Download Positioning your portfolio for rising interest rates

June 2017
Positioning your portfolio for
rising interest rates
Article highlights
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A rising interest-rate environment should spur you to
think about the potential impact on all of the investments
in your portfolio.
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While history shows that fixed-income performance has
been resilient following rate increases, other factors may
also affect results.
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For stocks, past performance shows positive returns
are possible when inflation is under control, as it is
today. Stocks may also benefit from an expected modest
improvement in economic growth.
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Stronger economic and job growth should support
demand for commercial real estate and the potential
for attractive returns, but with lower expected property
appreciation.
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Rate increases can also impact payments from fixed and
variable annuities.
Investors should consider what rising interest rates could
mean for an investment portfolio with long-term objectives.
We do not foresee extreme market shifts in a rising rate
environment. Because the current environment is different
from previous ones, however, you should weigh the potential
impact of rising rates. Here are some factors to ponder as
you look at your portfolio of stocks and bonds in the weeks
and months ahead.
Considerations for fixed-income investments
1. Make sure your fixed-income portfolio is diversified.
Bond sensitivity to interest-rate movements is based on
several factors, including credit quality and the type of
security. You should examine the bond funds in your portfolio
to see how well-diversified they are. They should include a
good mix of corporate bonds (both investment grade and
high yield), emerging markets debt and shorter-term issues.
These sectors may provide greater protection from potential
losses during periods of rising rates.
2. Active management may offer advantages over indexing.
Active management can help you achieve appropriate levels
of exposure to various areas of the bond market during
changing cycles, with greater flexibility to avoid some risks
currently reflected in broader market indexes. In contrast,
passively investing in an index bond strategy could leave
you overexposed to U.S. Treasury debt and underexposed to
higher-yielding, non-Treasury debt instruments, for example.
3. Maintain a strategic allocation to fixed income.
Fixed-income losses may occur in a rising interest rate
environment, but you should avoid the temptation to tinker
with long-term strategic allocations based on short-term
movements. A TIAA analysis shows that bonds tend to be
resilient during rising rate environments. This is why you may
be best served by maintaining a consistent exposure to fixed
income over time.
Positioning your portfolio for rising interest rates
4. Interest rates overall are likely to rise.
The Federal Reserve (Fed) sets the federal funds rate—
which is the interest rate that banks charge each other
for overnight lending. The theory holds that when this rate
increases, other rates follow. We expect the short-term
federal funds rate to reach a target range of 1.25% to 1.5%
and the 10-year Treasury to hit 2.75% by the end of 2017.
Considerations for equity investments
1. Expect volatility and manage expectations.
Investors should expect higher volatility due to uncertainty
over the pace of rate hikes, the new administration’s
economic policies and the risk of global conflicts. However,
even with greater volatility, equity markets are not expected to
decline significantly in response to rising rates. An improving
economy and the Fed’s policy of keeping rate hikes moderate
in size may be supportive of stocks.
2. Diversify your portfolio with enough exposure to
non-U.S. markets.
Although U.S. stocks have performed well in recent years,
valuations in overseas markets appear more attractive—
that is, less expensive—than in the U.S. This, along with
expected improvements in non-U.S. earnings growth, could
lead to outperformance in foreign developed and emerging
equity markets.
3. Diversify income sources to avoid the potential negative
impact on dividend stocks.
The search for yield over the past few years bid up prices for
high-dividend-paying stocks and related funds, which suffered
the most as rates began to rise. These stocks, such as real
estate investment trusts (REITs) and utilities, can also lag as
investors shift to bonds for steady income.
4. Consider tactical reallocations—carefully.
Given few lasting patterns in equity returns and the widely
variable nature of interest-rate cycles, investors may
carefully consider tactical changes. Technology, consumer
discretionary and small-company stocks seem likely to
benefit from the changing environment, while high-dividendpaying stocks are expected to underperform.
Commercial real estate returns remain attractive
despite rising rates
Investor fears about the potential impact of rising interest
rates on U.S. commercial real estate (CRE) property values
and total returns (income return and property appreciation)
are likely overdone. Analysis of historical data by TIAA
found no statistically significant relationship between CRE
performance and changes in interest rates.
While we don’t believe moderately rising interest rates will
hurt CRE performance, we do expect returns to be lower
and closer to long-term averages. With several years of
strong returns during the recovery—and the rising property
values embedded in them—there is likely limited potential
for further CRE appreciation, especially for higher-quality
properties in more desirable locations. Nonetheless, with
forecasts of continuing economic and job growth, CRE
prospects remain promising in 2017. Overall we expect real
estate performance to remain attractive and believe that real
estate should remain an important part of a well-diversified
portfolio.
For annuities, rising interest rates may affect
payments
Rising interest rates may affect income payouts from both
fixed and variable annuities. If you’re currently receiving
retirement income from a fixed annuity, rate increases will
not likely change the income you are receiving. However,
higher interest rates in the marketplace could result in
higher payouts in the future for new annuitants. Therefore,
if you are considering purchasing a fixed annuity, talk with
your financial advisor about the best course of action. If you
are currently working and saving into a fixed annuity through
your workplace retirement plan, higher rates may mean your
money will earn a higher rate over time.
Variable annuities invest your savings in both fixed-income
and stock-based accounts whose values change depending
on the performance of their underlying investments. If
you’re receiving retirement income from a variable annuity,
market volatility could affect your income payments. If you
are working and saving into a variable annuity, you may also
experience volatility in the underlying value of the account as
rates rise. However, it’s important to put any volatility in the
context of your long-term investment goals before changing
your investment strategy.
Positioning your portfolio for rising interest rates
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Positioning your portfolio for rising interest rates
Conclusion
We anticipate the Federal Reserve will continue to raise
short-term interest rates in 2017 and 2018 in response to
stronger economic and job growth. While rising rates have
the potential to cause volatility, investors should avoid the
temptation to make significant changes to their long-term
investment strategy.
A strategic allocation to fixed income, equities and real
estate continues to offer compelling benefits for diversified,
long-term investors. If you have questions about the role of
different investments in a diversified portfolio, contact your
TIAA advisor for more information.
Read more about TIAA’s perspective on rising interest rates.
This material is prepared by and represents the views of Nuveen, LLC. These views may change in response to changing economic and market
conditions. Past performance is not indicative of future results.
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
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Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not bank deposits, are not
insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.
Please note that equity and fixed-income investing involves risk.
Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income.
You should consider the investment objectives, risks, charges and expenses carefully before investing. Please call 877-518-9161
or go to TIAA.org for product and fund prospectuses that contain this and other information. Please read the prospectuses
carefully before investing.
Nuveen, LLC, formerly known as TIAA Global Asset Management, delivers the expertise of TIAA Investments and its independent investment affiliates.
Nuveen Securities, LLC, Members FINRA and SIPC, distributes securities products.
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