Download Finding Opportunities — Tackling today`s uncertain

Finding Opportunities — Tackling today’s
uncertain financial environment
Backed by more than 100 years of
experience, Columbia Management
is one of the nation’s largest asset
managers. At the heart of our success
— and, most importantly, that of our
investors — are highly talented industry
professionals, brought together by a
unique way of working.
It starts with carefully selected,
specialized investment teams. While
each team brings a diverse and
innovative range of skills, all are
grounded by a common set of core
beliefs. All possess a solid conviction
in the power of proprietary, bottomup research. All look not only at
generating returns but also at the likely
consistency of those returns and the
risks required to achieve them. And
while our culture encourages teams
to operate independently and question
established thinking, a rigorous
investment oversight process ensures
that each team stays true to its clearly
articulated investment process. At
Columbia Management, reaching our
performance goals matters, but the way
we reach them matters just as much.
Columbia Management outlook: Low, slow growth
Our view is that low, slow growth will remain the defining
trait of the global economic and financial market outlook
for the foreseeable future. The fiscal and debt crises in
the U.S., Japan and the eurozone remain unresolved, with
outcomes uncertain. While investors need to be defensive
in this challenging environment, that doesn’t mean piling
into cash or T-Bills. At Columbia Management, we offer
a research-driven approach, a focus on maximizing riskadjusted returns and a broad array of investment solutions.
We can help you uncover opportunities to help meet your
goals and take charge of your financial future:
> Redefining
income
> Uncovering growth
> Navigating volatile markets
> Managing interest rate risk
> Maximizing after-tax returns
The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by
other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by
CMIA and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed.
Investment theme
Redefining income
Market conditions this
theme addresses:
> Uncertainty
> Volatility
> Historically low
fixed-income yields
> Corporate balance sheets
are strong: cash rich, low
leverage
In a low-growth economy, income-producing assets can not only be a steady source of
cash, they can also be a significant component of a portfolio’s total return while helping
reduce price and return volatility.
Investors remain conservative. Investors, still leery of stock market volatility, continue
to be risk-averse.
Uncertain, low-growth economy. While there are some encouraging signs, the overall
economy continues to face significant structural issues. The result has been a
prolonged period of low-and-slow growth, volatile equity markets and historically low
fixed-income yields.
Strong corporate balance sheets. Companies have responded to the financial crisis
by cutting costs and deleveraging. Broadly, corporate balance sheets are healthy and
conservatively positioned, with historically high cash levels.
Weak government balance sheets. Unlike companies, governments have added to
already high debt levels, paving the way for challenging times and fiscal belt-tightening.
The next stage of the deleveraging cycle will be in the government sector, making
Treasury bond investing less appealing.
Opportunities for now
Income opportunities lie in corporate balance sheets.1 Investors can access the strong
balance sheets of cash-rich corporations by investing across the full spectrum of the
capital structure: from floating rate loans, corporate and convertible bonds to preferred
and dividend-paying stocks.
Dividends often indicate quality, and quality matters. Consistently paying dividends has
long been a reliable indicator of financial strength. Paying a dividend — or potentially
even increasing the amount of dividends paid to shareholders — sends a message
that even in tough times the dividend payer is able to maintain a healthy business
that returns value to shareholders.2 And healthy businesses are better able to weather
market downturns.3
Today’s dividends are likely to be maintained and even increased. Because companies
remain conservatively positioned, dividend payouts are historically low. But present cash
levels are historically high, which increases the likelihood that companies will be able to
afford to maintain their dividend payouts if the economy worsens or raise their dividends
if the economy improves.
1
Identifying entities as having “better
balance sheets” or possessing the
characteristics mentioned does not
assure a profit or protect against loss.
2
Dividend payments are not guaranteed.
The amount of a dividend payment, if
any, can vary over time and issuers may
reduce dividends paid on securities in
the event of a recession or adverse
event affecting a specific industry or
issuer.
3
Equity investments are affected by
stock market fluctuations that occur in
response to economic and business
developments.
4
Bond investing poses special risks,
including the credit quality of individual
issuers, possible prepayments, market
or economic developments, and yield
and share price fluctuations due to
changes in interest rates. When interest
rates go up, bond prices typically drop
and vice versa.
Dividends can play a central role in today’s uncertain times. To meet return goals
in previous markets, many investors relied on price appreciation and/or higher fixedincome yields. However, today’s stock market volatility and historically low interest rates
have discouraged these approaches. Here, dividend investments — with yields that
allow investors to realize some return on their investment now rather than later — can
be a prudent solution, providing current income that contributes to total return and
offers welcome reassurance in uncertain times.
