Download Gaining Trust

Issue 3, Volume 11
Summer 2016
Gaining Trust
A newsletter for personal trust, private asset management
and individual advisory clients
In this issue
1.U.S. outlook remains
stable amid global
uncertainty
7.Spotlight on
municipal bonds
Published by
TIAA-CREF Trust Company, FSB
211 North Broadway, Suite 1000
St. Louis, MO 63102
T 888-842-9001
M314-244-5000
F 314-244-5012
U.S. outlook remains stable amid
global uncertainty
WW
The U.S. economy continues to grow at a moderate pace. In the near term, the odds of a
domestic recession are low
WW
Slow global growth and interest rates near zero percent leave markets susceptible to
periodic shocks such as Brexit
WW
Ultimately, Brexit is more of a political event than an economic one and the impact on
global growth should be limited
WW
Federal Reserve policymakers continue to assess the Brexit vote’s implications and may
delay near-term interest rate hikes
WW
Risks from slower growth in China and continued mediocre economic performance in
Europe and Japan present challenges for global central banks
WW
Episodes of heightened volatility are possible
A measure of tentative calm has returned to global financial markets as fears dissipate
following the initial aftershocks triggered by Great Britain’s momentous June 23rd vote
for Brexit, the country’s separation from the European Union (E.U.) after 43 years of
membership. Markets have mostly recouped some of their nearly $3 trillion in Brexit-induced
losses, and any related damage to the U.S. is projected to be limited. Relative to other
intense bouts of volatility in financial market history, the global economy is more stable and
less encumbered by debilitating excesses. The fluidity of events in Europe and elsewhere
could cause fresh developments to roil world markets intermittently; but we believe domestic
conditions are sturdy enough to withstand a turbulent external environment in the months
ahead. The structural forces and central bank interventions that are driving the decline of
fixed-income yields to all-time lows will take a longer time to be addressed, but in the
meantime, the economy could benefit from the less restrictive financial conditions induced
by the lower-for-longer yield environment. Additionally, the Federal Open Market Committee
(FOMC) may delay its near-term, gradual resumption of interest rate hikes temporarily until
it achieves greater clarity about the effects of overseas conditions.
Brexit: What’s next?
WW
Shallow recession expected in U.K.
WW
E.U. growth expected to weaken modestly
WW
Other populist European movements unlikely to succeed
in leaving E.U.
become a sore spot for the American economy. Recent heavy
buying of U.S. financial assets has lifted the dollar’s value
sharply against some of its major global counterparts. If the
currency’s appreciation is persistent and extensive, it could
restrain growth, dampen inflation further and tie the Fed’s
hands as it seeks to normalize interest rates.
The fireworks that recently marked America’s birthday seemed
almost an apt metaphor for the financial market fireworks
set off days earlier by events in the nation from which
America declared independence 240 years ago. However,
the financial market version was no celebration. The second
half of 2016 finds investors anxious, uncertainty heightened
and the outlook seemingly more unclear than ever, largely
because of events half a world away. With the installation of
its new Prime Minister, Theresa May, Great Britain begins the
arduous task of extricating itself from its financial, legal,
diplomatic and other entanglements with the E.U. Prime
Minister May has expressed a preference for a slow approach,
and it is unclear how long those negotiations will last; but
the process and the outcome have implications for the
worldwide investing landscape. In acknowledgement of the
challenges ahead, Standard & Poor’s rating service stripped
the U.K. of its prized “AAA” credit rating, downgrading it two
notches to “AA” amid concerns ranging from a constitutional
crisis driven by Scotland and Northern Ireland (both of which
voted to remain in the E.U.) to prospective deterioration in
the U.K.’s fiscal and economic outlook. Forecasters predict
a mild recession in the U.K. and modest weakening of the
E.U. in the year ahead. To that end, we expect U.K. and E.U.
monetary policymakers to provide ample liquidity and ease
conditions to contain any potential economic setback.
Will other countries vote to exit the
European union?
These developments alone wouldn’t necessarily derail
worldwide growth, but there is a risk of damaging contagion if
market upheaval erupts and persists in the region or beyond.
