Large Cap Equity. January ROBERT C. DOLL, CFA Senior Portfolio Manager, Chief Equity Strategist

Transcription

1 Large Cap Equity January 2018 ROBERT C. DOLL, CFA Senior Portfolio Manager, Chief Equity Strategist NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

2 Important information This presentation includes information on strategies that may be available within different product types: institutional and retail managed accounts and mutual funds. Financial Advisers should understand the differences of each product type especially the impact of fees, which may affect performance when evaluating investment products. It is important to review your client s investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. This information represents the opinion of Nuveen Asset Management, LLC, and is not intended to be a forecast or guarantee of future events or results. Clients should consult their financial advisors before making any investment decisions. Financial advisors should consider the suitability of the manager, strategy and program for its clients on an initial and ongoing basis. This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Financial professionals should independently evaluate the risks associated with products or services and exercise independent judgment with respect to their clients. Information was obtained from sources we believe to be reliable, but are not guaranteed as to their accuracy or completeness. All investments carry a certain degree of risk, including possible loss of principal. Risks may include: equity security risk, large cap stock risk, non-diversification risk, smaller company risk, growth stock risk, and value stock risk. Non-U.S. investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. A portfolio's use of futures contracts involves transaction costs and the potential for negative impact on performance. A portfolio engaging in frequent trading of securities may result in taxable gains to investors and involve trading costs that may impact fund performance. A portfolio s use of short selling is a form of leverage and involves additional expense and risks including market loss and increased volatility of returns. Investing in securities involves risk of loss that clients should be prepared to bear. There is no assurance that an investment will provide positive performance over any period of time. Past performance is no guarantee of future results and different periods and market conditions may result in significantly different outcomes. Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen, LLC. 2

3 Investment philosophy Our research platform is based on the belief that combining quantitative and fundamental inputs leads to superior investment insights and can address potential weaknesses. Quantitative and fundamental: = 3 Objective Efficient Backward-looking Identifies stock-specific opportunities and risks Quantitative analysis Our approach Fundamental research Subjective Time-intensive Forward-looking Identifies stock-specific opportunities and risks Grounded in statistical principles Grounded in human judgment Deep research can uncover diverse opportunity The center of gravity is large cap, but we make broad use of the multi-cap nature of the Russell 1000 Index (mega-, large- and mid-cap companies). 3

4 Overview of strategies One investment process is applied to seven strategies in U.S. large cap equities. Benchmark Holdings range Tracking error range (%) Alpha/market cycle (target) (basis points) Beta range (target) Active share range (target) (%) Traditional Large Cap Value R1000 Value Large Cap Core R Large Cap Growth R1000 Growth Specialty Concentrated Core R1000 ~20 n/a Stable Growth R1000 Growth Alternative Equity Long/Short R1000 ~100 long/~100 short n/a to 1.0 (0.7) n/a Equity Market Neutral T-bills ~100 long/~100 short n/a to +0.4 (0.1) n/a Alternative strategies are not available as retail managed accounts. 1. Positions for Retail Managed Accounts range from 45 to Active Share refers to the degree to which the manager s stock selection differs from a benchmark index; the holdings of high active share portfolios differ from an index to a greater degree than a portfolio with lower active share. There is no guarantee that a portfolio with high active share will outperform portfolios with lower active share or the benchmark. 4

5 Themes and sector highlights Themes Sector preferences Stock examples Pro Expansion-oriented Reinvesting in growth Tax cut beneficiaries Information technology Intuit MasterCard VMware Con Beneficiaries of rising rates Mid-cyclicals Recession proof Non-growth cash use High foreign exposure Benefit from falling rates Expensive defensives Health care Miscellaneous Biogen Cigna McKesson AT&T State Street Target Source: FactSet, as of 12/31/17. See nuveen.com for more information. 5

6 Large Cap Core vs. Russell 1000 Index Large Cap Core rolling quarterly returns January 1, 2013 December 31, 2017 Quarter 1-year 3-years 5-years Performance vs. Russell 1000 Number of periods % Number of periods % Number of periods % Number of periods % More than +200 bp % 65% 78% 0 to +200 bp % 0 to -200 bp % 30% 35% 22% Less than -200 bp year 3-years 5-years Average outperformance 487 bp 146 bp 217 bp Average underperformance -257 bp -50 bp n/a Ratio 1.9 to to 1 n/a Data source: Morningstar Direct and Nuveen Asset Management, 1/1/13 to 12/31/17. Past performance is no guarantee of future results. Performance is gross of fees, based on rolling quarterly returns, using a representative account deemed appropriate by Nuveen Asset Management. Gross returns do not include product specific fees and expenses. Averages and rolling returns are not an indication of total return. The 3-year period is annualized. Percentage of periods (%) may not add up to 100% due to rounding. Data source for benchmark: Morningstar Direct. The Russell 1000 Index is an index that measures the performance of the large cap segment of the U.S. equity universe which includes approximately 1000 of the largest securities based on a contribution of their market cap and current index measurement. Index returns include reinvestment of income and do not reflect investment advisory and other fees that would reduce performance in an actual client account. Indices are unmanaged and unavailable for direct investment. Shown as supplemental information only and must be accompanied by the Nuveen Asset Management composite performance presentation for the corresponding strategies. 6