The benefits of dividend investing isn’t just today’s story. Dividends have historically
comprised a significant part of total return, and now is no different. As corporate
management teams seek to return value to shareholders from today’s cash-rich
businesses, we expect dividends will become an even larger part of total return.
Today’s corporate bonds offer reliable income with low default risk. Corporate bonds
are another way to take advantage of the income opportunities from companies with
healthy balance sheets.4 In contrast to government bonds, corporate bonds (both high
and low quality) currently provide a yield above inflation. Furthermore, corporate bond
default risk remains below average across the quality spectrum.
Bond yield spreads remain fairly valued. While bond yields are historically low, yield
spreads are fairly valued. Investors are being adequately compensated for moving down
the quality spectrum given the solid fundamentals underlying corporate issuers. Access
to capital is strong, pending maturities are low and defaults are expected to continue
to be below long-term averages. We believe the greatest value lies in lower-quality
investment-grade bonds, higher quality high-yield bonds (BB- to B-rated credit) and
bank loans.
2
Investment theme
Redefining income
(continued)
5
International investing involves increased
risk and volatility due to potential
political and economic instability,
currency fluctuations, and differences
in financial reporting and accounting
standards and oversight. Risks are
particularly significant in emerging
markets. Investing in emerging markets
may involve more risk than investing
in developed countries. In addition,
concentration of investments in a single
region may result in greater volatility.
Uncovering growth
Market conditions this
theme addresses:
> Low overall growth
> Growth opportunities scarce
> Superior emerging market
economies
> Within developed markets,
exceptions buck low-growth
trend
Equity
Class A
Class C
Class Z
Columbia Convertible Securities Fund
Columbia Dividend Income Fund2
Columbia Dividend Opportunity Fund2
Columbia Flexible Capital Income Fund
Columbia Global Dividend Opportunity Fund
(formerly Strategic Investor Fund)2, 5
PACIX
LBSAX
INUTX
CFIAX
PHIKX
LBSCX
ACUIX
CFIGX
NCIAX
GSFTX
CDOZX
CFIZX
CSVAX
CSRCX
CSVFX
Fixed income4
Class A
Class C
Class Z
Columbia Corporate Income Fund
Columbia Floating Rate Fund
Columbia Income Builder Fund
Columbia Intermediate Bond Fund
Columbia Limited Duration Credit Fund
Columbia Strategic Income Fund
LIIAX
RFRAX
RBBAX
LIBAX
ALDAX
COSIX
CIOCX
RFRCX
RBBCX
LIBCX
RDCLX
CLSCX
SRINX
CFRZX
CBUZX
SRBFX
CLDZX
LSIZX
In a world of tepid economic growth, companies and countries that can fund their own
growth rather than relying on capital markets have a decided advantage over those
that cannot.
Equity growth opportunities are scarce. The overall economy is experiencing a
prolonged period of low-and-slow growth combined with heightened uncertainty.
Therefore, most companies have stayed on the defensive, keeping costs down and
staying clear of the risks associated with expansion. Consequently, opportunities to
fuel the growth component of investment portfolios are in short supply.
Emerging market economies are stronger today and have excellent prospects for
tomorrow. Today’s emerging market economies boast better overall balance sheets than
their developed peers. These countries largely avoided the financial crisis that continues
to plague developed economies. And while the developed world struggles with costly
social programs, mounting debt and aging populations, emerging market nations run
leaner, have vast rainy day funds and much more favorable demographics.
Select developed market sectors and companies are growing. While the overall
economy proceeds at a sluggish pace, there are exceptions. Certain sectors and
individual companies are defying the dominant macroeconomic trend and creating
shareholder value by offering products and services that are in high demand regardless
of the environment.
Opportunities for now
Embrace the new global economy. With their impressive balance sheets, sound
fundamentals and bright prospects, emerging market countries should no longer be
viewed as a “speculative play.”5 Growth and quality can be found here in both equities
and fixed income, and it is time for investors to consider the implications of this
paradigm shift for their asset allocation strategy.
In today’s economy, some industries are prospering. While few sectors are spared from
the global economic slowdown, the near-to-long-term outlook remains unshakably positive
for certain industries (e.g., within health care and technology).
There is always room to grow for great companies. While most companies rely on
secular (i.e., broad and lasting) economic expansion for growth, a select few companies
are able to capture or even create market share through a superior business model and/
or innovation despite macroeconomic headwinds.
3
Investment theme
Uncovering growth
(continued)
6
Funds whose investments are
concentrated in a specific industry,
sector or geographic area may be
subject to a higher degree of market
risk than funds whose investments
are diversified.