One potential source of pressure in the Eurozone is Italy,
where the outcome of a constitutional reform referendum in
October could amplify internal political conflicts and stir up
more turbulence. There’s been a considerable reduction in
investor anxiety over China ever since it was at the epicenter
of the volatility outbreak earlier this year; but concerns about
its economic and financial underpinnings are prevalent.
Beijing has engineered a slowdown in the deterioration
of the economy, and the government has the financial
firepower to do more if necessary. In addition to reserves of
$3.2 trillion, authorities could mandate increased lending
by state-owned enterprises, tighten controls to prevent
increased capital flight (although this could eventually prove
counterproductive), ease monetary policy and implement
more fiscal stimulus measures. Nevertheless, there are still
valid questions about China’s debt trajectory and its general
outlook. The U.S. dollar’s recent strengthening trend could
WW
U.S. growth could take a slight hit but the probability of
recession is low
WW
Some Brexit-induced market side-effects, like lower-cost
mortgages and loans, are actually helpful to the
U.S. economy
2 Gaining Trust | Summer 2016
WW
Unlikely in the near term
WW
Leaving a currency union is much more difficult
In our view, the region is unlikely to see a wave of exit votes
imminently. Populist groups in several European countries
applauded the results of the Brexit vote and announced
plans for referenda of their own; but leaders of most Euroskeptic movements lack the political authority to launch
them, and governing parties won’t easily accede to their
demands. The danger exists, however, that populists could
opportunistically seize on the prevailing heated sentiment
to broaden their support, enhance their clout and pose
serious political challenges in future official elections.
Although Brexit will not be easy, at least Great Britain
has its own currency, unlike nations that use the Euro.
Leaving the European Union would be much more onerous
and complicated for countries that are part of the shared
currency arrangement, which is the case for some of the
countries where Euroskeptic parties have expressed the
desire to hold their own referenda.
Could Brexit cause a U.S. recession?
The fallout from Europe’s challenging summer is expected
to be limited for the U.S. Most of the stresses stoked by
the Brexit-related market turbulence are already easing.
Furthermore, if and when Brexit takes effect, the impact on
trade should be limited as Great Britain accounts for a mere
3.6% of American exports (the Euro area represents less
than 15%.)1 Moreover, the American expansion is progressing
modestly. For at least 17 straight weeks through mid-July,
most reports on the U.S. economy’s health surpassed
expectations. An index that tracks the number of positive
economic surprises now sits at a 19-month high. This
trajectory renders a near-term recession a very low probability
event. Manufacturing, which had been under intense pressure
in recent months, shows distinct signs of stabilizing. There is
Header, if needed
also reason for optimism overseas: 80% of the components
in a broad index of global manufacturing are now at levels
consistent with expansion. A year ago, nearly half were
contracting.2 Moreover, though the post-Brexit market turmoil
led to tighter financial conditions, they are being offset by
other effects­—like lower-cost mortgages and loans.
When second-quarter figures are tallied, consumption growth
is expected to be 4%, a rate that corresponds with GDP
growth of around 2.8%.3 Collectively, consumers have much
more pent-up spending power, having fortified their balance
sheets since the Great Recession. Currently, household
net worth is near an all-time high, and the cost of servicing
household debt is near a 14-year low.
Will the Fed resume raising interest rates this year?
WW
Possibly, if the U.S. growth outlook improves and the
domestic effects of overseas developments are negligible
WW
Any Fed moves will likely be slow and deliberate
Immediately after the Brexit vote, market expectations for
the likelihood of another hike this year plummeted as traders
anticipated that decelerating growth would force the Fed to
delay tightening. After the release of the June jobs report,
the odds of a 2016 hike rebounded to at least 25%.4 We
believe Fed officials will delay a hike to allow more time to
better analyze the implications of the post-Brexit fallout for
the domestic picture. The Fed prefers to raise rates gradually
to avoid inducing an economic contraction. Such caution
is warranted because it would be difficult to ameliorate a
major economic setback. Official interest rates are still very
close to zero, so monetary policymakers would have very
little room to provide further accommodation if that becomes
necessary. (Conversely, if the Fed delays hiking too long
and inflation heats up, they have much more leeway to raise
rates and course-correct.) The central bank now anticipates
raising interest rates just once this year, down from its
December projection of four hikes. Some Fed policymakers
acknowledge that, in deciding the appropriate timing of the
next interest rate hike, they need to assess follow-on issues
surrounding the Brexit vote as well as domestic economic
progress. Analysts are split on whether the FOMC will raise
rates in September or December. Either way, June’s hiring
rebound may be extinguishing some of the Fed’s anxieties,
especially if it continues to be corroborated by other upbeat
economic news.
