The Municipal Bond Market Has Changed. Has your portfolio adapted?

Transcription

1 The Municipal Bond Market Has Changed Has your portfolio adapted?

2 Investing in municipal bonds has become more complicated since the financial crisis. Understanding the current environment may help investors evaluate the need for actively managed municipal bond solutions. Because while the markets change, your investment goals don t. Get started in three steps: Understand the environment Identify portfolio needs Evaluate solutions 2 NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE

3 Understand the Environment 1 The need for independent, fundamental research has intensified as municipal finances have become more complex. Several factors are affecting municipal dynamics. Municipal Market Changes Underscore the Need for Research Economic uncertainty and changes in credit fundamentals can cause movements in credit spreads, which is the difference between yields of lower- and higher-quality bonds. When spreads shift, opportunities arise to capture additional yield the key is understanding the market well enough to benefit. Opportunity Exists for Those Who Know How to Assess Risk Credit Spreads vs. AAA-Rated Municipal Bonds (January 1, 1999 March 31, 2017) Credit Spread (%) 3.0% 2.5% 2.0% 1.5% 1.0% Corporate Accounting Scandals Lehman Brothers Bankruptcy Bond Insurers Ratings Cut Municipal Bond Market Collapse Predicted Taper Tantrum BBB 0.5% 0.0% Chart does not represent the yield or past performance of any Nuveen product. Data source: S&P/Investortools, 1/1/99-3/31/17. Past performance is no guarantee of future results. Chart shows yield difference between the AAA-rated Municipal Bond Yield Curve and the AA-, A- and BBB-rated Municipal Bond Yield Curves. Different benchmarks, economic periods, methodologies and market conditions will produce different results. Indexes are unmanaged and unavailable for direct investment. Credit Ratings May Not Tell the Whole Story 2008 Higher rated bonds may appear more secure, but a bond s rating can change at any time. Professional credit research teams continually assess issuers and can identify potential risks before a rating is changed YTD A AA Downgrades Show the Importance of Research Municipality 2007 Rating S&P / Moody s 2017 Downgraded Rating S&P / Moody s Illinois AA/Aa3 BBB/Baa2 New Jersey AA/Aa3 A-/A3 Chicago AA-/Aa3 BBB+/Ba1 Dallas AA+/Aa1 AA-/A1 Puerto Rico BBB-/Baa3 D/Caa3 Why is this important? Data sources: Standard & Poor s, Moody s, 3/31/17. 3

4 1 Understand the Environment Bonds with Similar Ratings Are Not Created Equal Bonds with the same credit rating may show a wide yield range. For example, the yields of A-rated bonds with 10-year maturities ranged from 1.2% to 5.7%, making it difficult to assess each bond. Investment managers research extensively to determine if a higher yielding bond is compensating an investor adequately for the risk. Yields Can Vary Widely Among Bonds with the Same Rating Selection Is Critical Range of Yields for A-Rated Bonds in the S&P Municipal Bond Index Highest Average Lowest 6% 5% 5.0% 5.7% 5.3% 5.4% 4.2% 4% 3.4% 3.6% 3% 2.9% 2.4% 2% 1.8% 1.9% 1% 1.2% 1.2% 0.6% 0.9% 0% 2-Year 5-Year 10-Year 20-Year 30-Year Maturity Chart does not represent the yield or past performance of any Nuveen product. Data source: S&P/Investortools, as of 12/31/16. Past performance is no guarantee of future results. Yield data represents the yield to worst of all bonds in the index at each maturity level. Any reference to municipal credit ratings refers to the highest rating given by one of the following national rating agencies: S&P, Moody s or Fitch. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings. Yield to worst is the lowest potential yield that can be received on a bond without the issuer defaulting. Yield (%) Yield Range Individual Investors Are at a Pricing Disadvantage The inefficient and negotiated municipal market can make it difficult for retail investors to obtain the best prices. Buying or selling individual municipal bonds is generally more expensive for individual investors who buy smaller blocks of bonds than institutional investors that buy in bulk. Lower Pricing May Help Investors Keep More Income Median Trading Spreads by Trade Size in Fixed Coupon Municipal Securities (January 1, 2016 December 31, 2016) Median Trading Spreads 1.01% 0.79% 0.45% LOWEST TRADING COSTS: LARGE INSTITUTIONAL INVESTORS 0.23% 0.59% $25K or less $25K - $100K $100K - $1M Trade Size $1M+ All Trades Data source: Municipal Securities Rulemaking Board, Nuveen Asset Management Research, based on the most recent data available. Past performance is no guarantee of future results. This illustration provides estimated monthly price spreads as a percentage of the principal amount traded for fixed coupon municipal securities based on the size of the trade. Other methods may produce different results and the results for individual portfolios and different periods may vary. Institutional trade execution applies primarily to municipal bond trading as part of ongoing account management and generally does not include sales of legacy securities contributed to new or existing accounts or in connection with termination and liquidation instructions. Nuveen Asset Management Research conducted a study of daily municipal bond trades to calculate estimated spreads for fixed coupon municipal securities, or the difference between the average purchase price and the average sale price. See risk and disclosure section on page 7 for more information. 4

