Asset class opportunities Q invesco.com/flipbook

Transcription

1 Asset class opportunities Q invesco.com/flipbook

2 Delivering what you need We provide: Economic and market insights Invesco s quarterly Asset class opportunities brochure is designed to provide financial advisors with compelling insights and strategies to capitalize on today s market. Timely asset class opportunities Value-added tools that take you beyond the data Easy-to-understand charts and graphs Portfolio construction strategies for your clients Asset class opportunities Q invesco.com/flipbook 1

3 Contents Economic and market overview Equities Fixed income Alternatives Portfolio strategies About Invesco Exploring international and domestic equities Consider an allocation to municipal and high-quality bonds Actively pursue investment goals with alternative opportunities Being strategic with diversification and college savings plans Asset class opportunities Q invesco.com/flipbook 2

4 Economic and market overview

5 Economic and market overview Asset class returns Industry fund flows Current state of the US economy Leading indicators of the US economy Economic and market overview Q invesco.com/flipbook 4

6 Asset class returns One-year performance % as of Sept. 30, Equities: US S&P 500 Index International MSCI EAFE Index 1 Growth Russell 1000 Growth Index Value Russell 1000 Value Index Large cap Russell 1000 Index Mid cap Russell Midcap Index Small cap Russell 2000 Index Developed MSCI World Index 1 Emerging MSCI Emerging Markets Index 1 Fixed income: TIPS Bloomberg Barclays US TIPS Index Government Bloomberg Barclays US Government Bond Index Intermediate Bloomberg Barclays US Aggregate Index High yield Bloomberg Barclays US Corporate High Yield Index International Bloomberg Barclays Global Aggregate ex-us Index Emerging market debt JP Morgan GBI-Emerging Markets Diversified Index High yield municipals Bloomberg Barclays US Municipal High Yield Index Intermediate-term municipals BofA Merrill Lynch 3 7 Year US Municipal Securities Index Alternatives: Non-US real estate FTSE EPRA/NAREIT Developed ex-us Index 1 US real estate FTSE NAREIT AII Equity REITs Index Commodities Bloomberg Commodity Index Senior loans S&P/LSTA Leveraged Loan Index 1 Index is computed using the net return, which withholds applicable taxes for non-resident investors. Source: Lipper, Inc. and StyleADVISOR, for the period October 2015 to September Past performance is not a guarantee of future results. An investment cannot be made directly in an index. The index performance shown is not meant to be a proxy for any Invesco product. The Russell indexes are trademarks/service marks of the Frank Russell Co. Russell is a trademark of the Frank Russell Co. Economic and market overview Q invesco.com/flipbook 5

7 Industry fund flows Net flows $ billions as of Sept. 30, Q Q Q Q US equity Tax-free fixed income Taxable fixed Income Sector International/global equity Alternative Allocation Source: Strategic Insight, as of Sept. 30, Data grouped by Lipper classifications and organized into larger asset classes. Economic and market overview Q invesco.com/flipbook 6

8 Current state of the US economy Factors Current state Commentary GDP Positive The US economy expanded 1.4% in the second quarter, which was 0.3% higher than estimated. Unemployment Positive Unemployment came in at 5.0% in September, slightly higher from 4.9% in August. However, this rate has remained constant at around 4.9% over the past year. Inflation 1 Positive The Consumer Price Index (CPI) is currently at 0.9%, which is a 1% increase from a year ago. The US Federal Reserve (Fed) targets 2% inflation. Disposable income Neutral Real disposable income stayed flat in August from the prior month. However, the number is still 1.5% higher than it was the prior year. Housing 2 Neutral July home prices increased 5.1% year-over-year. This modest increase is below the historical median of 5.3%. Corporate profits after tax 3 Negative Second-quarter profits decreased 1.9% from the previous quarter, signaling an abrupt change in corporate profitability quarter-over-quarter. However, the oneyear moving average trend has been steadily declining since first quarter % change in Consumer Price Index 2 S&P Case-Shiller US National Home Price Index 3 Corporate profits after tax with Inventory Valuation Adjustment and Capital Consumption Adjustment Source: Invesco, US Bureau of Economic Analysis, FRED Federal Reserve Bank of St. Louis, and US Bureau of Labor Statistics, as of Sept. 30, 2016 Economic and market overview Q invesco.com/flipbook 7