The 287,000 jobs created in June reflected a broad-based
bounce-back from May when only 11,000 people were hired.
The uptick in labor force participation and the slight uptick in
the unemployment rate to 4.9% suggest that more unemployed
workers are re-engaging. Not surprisingly, the pace of job
creation has slowed. As the economy nears full employment
(which many economists believe the U.S. is approaching),
the rapidity of hiring typically declines as increasing numbers
of available workers become absorbed. One of the most
reliable employment indicators is initial jobless claims—
the weekly total of new applications for unemployment
benefits. Currently, it stands near its lowest level in 43
years. Put another way, the number of new applicants for
unemployment aid weekly has fallen consistently in recent
years to its lowest level since 1973, confirming that job
cuts have decreased—an unlikely prospect if recession
were imminent. The pace of hiring may drop further as the
expansion matures, but the fundamental strength should
be encouraging to FOMC policymakers since maximum
sustainable employment is one half of their dual mandate.
The other half of that mandate is price stability, and the
verdict on that score is still out. Inflation remains slightly
below the Fed’s target level as it has been for more than
43 months now. Subdued inflation is a major challenge
facing many major developed countries, and this serves
as a potent restraint on domestic pricing power.
Fed officials have long noted that inflation has been
suppressed by “transitory” influences like falling commodity
prices. After sinking to multi-year lows in February, oil prices
have nearly doubled—a development that is undoubtedly
being carefully watched by the Fed for its impact on inflation.
Fixed income
Year to date, U.S. fixed income securities have put in their
strongest performance in at least 20 years, thanks to the
Brexit vote and the market’s perception that the Federal
Reserve is unlikely to raise interest rates imminently. Investors
sold riskier assets and moved into safe-haven assets such
as U.S Treasuries on the Brexit news. During the final week
of June, 10-year Treasury yields closed at 1.44%. Yields on
benchmark securities issued by Japan, Germany and the
U.K. hit all-time lows at the end of the first half.
Demand for government debt was stoked by lackluster global
growth and the extraordinary buying of fixed-income assets
from foreign central banks. Quantitative easing, or the
aggressive bond-buying stimulus programs being pursued
by central banks in Europe and Japan have inflated their
balance sheets. This is causing a significant amount of
debt in those countries to trade at yields below zero.
With almost all of the negative-yield debt concentrated in
Europe and Japan, investors are flocking to Treasuries,
which offer some of the highest yields among industrialized
nations. This has caused the yield on the average 10-year
security to drop to as low as 0.32% as of early July 2016.
Gaining Trust | Summer 2016
3
While fixed-income securities have posted impressive returns
to begin the year, investors should take a cautious approach
when projecting those returns out for the remainder of 2016.
Central bank balance sheet expansion and bond yields
Bond yields have fallen since 2000.
that it will take a more cautious posture to future rate hikes
given the uncertainty surrounding the global economy in the
post-Brexit vote environment (see above.) While the near-term
focus is on the U.K. and the political fallout from the vote,
longer-term concerns may result in additional volatility within
financial markets which could influence fixed-income activity.
As the third quarter gets underway, money continues to flow
into the municipal bond market. This high-quality asset class
remains a pillar of strength and stability amid uncertainty
surrounding Puerto Rico’s debt crisis and the E.U.’s Brexit.