7 Determinants of active manager performance Active share Similar themes discussed recently by Barron s Less expensive funds have beat expensive funds over time Fund size Portfolio manager ownership Managers invested in their own funds outperformed Not following the benchmark can mean greater dispersion of returns Investing with conviction matters Investment teams comprised of men and women can win Chart 1: The information reflects the opinion of Bob Doll and not the firm. Chart 2: Ideas compiled by Nuveen Asset Management based on Barron s article In Fund Management, Winning Trends Persist, September 11,

8 Differentiators Multi-dimensional process Power of combining quantitative and fundamental research Investment approach has existed for more than 30 years Performance merits Seeks to provide: Outperformance most of the time and over time, but not all of the time Target alpha range of basis points per annum Favorable upside/downside capture ratios Moderately high to high active share Experienced management Backed by a service model Ten Predictions Weekly Commentary Media Appearances Magnitude of portfolio manager ownership Small portfolio size but supported by management tenure Please see the specific performance section for details. 8

9 2018 Investment Outlook Ten Predictions JANUARY 2018 ROBERT C. DOLL, CFA Senior Portfolio Manager, Chief Equity Strategist NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

10 2017 recap 2017 returns (%) 90-Day Treasury Bills Year U.S. Treasury 2.1 U.S. Bonds 3.5 High Yield Corporate Bonds 7.5 S&P MSCI World ex U.S MSCI Emerging Markets 37.8 Commodities 1.7 Data source: Morningstar Direct as of 12/31/17. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. 90-Day Treasury Bills: BofA Merrill Lynch 3-Month U.S. Treasury Bill Index; 10-Year U.S. Treasury: 10-year Treasury Constant Maturity Rate; U.S. Bonds: Bloomberg Barclays U.S. Aggregate Bond Index; High Yield Corporate Bonds: Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index; Commodities: Thomson Reuters/CoreCommodity CRB Index. 10

11 12-month year-over-year growth Why was 2017 an outstanding year for stocks? First perfect year ever (Positive total returns every month) S&P 500 Index total returns (%) January 1.9 February 4.0 March 0.1 April 1.0 May 1.4 June 0.6 July 2.1 August 0.3 September 2.1 October 2.3 November 3.1 December 1.1 Earnings growth powered stocks higher S&P 500 earnings per share growth 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Data source: Evercore ISI,1/1/17 12/31/17. Used with permission. Past performance is no guarantee of future results. Data source: Strategas Research Partners, 12/31/15 9/30/17. Used with permission. Past performance is no guarantee of future results. 11

12 2017 Ten Predictions scorecard Theme: A year of transition 1. U.S. and global economic growth improves modestly as the dollar strengthens and reaches parity with the euro. 2. Unemployment drops to its lowest level in 17 years as wages increase at the fastest pace since the Great Recession. 3. Treasury yields move higher for a third consecutive year for the first time in 36 years as the Fed raises rates at least twice. 4. The yield curve flattens (but does not invert) as the yield on the 10-year Treasury reaches 3% for the first time since Stocks outperform bonds for the sixth year in a row for the first time in 20 years while volatility rises. 6. Small caps, cyclical sectors and value styles beat large caps, defensive and growth areas. 7. The financials, health care and information technology sectors outperform energy, utilities and materials. 8. Active managers performance improves as flows into equities rise. 9. Nationalist and protectionist trends rise as pro-domestic policies are pursued globally. 10. Initial optimism about the Trump agenda fades in light of slow legislative progress. 7.0 Correct Scorecard based on Bob Doll's 2017 Ten Predictions with data as of December

13 2018 outlook Themes Nearly perfect Skepticism Smooth gallup less than perfect optimism bumpy grind A slightly more difficult climb Economy Good, accelerating from 2016 Good, decelerating into Inflation Very low, flat Low, rising 3. Interest rates Very low, flat Low, rising 4. Earnings Exploding expectations Meeting expectations Biggest risks Inflation Protectionism China policy misstep 5. Valuations Higher Flattish 6. Policy Anticipating tax cuts Realizing tax cuts 7. Sentiment Skepticism Optimism 8. Confidence Rising Flat, at high level 9. Political backdrop Messy Messier 10. Stocks Straight up Bumpy up 11. Stock returns Double digits Single digits 12. Consistency Every month up A few down months 13. Bad day Flat day Down day 14. Bad performance Make less money Lose money 15. Asset allocation Stocks up more than bonds Stocks up some, bonds down some 13

14 2018 investment questions 1. When does the Fed become punitive? 2. Do 10-year U.S. Treasuries see 2% or 3% yield first? 3. What is the impact of the global monetary unwind? 4. Is the tax bill the only major legislative accomplishment of Trump s first two years? 5. Will more key administration personnel depart? 6. Where does the Mueller investigation go? 7. What is the outcome and impact of the November midterm elections? 8. Will there be protectionist action or just rhetoric? 9. What happens to leadership/elections in the United Kingdom, Germany and Italy? 10. Will we have nuclear issues in North Korea? Iran? 14