9 Leading indicators of the US economy Leading indicators Outlook Commentary Stock market Positive The third quarter saw the S&P 500 remain flat, producing similiar numbers as the second quarter. Investors still seem relatively reluctant after early drawbacks in 2016 and are still monitoring the Fed closely for future rate hikes. Manufacturing activity Positive The composite PMI for September was 51.5%. Generally, a reading >50% indicates an expanding economy, while a <50% reading indicates a contracting economy. The PMI has continued to go strong over the past seven months after a very sluggish start. Interest rate spread Neutral The interest rate spread was 1.31% at the end of the third quarter. An inverted yield curve has typically preceded recessions. However, as long as the Fed holds interest rates near the zero bound, the spread may not move as it has historically. Housing starts Neutral Housing starts have remained neutral from a year ago in August, while the six-month moving average has continued to remain positive at 0.2% in what some consider to be an unpredictable market. Consumer expectations Positive Consumer confidence continues to increase and stands at in September. Positive views of the labor market and short-term employement seem to be fueling consumer sentiment. However, concerns over business conditions and income exist. 1 1 The Conference Board Source: Invesco, US Bureau of Economic Analysis, FRED Federal Reserve Bank of St. Louis, Bureau of Labor Statistics, and Conference Board, as of Sept. 30, Stock market represented by the S&P 500 Index; manufacturing activity represented by Purchasing Managers Index; interest rate spread represented by the 10-year US Treasury Note less 3-month US Treasury Bill; housing starts represented by housing starts (US Bureau of the Census); and consumer expectations represented by Index of Consumer Expectations. Economic and market overview Q invesco.com/flipbook 8

10 Equities

11 The compelling case for international equities Now may be the right time to rebalance into international equities International and US markets have historically moved in cycles International stocks continue to trade at a discount to the US Emerging markets appear attractively valued relative to the US A weaker euro, declining oil prices and quantitative easing have led to continued support for growth in Europe Equities Q invesco.com/flipbook 10

12 Now may be the right time to rebalance into international equities International markets are currently at a discount to peak levels Emerging markets are at a 32% discount to peak Europe is at a 34% discount to peak Developed markets (ex-us) are at a 29% discount to peak The US is at a 40% premium to peak Index price $ The US market is at a 40% premium from its peak level over the past 10 years, while many international markets are well below peak levels. 2, , , ,500 2,000 1, , , , ,500 1, October 2007 peak 1 Sept. 30, 2016 value 1 Over the past 10 years, emerging markets, Europe and developed markets (ex-us) peaked on Oct. 31, 2007, and the US peaked on Oct. 1, Source: Invesco and MSCI, as of Sept. 30, The US is represented by the S&P 500 Index, Europe by the MSCI Europe Index, emerging markets by the MSCI Emerging Markets Index and developed markets (ex-us) by the MSCI EAFE Index. Past performance is not a guarantee of future results. An investment cannot be made directly in an index. Equities Q invesco.com/flipbook 11

13 International and US markets have historically moved in cycles International and US markets have outperformed in cycles YTD 2016 % International markets have outperformed the US in 20 of the last 40 calendar years. International markets outperformed the US International markets underperformed the US Source: Lipper, Inc., for the period Jan. 1, 1976 to Sept. 30, International markets are represented by the MSCI EAFE Index and the US market by the S&P 500 Index. Note the MSCI EAFE Index and S&P 500 Index both posted negative returns in 1981, 1990, 2000, 2001, 2002 and Past performance is not a guarantee of future results. An investment cannot be made directly in an index. Equities Q invesco.com/flipbook 12

14 International stocks continue to trade at a discount to the US International markets remain inexpensive relative to US markets YTD 2016 % 80 International stocks are currently trading at an approximate 43% discount to the US versus a historical average of 12%. 60 International markets trading at a premium to the US % 0 International markets trading at a discount to the US International markets price-to-book relative to US Current discount: 43% International markets average discount Source: Invesco, Compustat and MSCI, for the period Jan. 1, 1975 to Sept. 30, International markets are represented by the MSCI EAFE Index and the US market by the MSCI USA Index. Past performance is not a guarantee of future results. An investment cannot be made directly in an index. Equities Q invesco.com/flipbook 13

15 Emerging markets appear attractively valued relative to the US Emerging markets are trading at a discount to the US Emerging markets trading at a premium to the US YTD 2016 % 10 0 Emerging market stocks are currently trading at an approximate 45% discount to the US versus a historical average of 39%. Emerging markets trading at a discount to the US % Current discount: 45% European markets price-to-book relative to US European markets average discount Source: Invesco, Compustat and MSCI, for the period Sept. 1, 1995 to Sept. 30, Emerging markets are represented by the MSCI Emerging Markets Index and the US market by the MSCI USA Index. Past performance is not a guarantee of future results. An investment cannot be made directly in an index. Equities Q invesco.com/flipbook 14

16 A weaker euro, declining oil prices and quantitative easing have led to continued support for growth in Europe A weaker euro could benefit export-driven Europe YTD 2016 % The euro is trading at its weakest level versus the dollar in more than 10 years, as it has fallen approximately 18% from its July 2014 high. However, a weaker euro could benefit an export-driven European economy % decline since July US dollar to the euro exchange rate Source: FactSet Research Systems, Inc., for the period Jan. 1, 1999 to Sept. 30, Equities Q invesco.com/flipbook 15

17 Searching for domestic value The performance of growth versus value has been primarily driven by two sectors A weak financials sector led to value's underperformance in 2015 The financials sector is trading at a substantial discount to historical levels Equities Q invesco.com/flipbook 16