The longstanding decline in Puerto Rico’s credit quality has
yet to produce any negative spillover effects on the broader
high-grade municipal market. Strong cash inflows into the
municipal market have come through the traditional retail and
institutional channels as well as from non-traditional foreign
investors, seeking a safe haven to escape negative and
ultra-low global interest rates. Sentiment remains resilient
in the municipal bond market reflecting stronger demand
for tax-free income from an aging demographic, recent tax
increases, attractive yields and low correlation to other asset
classes. More information on munis can be found in the
article Spotlight on municipal bonds, on page 7.
Equities
WW
U.S. Equity Markets appreciated moderately in the first
half of the year
WW
Expect moderate, but positive returns over the medium
term (3-7 years)
WW
Risk aversion within the equity markets is very high
WW
Equities that are most correlated to the bond market are
very expensive, reflecting investor flight from cyclical stocks
and into traditionally stable, income-producing securities
WW
Over long time frames, a great deal of global political and
economic turmoil is needed to dent capital appreciation
in the equity markets
Source: Evercore ISI
Uncertainty and flight-to-quality demand have contributed to
near-record low interest rates and extraordinarily high returns
for most fixed income asset classes to begin the year.
Given the current low interest rate environment,
it will be difficult to duplicate the impressive
returns already experienced unless additional
fears and uncertainty continue to propel the
bond market during the second half of 2016.
In our view, U.S. rates are likely to remain in a low range.
Questions remain about the parameters of the new lower
range and the length of time that interest rates could remain
in the new lower range. While the Federal Reserve appeared
poised to raise interest rates this summer, it now appears
4 Gaining Trust | Summer 2016
After a rough start to the year, equities have recovered from
their February lows, particularly in the U.S. and the emerging
markets. Equities in Europe and Japan continue to struggle,
though there has been some recovery. As of the end of the
second quarter, the S&P 500 had risen 3.8%, with U.S.
mid-cap stocks rising 5.5% and small-cap stocks up 2.2%.
This is a reasonable pace within the context of a sub-2%
core inflation rate. International stocks remain mixed, with
Developed Market equities returning -4.0% in dollar terms
and Emerging Market equities returning 6.5%.
The medium term (3-7 years) should look a little like the
recent past. We expect moderate but positive returns, with
the occasional flare-up and regionalized crisis resulting in
periods of market volatility and stress reminiscent of 2011-
Header, if needed
2012. Sustained outsized positive returns are unlikely since
markets have largely recovered from 2009’s extreme lows,
and the recovery phase of the economic and stock market
cycle is in the rear view mirror. At some point in this time
frame, a U.S. recession could impact markets, but the odds
of one developing in the near term appear low.
A host of issues could impact market valuation and
earnings growth in the near term. On one hand, earnings
growth is likely to recover as year-over-year earnings
comparisons begin to lap the severe weakness experienced
in the commodity sectors over the past two years. Still,
atmospherics around Brexit and growing concerns over
European banks, particularly in Italy, could spark a market
retreat if policymakers allow concerns to fester without
taking appropriate action. The U.S. Presidential election
could also be a source of disquieting market movement
near term, especially if the market senses an increasing
level of policy uncertainty as November approaches. A
(possibly) rising dollar could spark volatility as capital moves
in reaction to either a stronger U.S. economy or weakening
foreign economies. China could add to the mix if their
economy appears to slow too much too quickly, as could
broader concerns regarding global economic growth.
Despite recent bouts of volatility, our base case
remains a continuation of slow and steady global
growth which should lead to low to mid-single
digit market returns for the second half of 2016.
unprecedented. The valuations of the stable, defensive
sectors are also stretched. For example, the stocks that are
most correlated to moves in the U.S. 10-year Treasury note
are selling at a premium to the market that has only been
seen about 10% of the time since 1952. Normally, these
stocks perform best as the economy approaches recession;
yet economic signals in the U.S. do not point to elevated risk
of near-term recessionary conditions. Those stocks least
correlated to the U.S. 10-Year Treasury are selling at a very
large discount to the market, having only been cheaper about
2% of the time.5 The division between “safe, stable and
dividend-paying” and cyclical, economically-sensitive (such
as Financials, Industrials and Discretionary) stocks can be
made along other factors such as cash flow generation.
