returns do not include the effect of any sales load. |
| | The ratios of expenses to average net assets do not include expenses of the Investment Funds in which the Master Fund invests. | |
| | | | | | | | | | | | | | | | |
| | The expense ratios are calculated for all Members taken as a whole. The computation of such ratios based on the amount of expenses assessed to anindividual Member's capital may vary from these ratios based on the timing of capital transactions. |
| | | | | | | | | | | | | | | | |
| | The ratios above do not include the proportionate share of income or loss from their investments in other funds. | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| The accompanying notes are an integral part of these financial statements. | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| * * * * * * |
Additional Information
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Master Fund uses to determine how to vote proxies relating to portfolio securities, as well as information relating to how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, will be available (i) without charge, upon request, by calling 1-800-245-9888; and (ii) on the SEC’s website at www.sec.gov.
Portfolio Holdings Disclosure
The Master Fund will file its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT, and for reporting periods ended prior to March 31, 2019, on Form NQ. The Fund’s Form N-PORT and Form N-Q filings are available on the SEC’s website at www.sec.gov, and may also be reviewed and copied at the SEC’s Public Reference Room. For information about the operation of the Public Reference Room, please call 1-800-SEC-0330.
BOARD APPROVAL OF ADVISORY AGREEMENT (UNAUDITED)
The Board of Directors (collectively, the “Board”) of each of City National Rochdale High Yield Alternative Strategies Master Fund LLC (the “Master Fund”), City National Rochdale High Yield Alternative Strategies Fund TEI LLC (the “TEI Fund”) and City National Rochdale High Yield Alternative Strategies Fund LLC (together with the TEI Fund, the “Feeder Funds,” and together with the Master Fund and the TEI Fund, the “Funds”) is comprised of six Directors, five of whom are independent of the Funds’ investment adviser (the “Independent Directors”). During the six months ended September 30, 2019, the Board and the Independent Directors approved renewal of the Funds’ advisory agreement (the “Agreement”) with City National Rochdale, LLC (the “Adviser”), as described below.
General Information
The following information summarizes the Board’s considerations associated with its review of the Agreement. In connection with its deliberations, the Board considered such information and factors as the Board members believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. As described below, the Board considered the nature, quality and extent of the various services performed by the Adviser. In considering these matters, the Independent Directors discussed the approval of the Agreement with management and in private sessions with their independent counsel at which no representatives of the Adviser were present.
The Board reviewed extensive materials regarding investment results of the Adviser with respect to the Funds, advisory fee and expense comparisons, financial information with respect to the Adviser, descriptions of various functions such as compliance monitoring and portfolio trading practices, and information about the personnel providing various services to the Funds. The Board also took into account information they received at past meetings of the Board and its committees with respect to these matters.
In deciding to renew the Agreement, the Board and the Independent Directors did not identify a single factor as controlling and this summary does not describe all of the matters considered. In addition, each Board member did not necessarily attribute the same weight to each matter. However, the Board and the Independent Directors concluded that each of the various factors referred to below favored such approval.
Nature, Extent and Quality of Services
In reviewing the services provided by the Adviser to the Funds, the Board considered a variety of matters, including the background, education and experience of the Adviser’s personnel; its overall financial strength and stability; its resources and efforts to retain, attract and motivate capable personnel to serve the Funds; and the overall general quality and depth of its organization. The Board also took into account the experience, capability and integrity of the Adviser’s senior management; its investment philosophy and processes; its portfolio trading and soft dollar practices; its commitment to compliance with applicable laws and regulations and the systems in place to ensure compliance with those requirements; and its disaster recovery, cybersecurity and contingency planning practices. The Board found all of these matters to be satisfactory.