18 The performance of growth versus value has been primarily driven by two sectors Returns % for value and growth categories have tended to mirror performance of technology and financials sectors, respectively In nearly every year since 2000, the information technology sector has performed in tandem with the growth asset class, while the financials sector has performed in tandem with the value asset class Financials Value Information technology Growth Source: Lipper, Inc., for the period Jan. 1, 2000 to Dec. 31, Value is represented by the Russell 1000 Value Index; growth by the Russell 1000 Growth Index; financials sector by the S&P 500 Financials Index; and information technology sector by the S&P 500 Information Technology Index. Returns for one year and greater are annualized. Past performance is not a guarantee of future results. An investment cannot be made directly in an index. Equities Q invesco.com/flipbook 17

19 A weak financials sector led to value s underperformance in 2015 Sector weights have recently impacted returns in value and growth categories Total return Information technology weight Financials weight 15.6 Broad US market Large cap growth Large cap value % The sell-off in financials, which declined 1.53% in 2015, led value to underperform growth. Similarly, growth held up better in 2015, as the information technology sector performed better than the overall market with a return of 5.92%. Large value has outperformed large growth year-to-date, returning 10% versus 6%, as of the third quarter in However, it is too early to tell if this is a longerterm secular trend. Source: Lipper, Inc., for the period Jan. 1, 2015 to Dec. 31, Broad US market is represented by the S&P 500 Index; large cap growth by the Russell 1000 Growth Index; large cap value by the Russell 1000 Value Index; financials sector by the S&P 500 Financials Index; and information technology sector by the S&P 500 Information Technology Index. Returns for one year and greater are annualized. Past performance is not a guarantee of future results. An investment cannot be made directly in an index. Equities Q invesco.com/flipbook 18

20 The financials sector is trading at a substantial discount to historical levels Financial stocks are at their cheapest levels in the last 15 years % Given value s tilt toward financials, opportunities exist within this space, as potentially higher rates could help financials, particularly banks % 0.5 Financial stocks relative price-to-book ratio 1 1 Drawn from the largest 1,500 stocks; capitalization-weighted data. Source: Corporate Reports, Empirical Research Partners Analysis, for the period Jan. 1, 1965 to Dec. 31, Equities Q invesco.com/flipbook 19

21 Fixed income

22 Opportunities in the municipal bond market Intermediate-term municipals may provide an attractive risk-reward trade-off, as well as price appreciation Yields on municipal bonds are compelling Diversify credit and interest rate risk by allocating to both high yield and intermediate municipals Municipal default rates have historically been lower than those of rated corporate bonds Municipal bonds can potentially increase opportunities for growth and mitigate overall portfolio risk Diversification does not guarantee a profit or eliminate the risk of loss. Fixed income Q invesco.com/flipbook 21

23 About risk Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer s credit rating. Junk bonds involve a greater risk of default or price changes due to changes in the credit quality of the issuer. The values of junk bonds fluctuate more than those of high-quality bonds in response to company, political, regulatory or economic developments. Values of junk bonds can decline significantly over short periods of time. Lower-rated municipal bonds involve a greater risk of default or price changes due to changes in the credit quality of the issuer. The values of such bonds fluctuate more than those of high-quality bonds in response to company, political, regulatory or economic developments. Values of these bonds can decline significantly over short periods of time. Municipal bonds are issued by state and local government agencies to finance public projects and services. They typically pay interest that is not subject to federal regular income tax or state and local income taxes in their state of issuance. Because of their tax benefits, municipal bonds usually offer lower pre-tax yields than similar taxable bonds. Economic and regulatory factors may affect a municipal security s value, interest payments, repayment of principal and one s ability to sell it. An issuer s failure to comply with tax requirements may make income paid thereon taxable, thus reducing the security s value. In addition, there could be changes in applicable tax laws or tax treatments that reduce or eliminate the current federal income tax exemption on municipal securities or otherwise adversely affect the current federal or state tax status of municipal securities. There is no guarantee that income derived from municipal bonds will be exempt from federal or state income taxes. including alternative minimum tax. Asset class opportunities Q invesco.com/flipbook 22

24 Intermediate-term municipals may provide an attractive risk-reward trade-off, as well as price appreciation Intermediate-term municipals may appreciate in price as they approach maturity based on AAA general obligation yield curve Years to maturity Rolling down the yield curve can lead to price appreciation when the value of a bond converges to par as maturity is approached. Shorter bonds typically yield less than longer bonds as you hold a bond its market value rises (to a point) as it rolls down the curve Yield % Intermediate-term municipals may provide an attractive risk-reward trade-off, as well as price appreciation potential as bonds move toward maturity As a bond rolls down the curve toward maturity, it approaches the steepest part of the curve, where the market demands lower yields. Therefore, a bond paying a constant coupon greater than what the market is currently pricing in will see its price increase Source: Thomson Municipal Market Data, as of Sept. 30, Ratings allocations are based upon ratings assigned by Standard & Poor s. A credit rating is an assessment provided by a nationally recognized statistical rating organization of the creditworthiness of an issuer with respect to debt obligations, including specific securities, money market instruments or other debts. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest); ratings are subject to change without notice. For more information on Standard and Poor s rating methodology, please visit standardandpoors.com and select Understanding Ratings under Rating Resources on the home page. Past performance is not a guarantee of future results. Fixed income Q invesco.com/flipbook 23