Stable stocks have been priced up to the point where the
cash flow they generate relative to their more cyclical peers
is approaching extended levels. One other unsettling trend is
that the defensive stocks’ daily price movements are more
highly correlated with each other than normal; essentially,
stocks within the Utilities, REITs or Staples sectors have
a greater tendency to move as a group than normal. In
essence, the group to which a company belongs has been
taking on a greater role in determining its performance.
REITS, Large-Cap Consumer Staples, Financials and
Utilities Correlation of Relative Returns with the
Positive Total Returns of Treasury Bonds*
1989 through June 2016
100%
The U.S. economy remains in good shape and policymakers
in Europe and Asia have large incentives to dampen volatility
should their economies slow further or other concerns emerge.
80
Since the recession in 2008-2009, retail and institutional
investors have been exhibiting risk-averse behavior and
have crowded into equities perceived as providing stability
and income. In the past year, the level of risk aversion has
increased. The conundrum at this juncture is that much of
what is attractive for long-term investment is cyclical and
vulnerable to slowing global growth. On the other hand, what
is traditionally safe and stable is quite expensive and trading
at valuations that will be difficult to sustain over time.
20
A related concern is that in the defensive sectors,
movements in the bond market define stock and sector
performance to a degree rarely ever seen before. The chart
below reflects the trading relationships that have emerged.
When bond yields decline, REITs, Staples and Utilities
outperform on a consistent basis. In contrast, more cyclical
financial stocks underperform with a consistency that is
60
40
0
-20
-40
-60
-80
-100
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Recessions
REITS
Consumer Staples
Financials
Utilities
Source: National Bureau of Economic Research, Empirical Research
Partners Analysis.
*Constructed using trailing two-year capitalization-weighted
returns, smoothed on a trailing three-month basis. Past
performance is no guarantee of future results.
Gaining Trust | Summer 2016
5
The desire for perceived safety has been reflected in the
price action of stocks. Utilities have returned 31.5% over
the past year, Telecom 25.1%, Staples 18.7% and REITs
have returned 24.2%. Importantly, these returns are not
being driven by highly improved growth prospects or strong
revenue growth. Instead, they represent capital flows seeking
safety in assets that were already fairly to richly valued one
year ago. Healthcare is the only defensive sector that is
negative over the past year, at -2.0%. The cyclical sectors, in
contrast, have turned in performances ranging from -4.2% to
7.0%, with Financials, Energy and Materials all negative over
the past twelve months. It is not typical for defensives to
outperform to this degree outside of recessionary conditions.
The “safety premium” embedded in stable, defensive,
dividend-paying equities has reached a point where their
traditionally defensive characteristics may be at risk. In
addition, to the degree that investors are overweighting these
sectors in an allocated portfolio, they may be unwittingly
adding additional interest rate exposure to their portfolios at
a cyclical low in interest rates. To the degree that investors
are overweight in defensive sectors that have generated very
strong returns in the past year, it could be appropriate to
consider rebalancing into other sectors. It is also a good time
to consider the overall balance between bonds, equities that
move with the bond market and more cyclical equities in
portfolios as we move toward the end of the year.
The high level of risk aversion in the equity markets stands
in contrast to what equities have achieved for investors
in the past. Despite the financial and economic turmoil of
the past 10-20 years, equity markets have continued to
generate real, inflation-adjusted returns largely in line with
historical averages. Over the past twenty years, the S&P
500 has generated a return of 5.6% after adjusting for
inflation. The inflation-adjusted return for the past ten years
has been 5.3%. It is worth remembering that these returns
were generated over a timeframe that included substantial
volatility generated by a multitude of economic, financial,
political and geopolitical concerns. See chart below.
Despite all of those world events and concerns, $1.00
invested in the S&P 500 twenty years ago was worth $4.54
on June 30th, 2016. In fact, even someone who purchased
U.S. equities at the peak of the market in October 2007
would have realized positive returns even after accounting
for inflation through June 30th of this year.