Thorough research identifies quality opportunities. Today’s especially challenging
environment demands especially careful scrutiny when sorting through markets to
find issuers poised for organic growth. Investors should rely on deep, high-quality
fundamental research to help uncover these opportunities.
Equity
Class A
Class C
Class Z
Columbia Acorn Fund
Columbia Acorn International5
Columbia Select Large Cap Growth Fund6
LACAX
LAIAX
ELGAX
LIACX
LAICX
ELGCX
ACRNX
ACINX
UMLGX
Fixed income
Class A
Class C
Class Z
REBAX
REBCX
CMBZX
Columbia Emerging Markets Bond Fund
4, 5
Navigating volatile markets
In today’s global environment, investments that can tap into the opportunities that do
exist are especially valuable.
Market conditions this
theme addresses:
Uncertain, low-growth economy. While there are encouraging signs of improvement, both
the global and domestic economy continue to be challenged by major unresolved issues.
This has resulted in a prolonged period of low-and-slow growth.
> Uncertainty
> Low overall growth
> Volatility
> Range-bound trading
A recovery marked by volatile, range-bound markets. The recovery that came on the
heels of The Great Recession has been anything but assured. While confidence has
improved, businesses, consumers and investors remain wary, as numerous macro issues
remain. This uncertainty has been manifested in markets as volatility and range-bound
trading — prolonged periods of movement between “floors” and “ceilings” with no
dominant trend.
Opportunities for now
Avoid trying to time the market. Investors have been notoriously bad at buying low and
selling high in normal markets — range-bound markets are even more challenging.
Look to strategies designed to perform in today’s market conditions. There are some
investments that employ strategies that can be particularly effective during lengthy
periods of volatility and range-bound markets. These strategies fall into two categories:
disciplined and diversified.
Disciplined strategies can succeed when investor intuition fails.7 Taking emotion and
guesswork out of the equation, disciplined strategies maintain strict rules when it comes
to buying and selling, which can succeed when human instinct fails.
Diversified strategies are free to go where the opportunities are.7 Diversified strategies
— including those that employ tactical asset allocation — have the latitude to choose
from a wide spectrum of investment options. These strategies can react dynamically to
changing markets by taking advantage of relative value opportunities where they find
them. This can mean not being limited by conventional benchmark-driven approaches to
investing.
7
Equity3
Class A
Class C
Class Z
Columbia Contrarian Core Fund
Columbia Thermostat Fund
LCCAX
CTFAX
LCCCX
CTFDX
SMGIX
COTZX
Fixed income4
Class A
Class C
Class Z
Columbia Income Builder Fund
Columbia Strategic Income Fund
RBBAX
COSIX
RBBCX
CLSCX
CBUZX
LSIZX
Application of a disciplined and/or
diversified strategy does not assure
a profit or protect against loss.
4
Investment theme
Managing interest
rate risk
Market conditions this
theme addresses:
> Macroeconomic picture showing
signs of improvement
> The Fed’s guidance on monetary
policy has shifted
> Treasuries offer little protection
from rising rates and inflation
Duration: A measure of the sensitivity
of the price (the value of principal) of a
fixed-income investment to a change in
interest rates. Duration is expressed as
a number of years.
9 Diversification does not assure a profit
or guarantee against a loss.
10 The fund is designed for investors with
an above-average risk tolerance. The
market value of securities may fall, fail
to rise or fluctuate, sometimes rapidly
and unpredictably. Market risk may
affect a single issuer, sector of the
economy, industry or the market as a
whole. Due to its active management,
the fund could underperform other
mutual funds with similar investment
objectives. The fund invests primarily
in floating rate loans, the market value
of which may fluctuate, sometimes
rapidly and unpredictably. Risks of
investing in the fund include but are
not limited to liquidity risk, interest rate
risk, credit risk, counterparty risk, highly
leveraged transactions risk, derivatives
risk, confidential information access
risk, impairment of collateral risk,
and prepayment and extension risk.
Generally, when interest rates rise, the
prices of fixed-income securities fall;
however, securities or loans with floating
interest rates can be less sensitive
to interest rate changes, but they may
decline in value if their interest rates
do not rise as much as interest rates
in general. Limited liquidity will affect
the ability of the fund to purchase or
sell floating rate loans and have a
negative impact on fund performance.
The floating rate loans and securities in
which the fund invests are lower rated
(non-investment grade) and are more
likely to experience a default, which
results in more volatile prices and
more risk to principal and income than
investment-grade loans or securities.
8
It’s time to start seriously thinking about duration risk in portfolios.8 Short duration
bonds offer a higher yield than Treasuries, with less duration risk than mid- and
long-term bonds.