25 Yields on municipal bonds are compelling Municipal bonds offer attractive taxable equivalent yields compared to their taxable counterparts Tax equivalent yields at 43.4% for selected fixed income bond indexes 10-year US Treasury AA-rated municipal A-rated municipal BBB-rated municipal High yield municipal AA-rated corporate A-rated corporate BBB-rated corporate High yield corporate Yield-toworst 1 % The interest income earned on most municipal bonds is exempt from federal income taxes, and in many cases, may also be exempt from state and local taxes (39.6% federal tax rate + 3.8% NIIT) top marginal tax rate for single taxpayers with more than $400,000 in taxable income or couples with $450,000 or more. NIIT is the Net Investment Income Tax of 3.8% on investment income for single taxpayers with more than $200,000 in taxable income or couples with $250,000 or more. Source: Barclays, as of Sept. 30, AA-rated municipal is represented by the Bloomberg Barclays Municipal Bond AA Index; A-rated municipal by the Bloomberg Barclays Municipal Bond A Index; BBB-rated municipal by the Bloomberg Barclays Municipal Bond BBB Index; high yield municipal by the Bloomberg Barclays High Yield Municipal Bond Index; AA-rated corporate by the Bloomberg Barclays US Corporate Bond AA Index; A-rated corporate by the Bloomberg Barclays US Corporate Bond A Index; BBB-rated corporate the Bloomberg Barclays US Corporate Bond BBB Index; and high yield corporate by the Bloomberg Barclays US Corporate High Yield Index. An investment cannot be made directly in an index. Fixed income Q invesco.com/flipbook 24

26 Diversify credit and interest rate risk by allocating to both high yield and intermediate municipals Higher yield Various combinations can be used depending on investor needs Duration years % high yield, 50% intermediate 100% high yield Yield % 8 6 A strategic allocation to both high yield and intermediate-term municipal bonds may allow investors to earn an attractive yield while mitigating interest rate sensitivity. 100% intermediate 30% high yield, 70% intermediate 70% high yield, 30% intermediate 4 2 Less interest rate sensitivity Source: Barclays, as of Sept. 30, High yield municipals are represented by the Bloomberg Barclays High Yield Municipal Bond Index and intermediate-term municipals by the Bloomberg Barclays Municipal Intermediate 5-10 Year Bond Index. The chart illustrates the market opportunity that exists when choosing a blend of the two types of municipal bonds. Junk bonds are subject to greater risk than investment grade bonds and may not be suitable for all investors. Diversification does not guarantee a profit or eliminate the risk of loss. Past performance is not a guarantee of future results. An investment cannot be made directly in an index. Fixed income Q invesco.com/flipbook 25

27 Municipal default rates have historically been lower than those of rated corporate bonds Across many credit levels, municipal bonds historically have had lower default rates 10-year cumulative default rates Municipal bonds % Corporate bonds % Aaa Aa A Baa Ba B Caa-C All investment grade All high yield All rated securities Historical default rates across the credit spectrum are lower for municipal bonds than comparably rated corporate bonds. At lower credit ratings, the disparity in default rates has historically increased. Source: Moody s Investor Services ( Moody s ), as of May Past default rates are no assurance of future default rates. Data shown for the time period 1970 through 2015 is the most recent data available data may increase cumulative default rates for both municipal and corporate bonds. A credit rating is an assessment provided by a nationally recognized statistical rating organization of the creditworthiness of an issuer with respect to debt obligations, including specific securities, money market instruments or other debts. Ratings are measured on a scale that generally ranges from Aaa (highest) to C (lowest); ratings are subject to change without notice. For more information on rating methodologies, please visit and select Rating Methodologies under "Research & Ratings" on the homepage. Fixed income Q invesco.com/flipbook 26