The broad point investors should consider is that nearly
every 10- or 20-year period is going to have its share of
financial, economic, political and geopolitical crises. Some
20-year time frames have produced substandard U.S. equity
returns. Historically, periods of disappointing market returns
over a 20-year time frame have largely been limited to
windows that contained the Great Depression and windows
Events impacting markets in the past 20 years
S&P 500 from June 1996 to June 2016
1996
1997
1998
1999
2000
2001
2002
2003
Source: Bloomberg Financial LLP
Past performance is no guarantee of future results.
6 Gaining Trust | Summer 2016
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Header, if needed
that contained the inflationary 1970s. The economic,
domestic, political and geopolitical stresses of those two
eras should serve as a benchmark for the degree of stress
needed to have a large restraining influence on U.S. equity
returns over time. It is unlikely that the U.S. and the world
are re-entering a period of stress that can be likened to the
late-1920s to the early-1940s or the early-1960s to the
early-1980s.
Markets are rarely linear and most often advance amidst
bouts of volatility and declines. Since 1990, there have
been 21 calendar years in which full-year returns were
positive; yet, in 19 of those positive return years, the S&P
500 spent some portion of the year in negative territory.6
While equity returns have been good over the past 2030 years, bond returns have been even better relative to
the historical expectations for the asset class. Although
bonds continue to perform a critical income-generating and
volatility-reducing function in most portfolios, expectations
for returns on bonds and equity instruments that have
traded as “bond proxies” need to be tempered. Seeking
safety by overweighting bonds and equity bond proxies
relative to a target allocation could inadvertently introduce
unwanted risks into a portfolio. Overall, equities appear to
be in a reasonably good position to provide their traditional
return and inflation-hedging roles. Low inflation and low
interest rates argue for a period of moderate to slightly
below average returns for allocated portfolios going forward.
A period of extreme stress in the global economy is not
anticipated. However, incipient political trends and a period
of relatively low global growth do suggest a higher degree of
watchfulness and conservatism for those who rely on their
savings to fund their retirement, particularly those with high
spending levels and a long time horizon. Spending levels for
these portfolios should be monitored closely, and spending
trimmed where appropriate. We reiterate that we anticipate
episodic volatility, but making investment decisions based
on emotional reactions to headlines can do more harm than
good to portfolios. Focusing on one’s personal objectives
and tolerance for risk can help protect against myopia in
investment decision-making. Remain broadly diversified and
rebalance your portfolio periodically. Let us know how our
team of professional investing veterans can assist you.
1.
UBS
2.
Cornerstone Macro
3.
Morningstar
4.
As indicated by market-based bets on the path of Fed Funds futures
5.
Empirical Research
6.
Goldman Sachs
Spotlight on municipal bonds
Municipal bonds have wide appeal but are not always well understood by investors. These securities represent
debt obligations issued by state and local governments to fund day-to-day operations as well as both small- and
large-scale public projects including transportation and utility infrastructure. Professionally-managed municipal
bond portfolios seek a balance between risk and return while providing income that is exempt from Federal,
and in many cases, state and local income taxes. For investors subject to top marginal tax rates, high-quality
municipals can offer an attractive level of income while exhibiting lower volatility than other bond categories.
A high-quality municipal bond portfolio can help fulfill fixedincome investment goals:
WW
Capital preservation with potential for long-term growth
in principal
WW
Consistent tax-exempt income
WW
Low price volatility
WW
Strong liquidity profile
Evolution of the Municipal Investment landscape
Municipal bonds have long been known for their inherently
high credit quality and minimal default rates, which have
trended well below those of corporate issuers. While this
distinction continues to hold true, the municipal market
underwent fundamental changes in the years following
the 2008 financial crisis. This includes the demise of the
majority of municipal bond insurers, which, at their peak,
provided top tier (i.e., AAA) credit ratings to over 50% of
the market. With municipal bond insurance lacking for
most securities, investors now must diligently evaluate
the merits of each bond issuer based on its individual
creditworthiness. Additionally, the market has weathered a
handful of high-profile bankruptcies and defaults including
those in San Bernardino (CA), Stockton (CA), Detroit (MI) and
the Commonwealth of Puerto Rico. Although these events are
rare when measured against the vast size of the municipal
market, they send a clear message to investors: the value and
necessity of credit analysis and professional selection and
oversight of municipal securities cannot be overstated.