Interest rates are low because the Fed wants them low. The single most important
factor depressing interest rates over last 2–3 years has been the evolving Federal
Reserve (the Fed) response to weak economic growth. Interest rates could currently be
at an inflection point, as recent data suggest that both inflation and unemployment —
the two parts of the Fed’s dual mandate — have made progress back to their respective
targets. As such, interest rates should be more sensitive to improving economic data
and at greater risk of rising going forward.
Longer duration does not offer compelling relative value. The Fed has abandoned datebased guidance in terms of holding the federal funds rate near zero; it has also signaled
that short-term interest rates will remain unchanged at least until the unemployment
rate reaches 6.5% and inflation remains muted. This shift in guidance sets the stage for
increased interest rate volatility as longer-term interest rates in particular could be at risk
on any change in growth or monetary policy expectations.
Opportunities for now
Conservative investments no longer generate enough yield to preserve capital. At
historically low yield levels, U.S. Treasury bonds carry additional risks. First, shorter and
intermediate-maturity U.S. Treasury bonds do not offer enough yield to pace inflation.
Second, U.S. Treasury securities are perhaps the most interest-rate-sensitive assets, an
effect exacerbated by low yields. As such, U.S. Treasury bonds are likely to be heavily
affected by price volatility when interest rates begin to rise.
Spread products provide cushion against interest rate increases. Investments that offer
a yield premium, or spread, over U.S. Treasuries compensate investors for assuming
credit risk. This spread can help neutralize some of the price depreciation that often
occurs as interest rates rise.
Short-term corporate bonds. In a low interest rate environment, corporate bonds
can offer investors a higher yielding alternative. Short-term corporate bonds are less
sensitive to price volatility when interest rates change.
Floating rate loans. Bank loans uniquely feature a coupon tied to a market rate of
interest, such as LIBOR. Because floating rate loans reset frequently, they have
virtually no duration risk. This enables investors to reduce interest rate risk without
sacrificing income.
Mortgage-backed securities (MBS). Agency MBS are a high-quality asset with minimal
credit risk but unlike Treasuries offer a yield premium. Additionally, the low interest rate
environment affords investors a short duration profile. These investments can help
diversify a portfolio because they typically perform independently of the stock market.9
Fixed income
Columbia Floating Rate Fund
Columbia Limited Duration Credit Fund4
Columbia U.S. Government Mortgage Fund4, 11 (see next page)
10
5
Class A
Class C
Class Z
RFRAX
ALDAX
AUGAX
RFRCX
RDCLX
AUGCX
CFRZX
CLDZX
CUGZX
Investment theme
Maximizing after-tax returns
Tax-free municipal bonds can help investors keep more of their hard-earned income.
Market conditions this
theme addresses:
An increasing tax burden for taxpayers. Local and federal governments continue to
pursue revenue increases to address unsustainable budgets deficits. Higher taxes are
already a part of the solution, as a series of new taxes and tax rate increases go into
effect in 2013. In addition, further tax hikes are possible.
> Increasing tax rates
> After-tax yields remain attractive
> Low-default environment with
improving financial conditions
> Low-growth economy supports
fixed-income investments
Municipal defaults remain low. Municipal defaults in 2012 were lower than 2011, which
were lower than 2010 (and defaults are expected to remain low). Keep in mind that credit
downgrades are expected to remain elevated at the local municipality level — the result of
stress caused by contractual obligations, pensions and slow property tax growth.
Attractive market technicals. Net new supply is expected to remain low, as
municipalities continue to refinance (replace) existing debt with lower cost debt.
Meanwhile, demand is expected to remain strong. This combination should provide
a price support for the bonds.
Low-growth environment. In a low-growth environment, we expect that inflation will
remain subdued and interest rates will likely remain anchored at low levels.
Opportunities for now
Municipal bonds remain exempt from federal taxation, and it’s what investors keep
that counts. Assets that produce income exempt from taxes are attractive in any
scenario. But while we are mired in today’s global low-yield environment, the after-tax
yields of municipal bonds relative to Treasury and corporate bonds remain compelling.
Furthermore, in an increasing-tax-rate environment, tax-exempt income becomes even
more attractive.
11
There are risks associated with an
investment in a municipal bond fund,
including credit risk, interest rate
risk, prepayment and extension risk,
and geographic concentration risk. In
general, bond prices rise when interest
rates fall and vice versa. This effect
is more pronounced for longer term
securities.