28 Municipal bonds can potentially increase opportunities for growth and mitigate overall portfolio risk Municipal bonds have historically had low correlation to other asset classes 10-year correlations of municipal bonds to other asset classes Domestic small cap Domestic equities Emerging market equities Developed foreign equities US Treasuries US corporate high yield US bonds US investment grade bonds High yield municipals Diversification can potentially increase opportunities for growth and mitigate overall portfolio risk. Municipal bonds have historically had very low correlation to other asset classes, including equities and Treasuries, and may be effective portfolio diversifiers. 0.9 to 1.0 Very highly correlated 0.7 to 0.9 Highly correlated 0.5 to 0.7 Moderately correlated 0.3 to 0.5 Low correlation Less than 0.3 Little, if any correlation Source: Barclays, as of Sept. 30, Investment grade municipals represented by Bloomberg Barclays Municipal Bond Index; domestic small cap by Russell 2000 Index; domestic equities by S&P 500 Index; emerging market equities by MSCI Emerging Markets Index; developed foreign equities by MSCI EAFE Index; US Treasuries by Bloomberg Barclays US Government Index; US Corporate High Yield by Bloomberg Barclays US Corporate High Yield Index; US bonds by Bloomberg Barclays US Aggregate Bond Index; US investment grade bonds by Bloomberg Barclays US Corporate Investment Grade Index; and high yield municipals by Bloomberg Barclays High Yield Municipal Bond Index. Diversification does not guarantee a profit or eliminate the risk of loss. Past performance is not a guarantee of future results. An investment cannot be made directly in an index. Fixed income Q invesco.com/flipbook 27

29 High-quality bonds may offer income and diversification potential High-quality core bonds may help reduce volatility of an equity portfolio, while offering growth benefits Historically, high-quality core bonds have softened equity market downturns Diversification benefits within a portfolio may be achieved by adding high-quality core bonds High-quality core bond portfolio allocations seek to utilize greater diversification for both credit and sector allocations Diversification does not guarantee a profit or eliminate the risk of loss. Fixed income Q invesco.com/flipbook 28

30 High-quality core bonds may help reduce volatility of an equity portfolio, while offering growth benefits High-quality core bonds may help to diversify a portfolio and mitigate market volatility Risk Volatility Sharpe ratio Return 10-year returns % 20 Adding high-quality core bonds to an equity portfolio has the potential to improve risk-return profiles Stocks Bonds Balanced Source: Barclays and Bloomberg L.P., for the period Oct. 1, 2006 to Sept. 30, Stocks represented by the S&P 500 Index; bonds by the Bloomberg Barclays US Aggregate Bond Index; and balanced by a 60/40 split between the S&P 500 Index and Bloomberg Barclays US Aggregate Bond Index. Volatility is measured by standard deviation. High-quality core bonds refer to investment grade bonds that fall within the Bloomberg Barclays US Aggregate Bond Index. Diversification does not guarantee a profit or eliminate the risk of loss. Returns for one year or greater are annualized. Past performance is not a guarantee of future results. An investment cannot be made directly in an index. Fixed income Q invesco.com/flipbook 29

31 Historically, high-quality core bonds have softened equity market downturns High-quality core bonds have risen when stocks have fallen YTD 2016 High-quality core bonds Stocks Nontraditional bonds Returns % Historically, when stocks have gone down, highquality core bonds have gone up, potentially helping portfolios weather rough markets. Source: Morningstar and Bloomberg L.P., as of Sept. 30, High-quality core bonds are represented by the Bloomberg Barclays US Aggregate Bond Index; stocks by the S&P 500 Index; and nontraditional bonds by the Morningstar Nontraditional Bond Category. High-quality core bonds refer to investment grade bonds that fall within the Bloomberg Barclays US Aggregate Bond Index. Past performance is not a guarantee of future results. An investment cannot be made directly in an index. Fixed income Q invesco.com/flipbook 30

32 Diversification benefits within a portfolio may be achieved by adding high-quality core bonds High-quality core bonds have historically had low correlations to equities and other bonds 10-year correlations of high-quality core bonds to other asset classes Stocks Corporate high yield bonds Nontraditional bonds Emerging market bonds Diversification can potentially increase opportunities for growth and mitigate overall portfolio risk. High-quality core bonds historically have had very low correlation to equities, for example, and may be effective portfolio diversifiers. Investment grade corporate bonds Mortgage-backed securities to 1.0 Very highly correlated 0.7 to 0.9 Highly correlated 0.5 to 0.7 Moderately correlated 0.3 to 0.5 Low correlation Less than 0.3 Little, if any correlation Source: Barclays, Morningstar and Bloomberg L.P., for the period Oct. 1, 2006 to Sept. 30, High-quality core bonds are represented by the Bloomberg Barclays US Aggregate Bond Index; stocks by the S&P 500 Index; corporate high yield bonds by the Bloomberg Barclays US High Yield Index; investment grade corporate bonds by the Bloomberg Barclays US Corporate Investment Grade Index; emerging market bonds by the Bloomberg Barclays Emerging Market USD Aggregate Index; nontraditional bonds by the Morningstar Nontraditional Bond Category; and mortgage-back securities by the Bloomberg Barclays US MBS Index. High-quality core bonds refer to investment grade bonds that fall within the Bloomberg Barclays US Aggregate Bond Index. Diversification does not guarantee a profit or eliminate the risk of loss. Past performance is not a guarantee of future results. An investment cannot be made directly in an index. Fixed income Q invesco.com/flipbook 31