Gaining Trust | Summer 2016
7
A Fragmented Market
With over 80,000 issuing entities throughout the United
States, the municipal bond landscape is highly fragmented
and risks are often localized. Generalities are difficult to
make, as no two states share the same economic profile or
regulatory environment. Also, though the municipal market
remains principally healthy, state and local governments
continue to encounter economic, financial and political
pressures. New headlines that unsettle the market are
bound to unfold from time to time. With multiple sectors and
a variety of security structures, each bond must be evaluated
within the context of its own unique characteristics. Effective
fundamental analysis requires in-depth knowledge of the
many facets of municipal finance that can only be gained
through years of credit research experience. However, such
comprehensive credit analysis and diligent oversight remain
paramount to successful municipal investing. Therefore, it
can be quite daunting for the average investor to go it alone,
with limited access to the training and resources leveraged
by professional managers.
Quality Approach to Municipal Bond Investing
TIAA’s municipal investment approach consists of an
actively-managed mix of high-quality individual tax-exempt
bonds and mutual funds that are reviewed and monitored
by a team of seasoned investment professionals on an
ongoing basis. To fulfill our high credit quality mandate, we
primarily target broad-based, stable sectors of the taxexempt market that tend to exhibit a high degree of reliability
in cash flows and that can most effectively absorb market
and economic volatility. Sectors emphasized include state
and local governments, essential service providers (e.g.,
utilities), critical infrastructure, educational institutions
and others. Our approach to municipal security selection
starts with in-depth, bottom-up issuer analysis coupled
with a macroeconomic overlay designed to assess trends
with market-moving potential. Key metrics are regularly
reviewed and include financial performance, tax collections,
debt burden, general economic conditions, political will
and a variety of potential material events that could spur
a credit rating downgrade or jeopardize the issuer’s ability
to service debt. As a supplement to our formal credit
analysis process, we maintain strategic relationships with
key market participants including government officials and
legal specialists. These relationships add a dimension of
expertise not traditionally available to individual investors.
This focus on due diligence helps greatly in avoiding negative
credit events that may hinder portfolio performance, and
allows us to capitalize on opportunities that may not yet be
fully valued by the broader market.
Conclusion
Municipal bond investing, while ever-changing, remains a
vital piece of the puzzle for many individual investors in need
of high-quality, tax-exempt income. The cornerstone of TIAA’s
municipal strategy is an emphasis on quality and stability
supported by thorough credit analysis and ongoing oversight.
Our extensive expertise along with our broad access to deep
and varied resources are continually leveraged to pursue
outcomes that meet the needs of our clients.
Investment products are not insured by the FDIC; are not deposits or other obligations of TIAA-CREF Trust Company, FSB;
are not guaranteed by TIAA-CREF Trust Company, FSB; and are subject to investment risks, including possible loss of
principal invested.
The information provided herein is for informational purposes only. It does not constitute an offer or recommendation to buy or sell any security.
The views expressed in this newsletter may change in response to changing economic and market conditions. Past performance is not indicative
of future returns.
TIAA-CREF Individual & Institutional Services, LLC provides a range of investment advisory services, but does not provide tax or legal advice.
Consult a qualified tax advisor or attorney for specific tax or legal advice.
TIAA-CREF Trust Company, FSB, provides investment management and trust services. TIAA-CREF Individual & Institutional Services, LLC, member
FINRA & SIPC, distributes securities products. Advisory services provided by Advice & Planning Services, a division of TIAA-CREF Individual &
Institutional Services, LLC, a registered investment adviser.
©2016 TIAA-CREF Trust Company, FSB, 211 North Broadway, St. Louis, MO 63102
C32719
316820_681610
A37632 (07/16)