April 28, 2025                                                                                                                                                                                                         First Quarter 2025

Liberation Day?

It is always challenging to report on the last quarter while we are in the beginning of the next quarter, especially at this moment in our history.

Liberation Day was April 2^nd, and, while we will write below about what occurred during the first quarter of 2025, we will also comment on the tariff war perpetrated by the US. As with all the other activities we view as egregious by the current administration, this war is a self-imposed attack on allies and the public that began with a sweeping action devoid of nuance or forethought and without concern for harm, in our opinion. The tariff announcement was made with the same impulsive inhumane style DOGE demonstrated in defunding US Aid, attacking NIH and HHS, and escalating immigration brutality, among others. We believe all of this has caused the United States to be feared and hated by our allies and put our standing as a beacon of safety, stability, and promise in doubt.

The last few weeks in financial markets have been challenging. Our team has spent days drafting what we see as worst case to best case scenarios and then reworking them as Trump digs in and then backtracks. As we wrote to you a few days ago about cracking open the Project 2025 manual, the attacks on the government as we knew it were clearly outlined and elaborated with talk of outrageous appointments to Trump’s Cabinet. We were mildly hopeful that the appointment of Scott Bessent as Treasury Secretary, along with two divergent approaches to trade and tariffs in Project 2025, would lead to a less draconian impact on our financial stability as a nation. Unfortunately, with Trump’s decision to use the unfounded Navarro approach (again, mimicking the Musk approach to cost cutting), we saw Bessent put on his best schoolboy outfit and attitude to defend his boss on Meet the Press. He did not stand up for best practice or, heaven forbid, those who are suffering. Bessent stated (after the market lost 6 trillion dollars) that “everything was working smoothly…who knows how the market will react?” and “this is an adjustment process …most people don’t look day to day.” And, of course, he is looking forward to the tax cuts.

Many of us are aware of the removal and incarceration of a Tufts University student from the streets of Somerville this month. This is one of 400 recent known arrests by ICE in Massachusetts, and you may be interested in supporting the resistance. Several community groups in Massachusetts have developed a rapid response network and crisis center with a hotline LUCE Defense Hotline to call if ICE is spotted in your neighborhood. The coordinating group appears to be Neighbor to Neighbor . We have also attached an appendix to this letter outlining some of the many groups that are fighting back and need support!

There are some things that we can control and some things that we cannot. We remain vigilant, as we know  you are doing as well, and we will continue to do our best to both protect you and to challenge those we feel are working against liberty and justice.

Update on Economic Outlook and NorthStar’s Strategy

Q1, 2025: Chaos and confusion related to Tariffs, Department of Government Efficiency, and Trump 2.0 policies start to impact the financial markets

The market’s initial optimism about President Trump’s pro-growth agenda has given way to despair and disillusionment, in our opinion, as investors grapple with an ever-changing barrage of headlines on tariffs, geopolitical tensions, and disbanding of various government agencies and functions. CEO, consumer, and small business levels of confidence have plummeted in the recent months, and financial markets have begun to price in a significant slowdown in U.S. economic growth.

Consumer and Small Business Confidence                          Change in Estimates for FY 2025 GDP %

Source: Bloomberg 4/14/2025

Trump Tariffs 2.0

President Trump’s announcement of across-the-board 10% and additional reciprocal tariffs on the rest of the world has felt like declaration of economic war. The proposed measures would raise the average tariff rate to 25-30% compared to just 2.5% before Trump took office earlier this year. Historical evidence, including from the 2018 tariffs on China, overwhelmingly shows that tariffs fuel inflation, suppress global trade, and dampen economic activity. Estimates suggest the proposed tariffs have the potential to raise inflation by 2.5% and reduce GDP by 4%[1]. Haphazard tariff policies also heighten the risk of corruption, political favoritism through lobbying, and stagnant growth[2]– all of which are deeply concerning to us.

Tariffs rates in historical context

Source: Bloomberg 3/31/2025

U.S. corporations and equity investors have disproportionately benefited from global trade over the past 25+ years. Since 1995, U.S. GDP has quadrupled. However, globalization has not benefited everyone equally; income disparity has widened, and median household income has barely kept pace with inflation. We believe that without a thoughtful, long-term strategy to invest in workforce retraining and to remove structural barriers that prevent lower-income Americans from reaching their full potential, protectionist policies risk causing significant short-term disruption and inflicting long-term economic harm.