5 Identify Portfolio Needs 2 It may be harder for investors to research, purchase and hold individual municipal bonds than in the past. Your financial advisor can work with Nuveen Asset Management to analyze your existing fixed income holdings. A Personalized Portfolio Review May Offer Clarity and Direction The Municipal Bond Portfolio Review provides a basis for discussing portfolio strengths and potential challenges. An additional feature outlines which bonds may be affected when converting a portfolio to a separately managed account. * How many bonds do you own and what did you pay for them? We purchase large, institutional blocks of bonds and allocate them to individual accounts. You can potentially benefit from economies of scale. Do you know what you own? The revised credit rating scale lifted BBB bonds into higher-rated categories. We perform continuous, in-depth research to understand the credit risk of each underlying security. Are you subject to the Alternative Minimum Tax? Discuss with your tax advisor whether a portfolio that omits AMT bonds would better suit your tax needs. Are you capitalizing on higher coupon/premium bonds? For separately managed accounts, we focus primarily on premium bonds that may return cash flow faster and may be less sensitive to changes in interest rates. To get started, ask your financial advisor about a Municipal Bond Portfolio Review. * Source: Nuveen Asset Management. For illustrative purposes only. The Portfolio Transition Analysis provides a preliminary non-binding indication of how Nuveen Asset Management would expect to address holdings contributed to a new account in principal, for informational purposes only. See risk and disclosure section on page 8 for more information. 5

6 3 Evaluate Solutions How to Get Started Review your portfolio with your financial advisor Identify municipal allocations to fit your portfolio Consider different vehicles to help you reach your goals As you review your portfolio with your financial advisor to discuss investment goals and asset allocations, consider actively managed and customizable municipal options from Nuveen Asset Management. Separately Managed Account Mutual Fund Closed-End Fund Individually managed portfolios tailored to the account holder. Investors own the securities. Daily pricing and liquidity with lower investment minimums. Investors own shares of the fund. Exchange-traded with intra-day pricing determined by the market. Investors own shares of the fund. Short Term Limited Maturity Intermediate Term Long Term Short Duration High Yield High Yield Total Return Strategic Opportunities Inflation Protected AMT-Free State Specific State Preference Laddered Portfolios There is no guarantee that any of the strategies will achieve their stated objectives. There are risks inherent in any investment and these risks should be carefully considered before investing. Not all products are available at all firms. Please check with your firm for availability. Separately Managed Accounts, Open-End Mutual Funds and Closed-End Funds are different types of investment vehicles with different expense structures and different inflows/outflows and distribution requirements. Income may be subject to state and local income taxes. Capital gains, if any, will be subject to capital gains tax. For more information, contact your financial advisor and visit nuveen.com. 6