33 High-quality core bond portfolio allocations seek to utilize greater diversification for both credit and sector allocations Credit and sector allocation exposures seek to create diversification Credit quality Allocation A core plus portfolio includes sectors outside of a core bond portfolio, such as high yield, bank loans and emerging market bonds, which have the potential to provide return and diversification benefits. % % AAA+ rating Corporate bonds AA rating 5.10 Securitized debt A rating US government bonds BBB rating Emerging market debt 4.04 <BBB- rating Non-US debt Cash 0.40 Source: Barclays and Invesco, as of Sept. 30, Charts show percent of total assets of a representative core plus portfolio. Diversification does not guarantee a profit or eliminate the risk of loss. Fixed income Q invesco.com/flipbook 32

34 Alternatives

35 Actively pursue investment goals with alternative opportunities Key investment objectives may be achieved by incorporating alternatives into a portfolio Alternative investments have been a core part of institutional and high-net-worth portfolios Alternatives have historically helped investors generate return and manage volatility Alternatives have performed well relative to other asset classes in different market cycles Alternatives Q invesco.com/flipbook 34

36 About risk Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money. Alternative investments can be less liquid and more volatile than stocks and bonds, and often lack longer term track records. Although less volatile than stocks, bonds are subject to credit and default risks as well as interest rate risk; as interest rates rise, bond values fall and vice versa. Stocks fluctuate in response to activities specific to the company, as well as general market and economic conditions. Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Counterparty risk is the risk that the other party to the contract will not fulfill its contractual obligations, which may cause losses or additional costs. Leverage created from borrowing or certain types of transactions or instruments may impair liquidity, cause positions to be liquidated at an unfavorable time, lose more than the amount invested, or increase volatility. The dollar value of foreign investments will be affected by changes in the exchange rates between the dollar and the currencies in which those investments are traded. Alternatives are investments that do not fall into the three classic assets types of stocks, bonds and cash. Alternatives fall into non-traditional asset types such as commodities, currencies, real estate and any securities that aren t traded on the open market. Alternatives also include investments that incorporate non-traditional features such as long/short investing. The investment techniques and risk analysis used by portfolio managers may not produce the desired results. Short sales may cause an investor to repurchase a security at a higher price, causing a loss. As there is no limit on how much the price of the security can increase, exposure to potential loss is unlimited. The differences between retail investors and institutional investors dictate not only the size of the trades they make, but also the types of companies and financial instruments in which they invest their monies. Retail investors is synonymous with individual investors who buy and sell securities for their personal account(s) and not for another company or organization. Retail investors buy in much smaller quantities than larger institutional investors. Institutional investors are large, sophisticated investors that buy and sell securities for their investment portfolios. In contrast to retail investors, institutional investors engage in large block trades. Institutional investors have numerous advantages including access to more securities and the ability to negotiate trading fees and the guarantee of best price and execution. Asset class opportunities Q invesco.com/flipbook 35

37 Key investment objectives may be achieved by incorporating alternatives into a portfolio Today s investors face many challenges, but their goals are timeless Investment goals Today s investor 1. Preserving what you have Faces an extended bull market and historically low interest rates. 2. Building wealth Has access to more asset classes and strategies than ever before. 3. Enhancing income May use alternative investments to potentially achieve their goals. Adding alternatives to a portfolio may help investors: Generate more consistent and less volatile returns Cushion a portfolio during times of stock weakness Increase current yield during a low-rate environment Hedge against inflation and/or rising interest rates Benefit from opportunities outside of stocks and bonds Source: Invesco, as of Sept. 30, 2016 Alternatives Q invesco.com/flipbook 36

38 Alternative investments have been a core part of institutional and high-net-worth portfolios For years, university endowments have had significant allocations to alternatives Endowments 57.0 Retail 6.1 Allocation to alternatives % While alternatives are new to most individuals, they have long been used by institutional investors (such as university endowments) and high net-worth investors. Now, these investments are widely available to all investors through mutual funds, exchange-traded funds and unit investment trusts. Source: Endowments represented by the 2015 NACUBO Commonfund Study of Alternatives, as of January Retail represented by The Cerulli Report Alternative Products and Strategies 2015, data as of June Alternative investment allocations for endowments and retail may include venture capital, real estate/reits, private equity, distressed debt, hedge funds, absolute return, market neutral, equity long/short, long/short credit, master limited partnerships, commodities and managed futures. Alternatives Q invesco.com/flipbook 37

39 Alternatives have historically helped generate return and manage volatility Alternatives have the potential to smooth returns and volatility Annualized return Standard deviation Maximum drawdown % % A portfolio constructed with alternatives would have performed well against other investment types, with less volatility. Equities Fixed income Traditional 60/40 portfolio Alternative portfolio Source: StyleADVISOR, for the period January 1997 to August Alternatives portfolio represented by 20% BarclayHedge Equity Market Neutral Index, 20% BarclayHedge Long/Short Index, 15% FTSE NAREIT All Equity REIT Index, 12% BarclayHedge Global Macro Index, 10% S&P/LSTA US Leveraged Loan Index, 10% BarclayHedge Fixed Income Arbitrage Index, 8% BarclayHedge Multi-Strategy Index, and 5% Bloomberg Commodity Index. The performance of individual alternative investments will differ from that of the index. Equities represented by the S&P 500 Index, fixed income by the Bloomberg Barclays US Aggregate Bond Index, and traditional 60/40 portfolio represented by 60% S&P 500 Index and 40% Bloomberg Barclays US Aggregate Bond Index. Past performance is not a guarantee of future results. An investment cannot be made directly in an index. Alternatives Q invesco.com/flipbook 38