Municipal finances remain stressed, but signs of stability are emerging. The municipal
budget landscape continues to improve through a combination of revenue increases
and expense reductions via service reductions, layoffs and renegotiation of employee
contracts and benefits. Municipal defaults — currently near historically low levels —
are expected to remain low as the economy improves.
“Tax diversification” may enhance portfolios.9 Just as asset allocation is considered
prudent, tax allocation — spreading assets between taxable and tax-exempt assets —
may also enhance an investment portfolio’s risk/return profile.
Non-investment-grade securities,
commonly called “high-yield” or “junk”
bonds, have more volatile prices and
carry more risk to principal and income
than investment-grade securities. See
the fund’s prospectus for information on
these and other risks associated with
the fund.
Income from tax-exempt funds may be
subject to state and local taxes, and
a portion of income may be subject to
the federal and/or state alternative
minimum tax for certain investors.
Federal and state income tax rules will
apply to any capital gain distributions
and any gains or losses on sales.
12
Because the fund concentrates its
investments in municipal securities
issued by a single state and its
municipalities, specific events or factors
affecting a particular state can cause
more volatility in the fund than a fund
that is more geographically diversified.
6
Investment theme
Maximizing after-tax returns
(continued)
National tax-exempt funds11
Class A
Class C
Class Z
Columbia AMT-Free Tax-Exempt Bond Fund
Columbia Intermediate Municipal Bond Fund
Columbia High Yield Municipal Fund
Columbia Short Term Municipal Bond Fund
Columbia Tax-Exempt Fund
INTAX
LITAX
LHIAX
NSMMX
COLTX
RTCEX
LITCX
CHMCX
NSMUX
COLCX
CATZX
SETMX
SRHMX
NSMIX
CTEZX
State tax-exempt funds11, 12
Class A
Class C
Class Z
Columbia CA Intermediate Municipal Bond Fund
Columbia CA Tax-Exempt Fund
Columbia CT Intermediate Municipal Bond Fund
Columbia CT Tax-Exempt Fund
Columbia GA Intermediate Municipal Bond Fund
Columbia MA Intermediate Municipal Bond Fund
Columbia MA Tax-Exempt Fund
Columbia MD Intermediate Municipal Bond Fund
Columbia MN Tax-Exempt Fund
Columbia NC Intermediate Municipal Bond Fund
Columbia NY Intermediate Municipal Bond Fund
Columbia NY Tax-Exempt Fund
Columbia OR Intermediate Municipal Bond Fund
Columbia SC Intermediate Municipal Bond Fund
Columbia VA Intermediate Municipal Bond Fund
NACMX
CLMPX
LCTAX
COCTX
NGIMX
LMIAX
COMAX
NMDMX
IMNTX
NNCIX
LNYAX
COLNX
COEAX
NSCIX
NVAFX
CCICX
CCAOX
LCTCX
CCTCX
NGINX
LMICX
COMCX
NMINX
RMTCX
NNINX
LNYCX
CNYCX
CORCX
NSICX
NVRCX
NCMAX
CCAZX
SCTEX
CCTZX
NGAMX
SEMAX
CMSZX
NMDBX
CMNZX
NNIBX
GNYTX
CNYZX
CMBFX
NSCMX
NVABX
7
Keep pace with today’s market environment
Market Insights from Columbia Management
Today’s investing trends thoughtfully considered.
Economic and market events contextually
analyzed. Uncommon points of view. Unvarnished
outlooks. Find this and more in Market Insights:
columbiamanagement.com/market-insights
Visit the Market Insights section on
columbiamanagement.com to access
our current white papers, blog, videos
and market commentaries.
To learn more about Columbia Funds available to you, visit columbiamanagement.com or ask your financial advisor to
contact a Columbia Management representative at 800.426.3750.
Investors should consider the investment objectives, risks, charges and expenses of a
mutual fund carefully before investing. For a free prospectus, which contains this and other
important information about the funds, visit columbiamanagement.com. The prospectus
should be read carefully before investing.
225 Franklin Street
Boston, MA 02110 -2804
columbiamanagement.com
800.426.3750
Investment products involve risks, including possible loss of principal and fluctuation in value.
Past performance does not guarantee future results.
Class Z shares sold at NAV have limited eligibility and the investment minimum requirement may vary. Only
eligible investors may purchase Class Z shares of the fund, directly or by exchange. Please see the fund’s
prospectus for eligibility and other details. Performance results for other share classes will vary.
Not all products are available at all firms.
Columbia Funds are distributed by Columbia Management Investment Distributors, Inc., member FINRA,
and managed by Columbia Management Investment Advisers, LLC.
© 2013 Columbia Management Investment Advisers, LLC. All rights reserved.
CM-MK/246903 C (01/13) 3639/148660