Investment Performance
The Board assessed the performance of the Funds compared with their relevant benchmark index for the one-, three-, and five-year and since inception periods ended December 31, 2018. The Board members observed that the annualized returns of the Funds were higher than the returns of the Funds’ benchmark, the Credit Suisse Leveraged Loan Index, for the three-year, and five-year periods, and that although the returns of the Feeder Funds for the one-year period were below the return of the Index (by 13 basis points or less), the return of the Master Fund for that period was above the return of the Index. The annualized returns of the Funds for the period since inception were higher than that of the Index except for the return of the TEI Fund, which was five basis points below the return of the Index. The Board members considered the Adviser’s explanation that the recent performance of the Funds was impacted by volatility in the leveraged loan market during the second half of 2018, and that as a result, the underlying investments experienced negative performance during the fourth quarter, which reduced the performance for the full year. The Board members noted the Adviser’s assertion that the Funds had performed in line with expectations over longer periods, returning more than 6% annually, including outperforming the broader leveraged loan market. The Board also noted that the Adviser is considering strategic alternatives to make the Funds’ strategy more viable, as the Adviser explained that the current structure had proven difficult to raise assets and that the redemption limitations for some of the underlying investments created additional challenges. The Board concluded that the Adviser continued to provide high quality management and oversight services to the Funds.
Advisory Fees and Fund Expenses
The Board reviewed information regarding the advisory fees charged by the Adviser to the Funds and the total expenses of the Funds (as a percentage of average annual net assets). The Board noted that it was difficult to gather a peer group for comparison due to the unique investment strategy of the Funds and lack of public information regarding the Funds’ competitors. The Board reviewed fee and expense information from a broad sample of similarly structured closed-end funds and private funds with alternative investment strategies compiled by U.S. Bank Global Fund Services, the Funds’ administrator (the “Administrator”), in consultation with the Adviser, using data from Morningstar, Inc.
The Board observed that the Funds, which have annual advisory fee rates of 0.75%, compared favorably to a sample of 506 peer alternative investment funds, which had a median advisory fee rate of 1.49%. The Board also observed that the Funds’ advisory fee rate was 0.75% lower than the 1.50% median fee rate of 74 peer funds employing similar fund-of-funds strategies. The Board noted that any net advisory fees retained by the Adviser with respect to the Funds are rebated to shareholders investing in the Funds through separate accounts managed by the Adviser.
The Board next considered the total expense ratios of the Funds compared with those of a peer sample of 44 alternative investment funds that voluntarily report their annual net expense ratios. The Board members noted that the total expense ratios of the Feeder Funds (1.75%) were 0.53% higher than the peer group median and 0.29% higher than the peer group mean expense ratios. The Board recognized that the current sizes of the Funds impacted the ratios. The Board concluded that the advisory fees charged by the Adviser to the Funds were fair and reasonable in relation to the value of services provided, and that the total expenses of each Fund continued to be reasonable in light of the services provided.
Profitability, Benefits to the Adviser and Economies of Scale
The Board considered information prepared by the Adviser relating to its costs and profits with respect to the Funds. In doing so, the Board recognized the competitiveness of the registered fund industry and the importance of an investment adviser’s long-term profitability, including for maintaining management stability and accountability. Recognizing the difficulty in evaluating an investment adviser’s profitability with respect to the funds it manages in the context of an adviser with multiple lines of business, and noting that other profitability methodologies might also be reasonable, the Board concluded that the profits of the Adviser from its relationship with the Funds were reasonable.
The Board also considered the benefits received by the Adviser and its affiliates as a result of the Adviser’s relationship with the Funds (other than investment advisory fees paid to the Adviser) including fees paid to the Adviser and its affiliate, CNR Securities, LLC, for providing distribution services to the Funds; benefits to the Adviser’s general wealth management business as a result of the availability of the Funds to its customers; and the intangible benefits of the Adviser’s association with the Funds.