15 Prediction 1 U.S. real GDP reaches 3% and nominal GDP 5% for the first time in over a decade U.S. economy should strengthen Gross domestic product growth Real GDP (%) Nominal GDP (%) E E E 2.5 (E) 4.0 (E) 2018E 3.0 (E) 5.0 (E) Data sources: Bloomberg L.P. Data for is based on estimates from Nuveen Asset Management, Morgan Stanley, Merrill Lynch and JP Morgan. 15

16 U.S. truck tonnage change (year over year) Prediction 1 U.S. real GDP reaches 3% and nominal GDP 5% for the first time in over a decade Will we see an economic pickup now that tax reform has passed? U.S. trucking industry following the Tax Reform Act of % 16% 14% 12% 10% 8% Tax reform passed June % 4% 2% 0% -2% -4% 1/86 4/86 7/86 10/86 1/87 4/87 7/87 10/87 Data source: Deutsche Bank, 1/1/86 12/31/87. Used with permission. 16

17 Index level Prediction 1 U.S. real GDP reaches 3% and nominal GDP 5% for the first time in over a decade Recessions start on average six years after a new leading indicator peak U.S. leading indicator 140 Recessions New leading indicator peak years years 80 7 years Data source: Evercore ISI, 12/1/74 9/29/17. Used with permission. 17

18 Number of countries Prediction 2 Despite ongoing protectionism, the global expansion continues with the fewest countries in recession in history The world economy has likely never been in better shape Number of countries in a recession E Data source: IMFWEO, Haver Analytics, DB Global Markets Research, 12/31/17. Used with permission. Past performance is no guarantee of future results. Data for represents IMF forecasts. 18

19 Percent of GDP Prediction 2 Despite ongoing protectionism, the global expansion continues with the fewest countries in recession in history Is global trade peaking? U.S. imports and exports 30% 25% 20% 15% 10% 5% 0% Data source: Wolfe Research, 12/31/78 9/30/17. Used with permission. 19

20 Prediction 3 Unemployment falls to the lowest level in nearly 50 years as wage growth is the highest since the Great Recession U.S. unemployment is almost the lowest in nearly 20 years U.S. U-3 unemployment rate 12% 10% 8% 6% 4% 2% 3.9% 4.1% 0% Data source: Bloomberg L.P., 12/1/49 11/30/17. Data reflects the U-3 unemployment rate that omits out-of-work people who are willing and able to take a job but don't fit the official definition of unemployed. 20

21 U.S. average hourly earnings U.S. unemployment rate Prediction 3 Unemployment falls to the lowest level in nearly 50 years as wage growth is the highest since the Great Recession Lower unemployment should lead to increased wage inflation 10% 9% 8% 7% 6% 5% 4% 3% U.S. unemployment rate U.S. average hourly earnings Recessions 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% Data source: Cornerstone Macro, 1/31/84 11/30/17. Used with permission. 21

22 Prediction 4 The yield curve flattens (but does not invert) as the 10-year Treasury yield reaches 3% for the first time since 2014 Interest rates likely to rise 1. Great monetary experiment ended; unwind becoming synchronized: The Fed is done; European Central Bank and Bank of Japan to end soon 2. World becoming less deflationary 3. Central banks: easing normalizing tightening 4. Robust economic data 5. Capacity utilization rising (especially labor) 6. Valuation 10-year U.S. Treasury yield Low of 1.37% reached on July 8, 2016 Recent high was 2.63% on March 13, 2017 If the yield breaks through 2.63%, 3.00% is the next stop Data source: FactSet. Past performance is no guarantee of future results. 22

23 Asset purchases ($USD billions) Prediction 4 The yield curve flattens (but does not invert) as the 10-year Treasury yield reaches 3% for the first time since 2014 Peak liquidity is behind us Monthly flow of central bank asset purchases $400 Peak quantitative easing: March 2017 $350 $300 $250 $200 Forecast Bank of England U.S. Federal Reserve Bank of Japan European Central Bank Total $150 $100 $50 $0 -$50 -$ E 2019E Data source: Deutsche Bank Research, 3/31/09 12/31/19. Used with permission. 23

24 Yield differential (%) Prediction 4 The yield curve flattens (but does not invert) as the 10-year Treasury yield reaches 3% for the first time since 2014 Yield curve inversions are the best signal of recessions 10-year U.S. Treasury yield minus the federal funds rate 5% 4% Recessions Inversion 3% 2% 1% 0% -1% -2% Data source: Bloomberg L.P., 1/31/84 12/31/17. Past performance is no guarantee of future results. Chart represents the difference between the 10-year U.S. Treasury yield and the Federal Funds Target Rate Index. 24

25 Trading days Prediction 5 Stocks enjoy longest bull market in history but experience a 5%+ correction after the longest period without one An amazing bull market Trading days since the last 5% pullback in the S&P 500 Index Stocks were up every month in 2017 for the first time in history. Stocks have been up 14 consecutive months, beginning November The record is 15 months, from March 1958 to May The bull market will become the longest in history on August 22, 2018, and the second largest ever if the S&P 500 surpasses Stocks have not pulled back 3% since June February 13, 2018, will mark the longest period without a 5% pullback Average Data source: BofA Merrill Lynch, 3/15/29 12/29/17. Used with permission. Past performance is no guarantee of future results. 25