7 Leading the Way in Municipal Bonds Since 1898, Nuveen has been financing essential municipal bond projects and building lasting value for investors. This municipal bond heritage is reflected in the way Nuveen Asset Management manages portfolios today. 119 Years of Experience A rich heritage spanning 119 years remains focused on relative value, principal growth and tax-aware investing. 25 Credit Research Analysts As one of the industry s largest credit research teams, 25 analysts averaging 18 years of experience are dedicated to municipal investing. $ 122.0B AUM Municipal Presence Market power and institutional pricing provide an advantage when evaluating and purchasing bonds. Access Municipal Expertise with an Industry Leader #1 #3 #1 9 Separately managed accounts 1 municipal market share Open-end funds 2 municipal market share Closed-end funds 3 municipal market share 2017 Lipper Best Fund Awards 4 Nuveen traces its history back to Nuveen s asset management business was established in Personnel and assets as of 3/31/17. 1 Source: Money Management Institute Industry Guide to Managed Investment Solutions, Source: Morningstar Direct as of 12/31/16. Represents the total net assets of all U.S. open-end funds in the municipal bond category, excluding money market and fund of funds. Nuveen assets include managed accounts portfolio solutions. 3 Source: Morningstar Direct as of 12/31/16. Represents the total net assets of all U.S. closed-end funds in the municipal bond category. 4 Nuveen was awarded 2017 Lipper Best Fund Awards for delivering consistently strong, risk-adjusted performance for Class I shares over the 3-, 5-, or 10-year periods ending November 30, See nuveen.com for more information about the nine municipal bond funds that received the awards. In calculating the awards, Lipper considered funds registered for sale in the United States with at least 36 months of performance as of the end of the calendar year of the respective evaluation year. Classification averages are calculated with all eligible share classes for each eligible classification. The calculation periods extend over 36, 60, and 120 months. The highest Lipper Leader for Consistent Return (Effective Return) value within each eligible classification determines the fund classification winner over three, five, or ten years. A detailed awards methodology can be found at excellence.thomsonreuters.com/award/lipper. Class I Shares have no sales charge and may be purchased only by specified classes of investors. Other fund share class purchases may be subject to a front-end sales load. The total number of funds in a Lipper award classification may include multiple share classes of a single fund. From Thomson Reuters Lipper Awards, 2017 Thomson Reuters. All rights reserved. Used by permission and protected by the Copyright Laws of the United States. The printing, redistribution, or retransmission of this Content without express permission written is prohibited. Past performance is no guarantee of future results. Funds considered in the Lipper Awards may have experienced negative returns during or since the rating period. GLOSSARY The Alternative Minimum Tax (AMT) was originally enacted to ensure that all taxpayers pay their fair share of the costs of government. Determining if a taxpayer is subject to AMT requires tax liability to be calculated twice: first using the regular tax rules and then a second time using the AMT rules. Only if the AMT calculation produces a higher tax liability than the regular tax rules, is a taxpayer subject to the Alternative Minimum Tax. Dispersion describes the size of the range of values expected for a particular variable. Yield refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment s cost, its current market value or its face value. ADDITIONAL DISCLOSURES The comments and statements made are based solely upon the opinions of Nuveen Asset Management and the data available at the time of publication, which may change without notice. There is no assurance that any predicted results will actually occur. This brochure is provided for informational purposes only and should not be construed as a recommendation to buy or sell any specific securities and should not be considered investment advice of any kind. Certain information was obtained from third-party sources, which we believe to be reliable, but is not guaranteed. Nuveen Asset Management seeks to expeditiously and efficiently effect sales of legacy securities contributed to new or existing accounts or in connection with termination and liquidation instructions, generally by directing the execution of sale to the relevant broker-dealer/custodian designated by the client s managed account program, subject to program limitations. Primarily due to the time constraints and lot sizes applicable to these transactions, and because the full range of trading techniques is generally not available (including aggregation), the prices received in these transactions may be less favorable than the prices that could be attained for sales of securities selected by Nuveen as part of ongoing management. Clients always reserve the right to fund accounts with cash as opposed to legacy securities and to keep any securities in their accounts if terminating Nuveen s services. Nuveen Asset Management Research conducted a study of daily municipal bond trades to calculate estimated spreads for fixed coupon municipal securities. Each file was sorted by CUSIP to find multiple trades on a given day. For each CUSIP that appeared multiple times in one day, the algorithm searched to see if both a sale to a customer and a purchase from a customer occurred on that day. If there were multiple sales and purchases on a given day, the average was taken for each category. The estimated spreads were calculated for each CUSIP by subtracting the average purchase price from the average sale price of the CUSIP. Transactions between dealers were excluded. Spreads for some security-days appeared too large or small to be anything but data errors, so we sorted security days by the size of the spread and deleted observations with the largest and smallest 0.5% of spreads. Institutional size trades were separated from the retail trades and the median spread was taken by category ($25K or Less, $25K - $100K, $100k - $1M, and Over $1M). For example, the $25,000 or less dataset contains all instances where there was at least one customer purchase of principal amount of $25,000 or less and at least one customer sale of principal amount of $25,000 or less on the same day in the same security. Negative spreads (average purchase price greater than the average sale price from the customer) and zero spreads were excluded from the calculation. 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. PORTFOLIO REVIEW REPORT/PORTFOLIO TRANSITION ANALYSIS The report summarizes certain information regarding a prospective client s pre-existing holdings based on data provided by the prospect and/or its financial advisor and third party sources. The holdings and characteristics of an actual account managed by Nuveen Asset Management may vary materially from the prospect s current holdings. This report is for discussion purposes only and is not a recommendation to buy or sell any securities or a particular investment strategy. The Portfolio Transition Analysis does not reflect, establish or evidence an advisory or fiduciary relationship between Nuveen Asset Management and the prospect; is not based on the financial status, investment objectives, tax situation, or needs of a specific client; and is not and should not be relied upon as investment advice that should be independently relied upon by the prospect or their financial advisor. An advisory or fiduciary relationship between Nuveen Asset Management and the prospect requires the execution of an investment advisory agreement. Nuveen Asset Management reserves the right to take actions that differ from the analysis based on its then-current investment advice, market conditions, and client-specific information. The bond prices listed in this review are based on institutional evaluations and are not actual bids on the existing bonds. Institutional trade execution applies primarily to municipal bond trading as part of ongoing account management and generally does not include sales of legacy securities contributed to new or existing accounts or in connection with termination and liquidation instructions. When liquidated, bond blocks may receive less than the prices listed. Bonds are also subject to liquidity conditions and market fluctuations resulting in prices that may adjust accordingly. 7