 U.S. Trade and GDP                                                     Corporates and Households

Source: United States Census Bureau, Bureau of Economic Analysis and Bloomberg

Equity markets see a sharp reversal from what worked in 2024

In addition to heightened political uncertainty, equity investors are grappling with the outlook for artificial intelligence-related stocks, including the so-called Magnificent Seven. Just a week after President Trump’s inauguration, DeepSeek—a Chinese AI company—announced an open-source large language model (LLM) developed at a fraction of the cost of those from major U.S. players such as Alphabet, OpenAI, Meta, and others. Since then, Chinese firms have continued launching new LLMs at a breakneck pace, each claiming similar performance at significantly lower cost.

While there is considerable skepticism about the true cost of developing these models, the DeepSeek announcement sent shockwaves through Silicon Valley and the broader tech sector, as it fundamentally challenged the assumption that the U.S. holds a dominant lead in AI innovation. As a result, the Magnificent Seven stocks declined by 16% in Q1 2025, compared to a +67% gain in FY2024, and Chinese equities rose 15% during the same period[3].

Meanwhile, stunned by President Trump’s approach to NATO and his handling of the Ukraine/Russia conflict, European governments pledged to increase domestic spending, focusing on defense and infrastructure. Germany unveiled a $1 trillion spending plan and relaxed its debt cap, marking a significant shift from its historically fiscally conservative policies. As a result, Western European markets—led by Germany and the defense sector—posted a +10% return, while the S&P 500 saw a -4% decline.

Total Return Performance (%)

Source: Bloomberg 4/05/2025

As we have often noted, our approach to navigating what we feel are treacherous moments is to ensure that we understand your financial needs and objectives and establish an appropriate target asset allocation and liquid reserves. Secondly, we remain disciplined and committed to strategic asset allocation, maintaining appropriate diversification, and managing risk.

Selectivity in adding Fixed Income Exposure

Our base case assumption has included a high probability that interest rates will remain at current or higher levels over the mid-to-long term, as our government and others will need to fund Social Security, Medicare, and Defense programs as well as interest on US debt while grappling with challenges related to ecological limits and socio-political upheaval. That hypothesis has been further confirmed with the recent developments on Tariffs, longer term re-shoring of manufacturing back to the US, and the recently approved 2025 budget resolution paving the way for $5.3 trillion in tax cuts. Since the beginning of this year, yields on 10-year bonds have see-sawed from a low of 4.2% to a high of 4.8% in response[4] to economic and inflation data points. We have maintained our discipline of buying bonds only when we believe yields are at attractive levels.

Where appropriate, we will continue to diversify across duration and add government bonds in the one to ten-year maturity range to our clients’ portfolios. We believe that bonds in this maturity range offer an optimal combination of flexibility, higher income returns, and stability for the portfolio. We are also researching alternatives to the US government debt and will keep you updated.

High quality stocks with low debt can still provide long-term growth

Over the mid-to-long term, companies with low financial debt and that make products or sell services we believe are beneficial to human life and that solve or mitigate some of the most pervasive problems of our time are likely to continue thriving. We focus our research on companies providing solutions and products to cope with:

• Ecological Limits: We believe our planet’s resources are increasingly under threat from ecological imbalances and decades of extractive growth.
• Aging and changing demographics: The world’s population aged 60 and over is growing faster than all younger groups and is expected to reach 1.4 billion by 2030, up from 1 billion in 2020.[5]
• Leveling the playing field: Digital transformation and new business models are enabling small businesses and entrepreneurs to compete with big business.

We aim to own and add stocks that offer competitive returns and diversification while also providing opportunities to create the greatest impact by changing corporate behavior via our shareholder activism work.

As a refresher, our investment strategy for the global equity portfolio involves independent research into each company’s growth prospects and financials combined with diligently examining the ethics of management and company behavior. The resulting portfolio, we believe, is more resilient, sustainable, and stable because of our broad-based focus. In addition, we follow our systematic quarterly rebalancing strategy in which we trim individual stocks that we feel are well past their target weights and reallocate to stocks that are under their target levels. Of course, past performance is not an indicator of future performance, and all investing involves risk!