26 Prediction 5 Stocks enjoy longest bull market in history but experience a 5%+ correction after the longest period without one Why should this bull market continue? 1. Earnings outlook remains solid. 2. Inflation and interest rates remain contained. 3. Bull market unlikely to end before a rise in volatility. 4. Warning signs are not present. Environment is better than previous bull market endings Market technicals S&P 500 Index return (%) Percent of stocks up (%) Bull markets don t die of old age. Source: Strategas Research Partners, 2017 data as of 12/31/17. Used with permission. 26

27 Prediction 5 Stocks enjoy longest bull market in history but experience a 5%+ correction after the longest period without one It is painful to miss the last year of a bull market S&P 500 peak Prior 12 months return (%) March May August December We may witness a final melt up in the stock market February November January November August July March October Average 25 Median 21 Data source: BofA Merrill Lynch. Used with permission. Data since

28 Prediction 5 Stocks enjoy longest bull market in history but experience a 5%+ correction after the longest period without one The reward of a long-term time horizon Probability of negative returns (1971 present) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1 Day 1 Month 1 Qtr 1 Yr 3 Yr 5 Yr 10 Yr 20 Yr Large market pullbacks in midterm election years Pullback (%) Next 12 months return (%) Average -18 Data source: BofA Merrill Lynch, Used with permission. Data source: Strategas Research Partners, Used with permission. 28

29 Prediction 6 U.S. equity returns lag earnings growth for the first time in six years, the longest streak in decades S&P 500 total return has exceeded earnings growth S&P 500 earnings growth (% year over year) S&P 500 total return (%) S&P 500 earnings growth (% year over year) S&P 500 total return (%) E 21.8 Data source: BofA Merrill Lynch, 1/1/90 12/31/16. Used with permission. 29

30 Percent of previous July estimate Prediction 6 U.S. equity returns lag earnings growth for the first time in six years, the longest streak in decades 2018 earnings revisions are unlikely to remain as buoyant as 2017 S&P 500 annual revision trend 100% 98% 2017 Earnings per share estimate 2017E 2018E 2019E Prior to tax cut $132 (+10.9%) $142 (+7.6%) With tax cut $150 (+13.6%) $156 (+4.0%) 96% 94% S&P 500 Index target EPS P/E 2018E $142 x 19.8 = % 90% 2012 $150 x 18.7 = 2800 $156 x 18.0 = % % Months until year end Data source: Wolfe Research, 1/1/12 12/31/17. Used with permission. The forecast data reflects the opinion of the author, Bob Doll, and not the firm. The information provided herein is not intended to be a forecast or guarantee of future events or results. It is not a recommendation to buy or sell any specific securities and should not be considered investment advice of any kind. Investing in securities involves risk of loss that clients should be prepared to bear. There is no assurance that an investment will provide positive performance over any period of time. Past performance is no guarantee of future results and different periods and market conditions may result in significantly different outcomes. 30

31 Index level 3-5 year earnings per share growth Prediction 6 U.S. equity returns lag earnings growth for the first time in six years, the longest streak in decades Sentiment has become optimistic Market Vane Bullish Consensus Stock Index S&P year projected earnings per share growth 80 $14 70 $13 60 $12 50 $11 40 $10 30 $9 20 $ Data source: Strategas Research Partners, Barron's, Haver Analytics, 10/31/02 11/30/17. Used with permission. The Market Vane Bullish Consensus Stock Index is based on a weekly survey of futures professionals. Higher readings indicate optimism. Data source: FactSet, 10/31/02 10/30/17. Used with permission. 31

32 Prediction 6 U.S. equity returns lag earnings growth for the first time in six years, the longest streak in decades Low volatility years are often followed by wider return outcomes Historical S&P 500 performance after low volatility years Intra-year drawdown (%) S&P 500 return (%) Next year drawdown (%) Next year S&P 500 return (%) ?? Average Data source: Strategas Research Partners, data since Used with permission. 32

33 Prediction 7 Equities beat bonds for the seventh consecutive year for the first time in nearly a century Stocks outperform bonds From , stocks outperformed bonds Stocks outperformed bonds because stocks went up significantly and bonds went up slightly 2018 is likely to be a year where stocks beat bonds because bonds are down If stocks outperform bonds in 2018, it will be the first 7-year stretch since 1928 Observations Equities are vulnerable to corrections in response to rising bond yields, but a major de-rating of stocks is unlikely as long as growth and earnings are improving If yields rise as we expect, cash is a better diversifier than bonds July 2016 likely marked the end of the 35-year bond bull market (10-year Treasury yields fell from 15.84% on September 30, 1981, to 1.37% on July 8, 2016) Data source: Morningstar Direct and FactSet as of 12/31/17. Past performance is no guarantee of future results. 10-year U.S. Treasury Bond: 10-year Treasury Constant Maturity Rate. 33

34 Prediction 7 Equities beat bonds for the seventh consecutive year for the first time in nearly a century Stocks have outperformed bonds six years in a row S&P 500 Index (%) Bloomberg Barclays U.S. Aggregate Bond Index (%) year return Data source: Morningstar Direct as of 12/31/17. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. 34