8 What Differentiates Nuveen? Investment Expertise From Leading Asset Managers Our multi-boutique model builds on more than a century of industry leadership. Alignment With Client Needs And Goals Our capabilities address clients specific and personalized financial goals. Commitment To Advisors And Investors We align outstanding people and relevant services with each client relationship. For more information, contact your financial advisor and visit nuveen.com. A WORD ON RISK Investing in municipal bonds and a municipal bond investment vehicle involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. In addition, the capability of bonds may increase interest rate risk exposure in the Laddered portfolios. Upon call, a client may be confronted with a less favorable interest rate environment than the one that existed when the original bond was purchased. Investors should contact a tax advisor regarding the suitability of tax-exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the state of residence. Nuveen Asset Management is not a tax advisor. Consult your professional advisors before making any tax or investment decisions. This information should not replace a client s consultation with a professional advisor regarding their tax situation. Before investing, carefully consider fund investment objectives, risks, charges and expenses. For this and other information that should be read carefully, please request a prospectus or summary prospectus from your financial advisor or Nuveen at or visit nuveen.com Delivering the expertise of TIAA Investments and our independent investment affiliates: Nuveen Asset Management, LLC, Symphony Asset Management, LLC, NWQ Investment Management Company, LLC, Santa Barbara Asset Management, LLC, Winslow Capital Management, LLC and Gresham Investment Management LLC, registered investment advisers and subsidiaries of Nuveen, LLC. Nuveen Investments Advisers Inc. ( NIA ), a registered investment adviser, provides Managed Account marketing services for its affiliates that are registered investment advisers, including Nuveen Asset Management, LLC. All such affiliates are also affiliates of Nuveen, LLC. The Funds feature portfolio management by Nuveen Asset Management, LLC, an affiliate of Nuveen Securities, LLC. Nuveen Securities, LLC, member FINRA and SIPC, is a subsidiary of Nuveen, LLC. Nuveen 333 West Wacker Drive Chicago, IL nuveen.com 8 MBR-MGDMUNI-0317D INV-Y-04/18