40 Alternatives have performed well relative to other asset classes in different market cycles Alternatives have had similar, if not better, relative performance during different market cycles Tech bubble 1/97 12/ Bursting of tech bubble 1/00 12/ Debt run-up 1/03 12/ Financial crisis 1/08 12/ Post-crisis bull market 1/09 8/ Total period 1/97 8/ Compound annual return % From the run-up in tech stocks to the post financial crisis bull market, alternatives have held their own with solid performance relative to stocks and bonds Equities Fixed income Traditional 60/40 portfolio Alternative portfolio Source: StyleADVISOR, for the period January 1997 to August Alternatives portfolio represented by 20% BarclayHedge Equity Market Neutral Index, 20% BarclayHedge Long/Short Index, 15% FTSE NAREIT All Equity REIT Index, 12% BarclayHedge Global Macro Index, 10% S&P/LSTA US Leveraged Loan Index, 10% BarclayHedge Fixed Income Arbitrage Index, 8% BarclayHedge Multi-Strategy Index, and 5% Bloomberg Commodity Index. The performance of individual alternative investments will differ from that of the index. Equities represented by the S&P 500 Index, fixed income by the Bloomberg Barclays US Aggregate Bond Index, and traditional 60/40 portfolio represented by 60% S&P 500 Index and 40% Bloomberg Barclays US Aggregate Bond Index. Past performance is not a guarantee of future results. An investment cannot be made directly in an index. Alternatives Q invesco.com/flipbook 39

41 Portfolio strategies

42 Investor behavior indicates the need for diversification Prudent investors can prepare for both the ups and downs of the market cycle Investors have a tendency to do the wrong thing at the wrong time Proper diversification can help mitigate equity downdrafts and narrow the return gap Strategic portfolio positioning may provide better returns, with less risk Diversification does not guarantee a profit or eliminate the risk of loss. Portfolio strategies Q invesco.com/flipbook 41

43 Prudent investors can prepare for both the ups and downs of the market cycle Since 1929, for every bear market, there has been a bull market Bear markets Market declines Bull markets 20% or Market gains 20% or more 1 more 2 Average length 10 months Average length 32 months Average return % Average return % Minimum decline Minimum gain 20.9 Maximum decline Maximum gain The average return and maximum decline during bear markets seem relatively low compared to the bull market gains. The average bear market loss of -35.4% requires a 55% gain to get back to even, and the maximum bear market decline of -61.8% requires a 162% gain to completely recover. A prudent investor can prepare for these scenarios. 1 Without a rally of 20% or more 2 Without a correction of 20% or more Source: Bank of America/Merrill Lynch and Bloomberg L.P., as of Sept. 30, Average returns shown are cumulative. Past performance is not a guarantee of future results. Portfolio strategies Q invesco.com/flipbook 42

44 Investors have a tendency to do the wrong thing at the wrong time Investor behavior can dampen portfolio returns % Average investor 10-year return % Average 10-year fund return % year return gap % US diversified Allocation International equities Taxable bonds % Investors have tended to over-allocate to equities in the good years and sell-off at the wrong time when markets correct. This results in a return gap that is, when investors fail to achieve targeted returns of funds or indexes. However, allocation funds have the smallest return gap, as diversification has tended to help investors stay the course. Source: Morningstar Mind the Gap 2015, as of Dec. 31, Return gaps reflect asset-weighted investor return less average total return. Diversification does not guarantee a profit or eliminate the risk of loss. Past performance is not a guarantee of future results. Portfolio strategies Q invesco.com/flipbook 43

45 Proper diversification can help mitigate equity downdrafts and narrow the return gap Look beyond equities for stronger portfolio positioning Market corrections > 10% 3/24/00 4/14/ /20/15 8/25/ /30/15 2/11/ Bear market periods 9/1/00 10/9/ /9/07 3/9/ Return % Investors who incorporate other asset classes into their allocation may reduce the white knuckle ride of an equity-only portfolio. The inclusion of other asset classes into a portfolio may assist them with staying the course and avoiding emotional investing decisions Stocks Bonds Government bonds (long) 60% stocks/40% bonds Source: Lipper, Inc. and FactSet Research Systems, Inc. Returns greater than one year are annualized. Stocks are represented by the S&P 500 Index; bonds by the Bloomberg Barclays US Aggregate Bond Index; and government bonds (long) by the Bloomberg Barclays US Government Long Index. Returns less than one year are cumulative. Returns greater than one year are annualized. Diversification does not guarantee a profit or eliminate the risk of loss. Past performance is not a guarantee of future results. An investment cannot be made directly in an index. Portfolio strategies Q invesco.com/flipbook 44