35 Prediction 7 Equities beat bonds for the seventh consecutive year for the first time in nearly a century Bond yields and stock prices often rise concurrently Dates Bond yield increase (basis points) Stock market increase (%) May 2, 1958 July 31, January 11, 1963 February 11, January 27, 1967 November 29, November 5, 1971 January 5, March 3, 1978 November 28, November 5, 1982 July 22, April 18, 1986 August 21, October 2, 1998 January 14, June 13, 2003 May 5, March 20, 2009 April 2, June 1, 2012 December 27, Average increase* July 8, 2016 December 31, Data source: The Leuthold Group and FactSet as of 12/31/17. Used with permission. Past performance is no guarantee of future results. Bond Yields: 10-year U.S. Treasury; Stock Market: S&P 500 Index. Indicates all periods where bond yields and stock prices rallied concurrently. *Average Increase does not include 2017 performance. It is not possible to invest directly in an index. 35

36 Prediction 8 Corporate capital expenditures increase at the expense of share buybacks Capex spending may increase 1. Chronic underinvestment this business cycle 2. Strong profitability 3. Low cost of capital Business fixed investment could rise 6% or more in 2018 (and could add 0.5% to real GDP) 4. Improved economic confidence 5. Lowered corporate taxes 6. Repatriation of deferred foreign profits 7. Expensing of capex in new tax bill 36

37 Four-quarter 5-year average Prediction 8 Corporate capital expenditures increase at the expense of share buybacks With tax reform, productivity could approach 2% U.S. nonfarm productivity 4.5 Recessions %? Data source: Cornerstone Macro, 12/31/59 9/30/17. Used with permission. Entitlement programs consist of mandatory federal spending on programs such as Social Security and Medicare that are not included in congressional appropriation acts. 37

38 Ratio Prediction 8 Corporate capital expenditures increase at the expense of share buybacks The old tax system incentivized debt-fund buybacks Companies implemented debt-funded buybacks due to this incentive. The new tax law disallows much of the interest deduction, which would curtail buybacks. Paired with full capex expensing, the new law shifts the incentive to investing. Ratio of net buybacks to net borrowing 140% Borrowing to buy back shares unproductive 120% 100% 80% 60% 40% Borrowing mainly to invest productive 20% 0% present Data source: Cornerstone Macro, 1/1/83 12/11/17. Used with permission. 38

39 Prediction 9 Telecommunication services, information technology and health care outperform utilities, energy and materials Overweights Telecommunication services Big yield premium Unpopular, under-owned Defensive, if market choppy Risk: Competitive price cutting Best: Large network providers Information technology Excellent earnings and revisions Global exposure, capex increase Strong balance sheets, net cash Risk: Run too hard? Best: Software, credit cards, not super high P/E Health care Best positioned defensive growth sector Demographics Pipelines improving Risk: Health care reform noise Best: Biotech, managed care Underweights Utilities Rising rate risk Little growth Expensive valuation Risk: Economy weakness, rates fail to rise Energy Oil high end of range? Exposure, leverage Oversupply risk Risk: Supply discipline, oil trades higher Materials Slowing China Infrastructure hope overdone Excess supply Risk: Dollar weakness, infrastructure spending accelerates 39

40 Prediction 9 Telecommunication services, information technology and health care outperform utilities, energy and materials Style preferences Value > Growth Cyclical > Defensive Big > Small As economic growth improves and investors feel the effects of tax reform, we expect markets to shift in

41 Prediction 10 Republicans lose the House, retain the Senate and further distance themselves from President Trump House seat changes two years into president s first term Democrats need 24 additional seats to retake the House Election year President Seats won/lost 1974 Ford Carter -15* 1982 Reagan H.W. Bush Clinton -54* 2002 W. Bush Obama -63* Projection: Republicans lose seats Democrats need 2 additional seats to retake the Senate Democrats defending 25 seats, Republicans 10 In six Democratic seats, Trump won by more than 15% (AL, IN, MO, MT, ND, WV) In only two Republican seats, Trump won by less than 5% (AZ, NV) Projection: Republicans retain the Senate * Balance of power shift 41

42 Entitlement costs per person Prediction 10 Republicans lose the House, retain the Senate and further distance themselves from President Trump Federal deficit will haunt us, but not yet Total cost of entitlement programs per U.S. citizen $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $ Data source: Deutsche Bank, 1/1/62 12/31/16. Used with permission. Entitlement programs consist of mandatory federal spending on programs such as Social Security and Medicare that are not included in congressional appropriation acts. 42