Outside Investments [6]

During these days of chaos, uncertainty, and cruelty, we have reached out to our CDFIs and other investees to ask for their perspective on the new administration’s funding threats and actions that began in February, though it feels like years ago. At that time, we heard back from the majority with appreciation for our concern, descriptions of the challenges they were facing, and their plans for dealing with them. During the ensuing weeks, we learned that some of the grants and contracts that had been frozen had been restarted, but there continues to be concern that future funding will end or be reduced.

Our generalized point of view is that nearly all the organizations we work with have long histories and experience dealing with economic downturns and crises. That said, it is dangerous to make assumptions using past performance as circumstances today are extreme, including the fact that, in our opinion, we have a selfish, power-hungry, willful president and his cronies who are doing worse than thumbing their noses at us.

Our investees need our support now more than ever. For example, one of our CDFI partners has expressed a need for longer-term loans from their investors so they have a cushion within which to navigate. Another investee has relied upon the USDA to fund its work with getting farm produce to people using SNAP and is raising investment funds to bridge the funding gap caused by the USDA uncertainty.

We continue to monitor and evaluate current and potential Outside Investments. During the next few weeks, we will be in touch with specific information and recommendations for both new Outside Investments and any loans that are maturing. With many of our investees seeking to increase private fundraising to make up for the loss of public funds, it’s even more important to support our Outside Investments.

Shareholder Activism Update

This quarter, we have seen deliberate efforts to weaken the shareholder proposal process—a cornerstone of corporate accountability and what we call “shareholder democracy.” These changes threaten to silence investor voices on critical issues like diversity, climate, and worker rights. Key attacks include:

• Mid-proxy season, the SEC reinstated tighter interpretations of Rule 14a-8 (formal SEC rule that regulates the shareholder proposal process in the U.S.), making it easier for companies to exclude shareholder proposals on social and ESG issues.
• Companies increasingly challenged proposals and, in some cases like Exxon, used litigation to intimidate or bypass traditional shareholder engagement channels.

New requirements make it harder for small investors to meet technical thresholds to file proposals.

It is more important now than ever to educate the public about the shareholder proposal and voting process — how it works, who can participate, and why it matters. Harvard’s Salata Institute for Climate and Sustainability recently invited us to help students understand this important tool for social change.  We discussed the importance of corporate accountability and the vital role NorthStar plays in upholding shareholder democracy.

Unfortunately, we are not surprised by these attacks. They are part of broader efforts to roll back DEI initiatives or pressure companies in doing so. We conducted an internal review of all our portfolio companies, identifying companies that have reduced or eliminated DEI commitments publicly or silently. We continue to monitor our portfolio companies closely to inform our engagement conversations and next steps.

Despite efforts on Capitol Hill to weaken shareholder rights and the media’s coverage of the attacks, many companies continue to value investor input. Uncertainty around potential SEC policy changes has also encouraged investors to prioritize dialogue, seeing it as a useful approach as shareholders and CEOs struggle to function effectively in the current environment. We are also seeing more constructive engagement between investors and corporations with our own proposals, resulting in withdrawal agreements.[7]

As mentioned in our previous letter, one of our key areas of engagement this year focuses on the impact of artificial intelligence on local community supplies. In addition to Adobe, we successfully reached withdrawal agreements with both Zoom and Salesforce regarding our proposals on water vulnerability risk assessments. As part of our negotiations, both companies committed to disclosing additional water-related metrics in their annual impact report. Greater disclosure allows investors to analyze the material business and community related risks arising from concerns about water scarcity and water allocation. Additionally, we successfully persuaded them to continue engaging with us on water issues and to share insights from their discussions with third-party data center providers regarding water risks and community impacts. Securing this commitment was particularly important, as it strengthens NorthStar’s broader efforts to drive responsible water stewardship across the AI data center value chain.