46 Strategic portfolio positioning may provide better returns, with less risk Portfolio diversification may help mitigate market volatility Risk/return profile over a 20-year period Risk % Government bonds (long) Stocks Return % 10 Diversifying with both stocks and bonds may help investors potentially achieve better riskadjusted returns. Bonds 60% stocks 40% bonds 5 0 Source: StyleADVISOR, for the period Oct. 1, 1996 to Sept. 30, Stocks are represented by the S&P 500 Index; bonds by the Bloomberg Barclays US Aggregate Bond Index; and government bonds (long) by the Bloomberg Barclays US Government Long Index. Risk is measured by standard deviation. Diversification does not guarantee a profit or eliminate the risk of loss. Past performance is not a guarantee of future results. An investment cannot be made directly in an index. Portfolio strategies Q invesco.com/flipbook 45

47 529 savings plans can offer a smarter way to pay for college A 529 plan can offer families a number of benefits College graduates have higher earning potential A college education is more than just a degree Saving early for college is a smart decision Portfolio strategies Q invesco.com/flipbook 46

48 A 529 plan can offer families a number of benefits Key features and benefits include: Availability Anyone can contribute to the plan, the beneficiary can be any age and live in any state, and you can participate in the plan regardless of your income level. A 529 savings plan, with the potential for both immediate and long term benefits, may be a strategic way to pay for college. Tax benefits Gift and estate tax advantages Withdrawals Earnings grow tax-deferred and your qualified withdrawals are tax-free from federal taxes and may also be free from state taxes. 1 Contribute up to $14,000 per beneficiary annually 2 with no gift tax-consequence, or take advantage of a $70,000 contribution 3 that can be treated as if it were made over a five-year period. 4 Funds can be used at any eligible two- or four year college, vocational/technical school, or graduate school around the country. 1 Earnings on non qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Tax and other benefits are contingent on meeting other requirements, and certain withdrawals are subject to federal, state and local taxes. This information is provided for general educational purposes only and is not to be considered legal or tax advice. Investors should consult with their legal or tax advisors for personalized assistance, including information regarding any specific state law requirements. 2 $28,000 for married couples filing jointly 3 $140,000 for married couples filing jointly 4 If the contributor dies during the five-year period, a prorated amount will revert back to the contributor's taxable estate. Portfolio strategies Q invesco.com/flipbook 47

49 College graduates have higher earning potential A college education can offer lifelong benefits Bachelor s degree High school diploma College graduates have the potential to earn $1 million more than high school graduates over their lifetime. 1 A person with a bachelor s degree can earn up to $24,000 more annually than a person with a high school diploma 1 Source: The Economic Values of College Majors, Georgetown University Center of Education and the Workforce. McCourt School of Public Policy. Anthony P. Carnevale, Ban Cheah and Andrew R. Hanson, Executive Summary, Source: US Bureau of Labor Statistics. "Earnings and unemployment rates by educational attainment, 2015," as of March Portfolio strategies Q invesco.com/flipbook 48

50 A college education is more than just a degree Benefits a college education may have on a child s life Personal 1 Social 2 Professional 3 Increased overall Greater community happiness involvement Greater life experience Lower divorce rates Improved quality of life for offspring Increased status More hobbies and leisure time Higher salaries Higher level job status Higher savings levels A thoughtful college savings strategy may help a child graduate from college with a bright future, which can result in personal, social and professional benefits. 1 Source: Pew Research, The link between a college education and a lasting marriage, December Source: Lumina Foundation Report from the University of Maine Margaret Chase Smith Policy Center & School of Economics, University of Maine, It s Not Just The Money: The Benefits of College Education to Individuals and to Society, by Professor Philip Trostel, October Source: US Bureau of Labor Statistics; Earning and unemployment rates by education attainment Portfolio strategies Q invesco.com/flipbook 49

51 Saving early for college is a smart decision The sooner you start saving, the more time your savings has to grow 18 years 10 years 5 years $ in thousands $13,965 $32,654 $76,567 Consider: Four years at a public, in-state university can average $76, Roughly 70% of graduating college seniors carry student loan debt. 2 The average debt load per student is approaching $30,000, with that figure increasing annually. 2 1 Source: Collegeboard.org, Trends in College Pricing Source: The Institute for College Access & Success Source: Invesco. The hypothetical examples shown above are based on saving $200 per month and are estimates of a 6% average annual total return. For illustrative purposes only and is not intended to represent actual performance of any particular investment product or real investor. Your actual return isn t likely to be constant from year to year and there is no guarantee that a specific rate of return will be achieved. Portfolio strategies Q invesco.com/flipbook 50