43 Long-term return observations Think about the long term and remain diversified Deflation/disinflation over; inflating asset values over. Gradual normalization of rates to take place. Sovereign bonds at risk. Volatility to increase as interest rates head higher. Equity returns acceptable, but below long-term averages. Emerging market assets best long-term performers. High starting valuation yields lower returns going forward. Traditional balanced portfolios struggle. Plan expected rates of return not realized. Absolute return products become more interesting. 10-year return forecast by asset class Forecasted return range (%) Equities 5 7 U.S. 5 7 Non-U.S. Developed Markets 4 6 Emerging Markets 6 8 Bonds 1 3 U.S. Government 0 2 U.S. Investment Grade 1 3 U.S. High Yield 3 5 Emerging Market Sovereign 4 6 Cash 2 3 Inflation 2 3 Diversified Portfolios Conservative 2 4 Balanced 3 5 Aggressive 4 6 Data sources: MRB Partners, Nuveen Asset Management as of December The forecast data reflects the opinion of the author, Bob Doll, and not the firm. The information provided herein is not intended to be a forecast or guarantee of future events or results. It is not a recommendation to buy or sell any specific securities and should not be considered investment advice of any kind. Investing in securities involves risk of loss that clients should be prepared to bear. There is no assurance that an investment will provide positive performance over any period of time. Past performance is no guarantee of future results and different periods and market conditions may result in significantly different outcomes. 43

44 1-year return Annualized 10-year return Higher valuations should not deter investors Valuations and P/E have a strong long-term relationship, but not in the short term Annualized stock returns versus starting P/E levels 1 year 60% 10 years 20% 40% 20% 10% 0% -20% 0% -40% -60% 5x 7x 9x 11x 13x 15x 17x 19x 21x 23x 25x Starting forward P/E -10% 5x 10x 15x 20x 25x Starting forward P/E Data source: Credit Suisse, 1/1/64 12/4/17. Used with permission. 44

45 What to do? 1. Overweight equities (but could be bumpy); be willing to reduce into strength and/or inflationary signs. 2. Focus more on alpha, less on beta (active management outperforms, lower correlations, higher volatility). 3. Underweight interest rate sensitive securities (fed funds and longer-term rates should rise). 4. Keep a very careful eye on inflation. 5. Diversify geographically. 6. Overall returns are likely to be mediocre. 7. Consider absolute return products as 2018 progresses. 45

46 2018 scenario forecasting Probability Scenario Earnings per share P/E ratio S&P 500 Index level Percent change (%) 60% Base case $142 (pre tax cut) $150 (post tax cut) 19.8x 18.7x % Melt up / big tax stimulus $ x % Less growth / more inflation $ x Tax bill impact uncertainties Rate effects Repatriation Capex changes The forecast data reflects the opinion of the author, Bob Doll, and not the firm. The information provided herein is not intended to be a forecast or guarantee of future events or results. It is not a recommendation to buy or sell any specific securities and should not be considered investment advice of any kind. Investing in securities involves risk of loss that clients should be prepared to bear. There is no assurance that an investment will provide positive performance over any period of time. Past performance is no guarantee of future results and different periods and market conditions may result in significantly different outcomes. 46

47 Where are we in the market cycle? Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. Sir John Templeton 47

48 Average annualized total returns (%) Set your sights higher 20-year annualized returns by asset class % 10% 9.7% 8.7% 8% 6.9% 6% 5.8% 5.3% 4.6% 4% 3.7% 3.4% 2% 2.1% 2.3% 0% REITs U.S. Equities 60/40 Portfolio Gold U.S. Bonds Non-U.S. Equities Oil Homes Inflation Average Investor Data sources: Morningstar Direct, Bloomberg L.P., Federal Reserve Bank of St. Louis, Nuveen Asset Management and DALBAR, Inc. Quantitative Analysis of Investor Behavior (QAIB), Data from 1/1/97 12/31/16. Past performance is no guarantee of future results. Used with permission. REITs: FTSE NAREIT Equity REIT Index; U.S. Equities: S&P 500 Index; 60/40 Portfolio: 60% S&P 500 / 40% Bloomberg Barclays U.S. Aggregate Bond Index; U.S. Bonds: Bloomberg Barclays U.S. Aggregate Index; Gold: USD/troy oz.; Non-U.S. Equities: MSCI EAFE Index; Homes by the median sale price of existing single-family homes; Oil: West Texas Intermediate (WTI) Index; Inflation: Consumer Price Index; Average Asset Allocation Fund Investor by DALBAR, Inc. Quantitative Analysis of Investor Behavior (QAIB), 2017, Average Asset Allocation Fund Investor performance results are calculated using data supplied by the Investment Company Institute. Investor returns are represented by the change in total mutual fund assets after excluding sales, redemptions and exchanges. 48

49 Important Disclosures This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor s objectives and circumstances and in consultation with his or her advisors. This presentation is for general information purposes only and should not be construed as specific tax or investment advice. The statements contained in this presentation are the opinions of Nuveen Asset Management, LLC and data available at the time of publication, and is not intended to be a forecast or guarantee of future events or results. It contains information from third-party sources believed to be reliable but are not guaranteed as to accuracy and not intended to be all inclusive. It does not constitute an offer, solicitation, or recommendation regarding securities or investment strategy and is not intended to predict or depict performance of any investment. Past performance is no guarantee of future results. A word on risk Equity investments are subject to market risk, active management risk, and growth stock risk; dividends are not guaranteed. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. The use of derivatives involves additional risk and transaction costs. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, derivatives risk, income risk, and other investment company risk. As interest rates rise, bond prices fall. Credit risk refers to an issuer s ability to make interest payments when due. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Foreign investments involve additional risks as noted above. Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen, LLC. 49