Continuing our water-related research efforts, our Director of Impact Research, Whitney Nguyen, CFA, led the panel “Deep Dive into AI’s Thirsty Growth: The Intersection of Environmental Justice and Human Rights Amidst the AI Boom” at the Interfaith Center on Corporate Responsibility’s spring conference. The session featured Shaolei Ren, UC Riverside professor and author of the widely cited “Making AI Less Thirsty” research paper, alongside Michelle Katz, Director of Investor Engagement at Ceres, who leads the Ceres Valuing Water Finance Initiative. The panel focused on equipping investors with a deeper understanding of AI’s hidden water consumption impacts and fostering collective action among colleagues to engage their own tech holdings on this growing issue. Following the positive response to the discussion, NorthStar was invited to co-lead a forthcoming report with As You Sow and the Sierra Club, designed to empower shareholders to engage tech companies on data center resource use by advocating for enhanced disclosure and target setting. NorthStar will lead the report’s focus on the critical issue of data center water consumption.

Sincerely,

Julie N.W. Goodridge                                                    Nimrit Kang

Founder & Chief Executive Officer                              Chief Investment Officer

Important Disclosures

Advisory services offered through NorthStar Asset Management, Inc., a registered investment adviser.  Registration does not imply any level of skill or training.  This communication is for educational purposes only.  It is neither an offer to sell nor a solicitation of any offer to buy any securities, investment products, or investment advisory services.

This material may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual results will not be materially different from those described here.

Past performance is no guarantee of future results.  All investment portfolios carry risk, including the risk of loss. No assurances can be given that NorthStar will attain its investment objective or that an investor will not lose invested capital.

This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation of or solicitation of any particular security, strategy, or investment product.  The forecasts, opinions, and estimates expressed in this report constitute our judgment as of the date of this letter and are subject to change without notice based on market, economic, and other conditions. The assumptions used in our forecasts concern future events over which we have no control and may turn out to be materially different from actual experience.

NorthStar does not provide legal or tax advice, and nothing contained in these materials should be taken as legal or tax advice. Although NorthStar believes the data presented here to be reliable, we do not guarantee the accuracy of third-party data.  Links to third party sites are provided for your convenience and do not constitute an endorsement. These sites may not have the same privacy, security or accessibility standards.

Indices are presented herein for illustrative and comparative purposes only.  Such indices may not be available for direct investment, may be unmanaged, assume reinvestment of income, do not reflect the impact of any trading commissions and costs, management fees, or performance fees, and have limitations when used for comparison or other purposes because they, among other things, may have different strategies, volatility, credit, or other material characteristics. In considering performance results discussed here, prospective clients should note that equity portions of individually managed accounts may differ from the results shown here because of client-specific restrictions, client circumstances, client legacy positions, different fee and expense structures, actual trading, tax considerations, and other reasons.

[1] Bloomberg “Global Preview: A Guide to Trump’s ‘Liberation Day’ 03/31/2025

[2] https://news.lehigh.edu/politically-connected-corporations-received-more-exemptions-from-us-tariffs-on-chinese-imports?utm_source=chatgpt.com

[3] Regional performance is based on the returns from the geographic classification for the MSCI ACWI Index

[4] Bloomberg

[5] Source: United Nations Department of Economic and Social Affairs, World Population Prospects 2022

[6] Outside Investments are privately placed with various types of entities, as described above.  Privately placed investments generally carry higher risk and are not publicly traded.  In addition to the risks of equity, (which include, but are not limited to, changes in revenue, margins, earnings, dividends, cash flow, balance sheet, leverage, liquidity, solvency, legal matters, negative publicity, brand image, and general market volatility) and the risks of fixed income investing (such as credit risk, interest rate changes and the yield curve, inflation, default, monetary policy changes, government instability, and other risks), Outside Investments are typically illiquid and may not be sold easily. More information on the risks of Outside Investments may be found in the applicable product offering materials or in our ADV 2A brochure, located at: https://northstarasset.com/wp-content/uploads/2024/04/2024.0321-NSAM-FYE-2023-FYE-ADV-Part-2A.pdf.

[7] Successfully Withdrawing a proposal is an ideal outcome. This means our shareholder proposal asks are being agreed to by the company in joint conversations. NorthStar will only withdraw our proposal if we feel the company is transparent and agrees to all parts of our proposal asks. We have strict expectations for withdrawing our proposal and if our engagement with the company does not result in a successful withdrawal, we will move forward with the formal filing, presentation and vote at the company’s Annual General Meeting.