In addition, the Board considered potential economies of scale realized by the Adviser as the Funds grow and how any such economies are shared with the Funds. The Board noted the Adviser’s explanation that it shares any economies of scale with Fund shareholders through means other than breakpoints, such as expense caps, fee waivers and investments in its business. Based on this explanation, the Board concluded that although there were no advisory fee breakpoints, the existing fee structure of each Fund reflected an appropriate sharing of any efficiencies or economies of scale to date and noted that it will have the opportunity to periodically reexamine the appropriateness of the advisory fees payable to the Adviser in light of any economies of scale experienced in the future.
Conclusion
Based on their review, including their consideration of each of the factors referred to above, the Board and the Independent Directors concluded that the compensation payable to the Adviser with respect to the Funds pursuant to the Agreement with the Funds is fair and reasonable in light of the nature and quality of the services being provided by it to the Funds and their shareholders, and that renewal of the Agreement was in the best interest of the Funds and their shareholders.
NOTICE OF PRIVACY PRINCIPLES
The City National Rochdale funds and their affiliates know our shareholders expect and rely upon us to maintain the confidentiality and privacy of all of the information about them in our possession and control. Maintaining the trust and confidence of our shareholders is our highest priority. The funds have adopted a Privacy Policy to guide our conduct when we collect, use, maintain or release nonpublic personal information from our shareholders and prospective shareholders. Certain information regarding the Privacy Policy is summarized below.
We will obey all applicable laws respecting the privacy of nonpublic personal information and will comply with the obligations of the law respecting nonpublic personal information provided to us. A fund may obtain nonpublic personal information from and about its shareholders and prospective shareholders from different sources, including the following: (i) information we receive from shareholders and prospective shareholders directly or through their financial intermediaries, on subscription agreements, forms or other documents; (ii) information about shareholder transactions with the fund, its affiliates, or others; (iii) information about a shareholder’s transactions with nonaffiliated third parties; (iv) information from or about a shareholder collected online; and (v) information we receive from a consumer reporting agency. We collect, use and retain the information, including nonpublic personal information, about our shareholders and prospective shareholders that we believe is necessary for us to, among other things, understand and better meet their financial needs and requests, administer and maintain their accounts, provide them with our products and services, anticipate their future needs, protect them and us from fraud or unauthorized transactions, and meet legal requirements.
We may share information regarding our shareholders with our affiliates as permitted by law because some of our products and services are delivered through or in conjunction with our affiliates. We instruct our colleagues and applicable affiliates to limit the availability of all shareholder information within their respective organizations to those colleagues responsible for servicing the needs of the shareholder and those colleagues who reasonably need such information to perform their duties and as required or permitted by law.
We do provide shareholder information, including nonpublic personal information, to our vendors and other outside service providers whom we use when appropriate or necessary to perform and enhance our shareholder services. When we provide shareholder information to anyone outside our organization, we only do so as required or permitted by law. We require all of our vendors and service providers who receive shareholder information from us to agree to maintain the information in confidence, to limit the use and dissemination of the information to the purpose for which it is provided and to abide by the law. To the extent permitted by law, we undertake to advise a shareholder of any government or other legal process served on us requiring disclosure of information about that shareholder.
We generally limit our disclosure of nonpublic personal information to third parties to the following circumstances: (i) when requested to do so by the shareholder; (ii) when necessary, in our opinion, to effect, administer, or enforce a shareholder initiated transaction or a shareholder request for a product or service; and (iii) when required or permitted to do so by law or regulation, including authorized requests from government agencies and if we are the victim of fraud or otherwise suffer loss caused by the unlawful act of the shareholder.
We maintain physical, electronic, and procedural safeguards that are designed to guard all shareholder information. In addition, we educate all our colleagues about the Privacy Policy and their obligations to maintain confidentiality and privacy of shareholder information as summarized in this Notice and we take appropriate disciplinary measures to enforce these obligations.
A full copy of the funds’ Privacy Policy is available upon request from the fund. Should you have any questions regarding the Privacy Policy, please contact your investment professional or the funds at (888) 889-0799.