50 GPP-10PRED-0118D INV-Y-01/19 Index Definitions One basis point equals.01%, or 100 basis points equal 1%. The Bloomberg Barclays U.S. Aggregate Bond Index represents securities that are SECregistered, taxable and dollar-denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage passthrough securities and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index tracks the performance of U.S. non-investment-grade bonds and limits each issuer to 2% of the index. The BofA Merrill Lynch 3-Month U.S. Treasury Bill Index is an unmanaged index of Treasury securities maturing in 90 days that assumes reinvestment of all income. Capital expenditures (capex) are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. The Chicago Board Options Exchange Volatility Index (VIX) shows the market s expectation of 30-day volatility. It is often referred to as the investor fear gauge. The Constant Maturity Treasury Rate is a general proxy for the most current U.S. Treasury bond at a particular maturity. Consumer Confidence Index (CCI) measures how optimistic or pessimistic consumers are about the economy in the near future. The Consumer Price Index (CPI) is an inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. Correlation is a statistical measure of how two securities move in relation to each other. Perfect positive correlation (a correlation coefficient of +1) implies that as one security moves the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation (a correlation coefficient of -1) means that securities will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; their movements in relation to one another are completely random. Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of common stock, serving as an indicator of a company's profitability. The federal funds rate is the interest rate at which U.S. depository institutions lend reserve balances to other depository institutions overnight, on an uncollateralized basis. The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. It is composed of the board of governors, which has seven members and five reserve bank presidents. The FTSE NAREIT Equity REIT Index is an unmanaged index reflecting performance of the U.S. real estate investment trust market. Gross domestic product (GDP) is a primary indicator used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period. Real GDP is adjusted for inflation. Nominal GDP is not adjusted for inflation. GDP deflator (implicit price deflator) is a measure of the level of prices of all new, domestically produced, final goods and services in an economy. The Market Vane Bullish Consensus is compiled daily by tracking the buy and sell recommendations of leading market advisers and commodity trading advisers relative to a particular market and reflects the open positions of that day s market close. The MSCI EAFE Index is a stock market index that is designed to measure the equity market. The MSCI World Index ex-u.s. is a free float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets minus the United States. The price-to-earnings ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative to its per-share earnings. Quantitative easing (QE) is a monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. The Sticky Price Consumer Price Index (CPI) is calculated from a subset of goods and services included in the CPI that change price relatively infrequently. Because these goods and services change price relatively infrequently, they are thought to incorporate expectations about future inflation to a greater degree than prices that change on a more frequent basis. The Thomson Reuters/CoreCommodity CRB Index tracks the performance of 19 different commodities. The troy ounce is used in the pricing of metals such as gold, platinum and silver. There are troy ounces in a pound. The Trade Weighted U.S. Dollar Index measures the value of the U.S. dollar relative to other world currencies. The U.S. Treasury T-Bill Constant Maturity Rate 10 Yr. Index is published by the Federal Reserve Board based on the average yield of a range of Treasury securities, all adjusted to the equivalent of a 10-year maturity. The West Texas Intermediate (WTI) Index is used as a benchmark for pricing much of the world s crude oil production. 50

51 Large Cap Core Strategy Large Cap Equity 51

52 Large Cap Core Strategy portfolio characteristics 1 As of December 31, 2017 Characteristics/statistics Inception: 12/31/12 Portfolio Russell 1000 Index Est. 3-5 Year EPS Growth 11.4% 11.8% Price/Book Value 3.4x 3.2x P/E (FY1) 16.1x 18.5x Weighted Average Market Cap ($B) $113.7 $177.6 Dividend Yield 1.4% 1.8% Number of Holdings Active Share 77% Upside Capture Ratio 104 Downside Capture Ratio Data sources: FactSet for characteristics; Nuveen Asset Management and FactSet for active share; Morningstar Direct for upside and downside capture ratio. Characteristics have been determined using a representative account deemed appropriate by Nuveen Asset Management. Cash is not included. Holdings are for informational purposes only and should not be deemed as a recommendation to buy or sell the securities mentioned or securities in the industries shown above. Portfolio characteristics are based on the underlying securities of the portfolio and should not be used to predict the portfolio s future performance. Active share is calculated by Nuveen Asset Management and represents the proportion of portfolio holdings that differ from those in the benchmark index. Shown as supplemental information only and must be accompanied by the Nuveen Asset Management composite performance presentation for the corresponding strategies. Large Cap Equity 52

53 Large Cap Core Strategy sectors and holdings 1 As of December 31, 2017 Sector weights 30% 25% Large Cap Core Strategy Russell 1000 Index 20% 15% 10% 5% 0% Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Real Estate Telecom. Services Utilities Top 10 holdings % of Portfolio Microsoft Corporation 2.8 Apple Inc. 2.6 Visa Inc. Class A 1.9 UnitedHealth Group Incorporated 1.8 Cisco Systems, Inc. 1.8 Mastercard Incorporated Class A 1.6 Wal-Mart Stores, Inc. 1.6 Boeing Company 1.6 Amgen Inc. 1.5 Alphabet Inc. Class A 1.5 Data sources: FactSet; Morningstar Direct for upside and downside capture ratio. Characteristics have been determined using a representative account deemed appropriate by Nuveen Asset Management. Cash is not included. Holdings are for informational purposes only and should not be deemed as a recommendation to buy or sell the securities mentioned or securities in the industries shown above. Portfolio characteristics are based on the underlying securities of the portfolio and should not be used to predict the portfolio s future performance. Shown as supplemental information only and must be accompanied by the Nuveen Asset Management composite performance presentation for the corresponding strategies. Large Cap Equity 53

54 Large Cap Core Strategy performance Annualized performance for the period ended December 31, % 20% 15% Large Cap Core Strategy (Gross) Large Cap Core Strategy (Net) Russell 1000 Index 10% 5% 0% Inception Date 3 Months YTD 1 Year 3 Years 5 Years Since Inception 12/31/ % 20.70% 20.70% 10.44% 17.83% 17.83% 12/31/ % 19.99% 19.99% 9.79% 17.13% 17.13% 6.59% 21.69% 21.69% 11.23% 15.71% 15.71% Preliminary. Final numbers are available upon request by contacting Nuveen Asset Management, LLC. Nuveen Asset Management, LLC. ( NAM ) has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS ). This report is not complete without the accompanying Large Cap Core performance disclosure. The composite consists of fully discretionary, fee-paying institutional accounts greater than $1 million managed in a Large Cap Core style. Nuveen Asset Management, LLC. s Large Cap Core strategy seeks to outperform the broad benchmark over a full market cycle, while generating comparable total return characteristics relative to the Russell 1000 Index. Please remember you could lose money with this investment. Safety of principal is not guaranteed. Past performance does not guarantee future results. Indexes are not available for investment. Individual account performance may be greater than or less than the performance of the composite. Large Cap Equity 54

55 Large Cap Core Strategy results explanation Year Calendar Year Total Return (Gross of Fees) (%) Calendar Year Total Return (Net of Fees) (%) Russell 1000 Index (%) Composite 3-Year Standard Deviation (%) Benchmark 3-Year Standard Deviation (%) Number of Accounts Internal Dispersion Non Fee-Paying Portfolios (%) Composite Assets at Period End ($ in Millions) Firm Assets at Period End ($ in Billions) N/A N/A N/A N/A 5 N/A * N/A N/A 5 N/A Nuveen Asset Management, LLC ( NAM ) claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. NAM has been independently verified for the periods January 1, 1993 through December 31, The verification reports are available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. 2. Nuveen Asset Management, LLC ( NAM ) is a registered investment advisor under the Investment Advisors Act of 1940, as amended, and a subsidiary of Nuveen, LLC Registration does not imply a certain level of skill or training. For the purposes of compliance with the Global Investment Performance Standards (GIPS ), the firm is defined as Nuveen Asset Management, LLC. NAM provides investment management services to a broad range of clients on a discretionary basis or non-discretionary basis. NAM offers its services either directly to clients (fee-based directadvisory accounts, fee-based institutional accounts and commission-based accounts) or through broker-dealer and other financial intermediary programs (fee-based advisor-sponsored accounts). 3. Prior to January 1, 2011, the firm was defined as Nuveen Asset Management for GIPS purposes. The firm was redefined to encompass the investment management activities of a new investment advisor, NAM. NAM is the successor firm to (1) the portfolio management business of Nuveen Asset Management and (2) the long-term asset management of FAF Advisors, Inc. following an internal reorganization of Nuveen Asset Management and Nuveen Investments, Inc. s acquisition of the long-term asset management of FAF Advisors, Inc. from U.S. Bank effective on December 31, NAM has complied with the portability requirements of GIPS. 4. To receive a complete list and description of the firm s composites, please call Ronald Stutes, Director of Performance Analysis at Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. 6. Gross-of-fees performance results include the cost of brokerage commissions, but exclude management and custodial fees and the impact of income taxes. When shown, net-of-fees results are calculated by taking the highest fee an account would be charged based on the current and, if applicable, historical fee schedule, and deducting onetwelfth of this annual fee from each monthly gross return. 7. All returns represent the reinvestment of income. 8. The composite dispersion is the asset-weighted standard deviation of annual returns for portfolios in the composite the entire year. The number of accounts represents the number in the composite at year end. Composite dispersion is reported as N/A when information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year. 9. The composite consists of fully discretionary, fee-paying institutional accounts greater than $1 million managed in a Large Cap Core style. Nuveen Asset Management, LLC s Large Cap Core strategy seeks to outperform the broad benchmark over a full market cycle, while generating comparable total return characteristics relative to the Russell 1000 Index. 10. The composite inception date is December 31, 2012; the composite was created February 28, This composite has not been redefined since its inception. 12. This composite has not had a name change since its inception. 13. As of December 31, 2015, the composite is comprised of less than 1% of seed capital funded by Nuveen Investments, Inc. 14. The composite performance has been achieved at Nuveen Asset Management. 15. The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market. Benchmark returns are not covered by the report of independent verifiers. 16. There have been no changes to the benchmark since the inception of the composite. 17. There are no derivatives, leveraged investments or short positions used in the management of this investment strategy. 18. There are no sub-advisors used in the management of this investment strategy. 19. The minimum asset size for this composite is $1,000,000. Large Cap Equity 55