3q | 2016 quarterly navigator · investment trusts (reits), and other high yielding sectors of the...

Quarterly NavigatorInvestment perspectives from MainStay and our independent boutiques

3Q | 2016

OPEC, Presidents, and Central Bankers“Get your facts first, then you can distort them as you please.” —MarkTwain(1835–1910)

OPEC Crude oil prices are up near $50 a barrel following the first Organization of Petroleum Exporting Countries (OPEC) production deal since 2008. The agreement is scheduled to go into effect in November and requires Saudi Arabia to reduce its production by nearly 1 million barrels of crude oil per day. Iran will receive concessions following a period of lost production levels during international sanctions—although its eventual production cap is not clear. The move underscores the pressures felt by oil-producing states and could signal a shifting opportunity set. Find out more on pages 15–16.

Presidents According to FiveThirtyEight,1 the Presidential candidate ahead in the polls 30 days after the second political convention has won the “popular vote” in every election since 1972. At the time of this writing, Mrs. Clinton had a clear lead over Mr. Trump in the RealClear Politics poll average.

What should we expect heading into November and how can investors prepare? Our panel of experts says to expect volatility to pick up as the election nears (see pages 12-14). Diversification and portfolio discipline can help. In terms of the electoral outcome, voter turnout should be key and conclude with the Presidency and Senate controlled by the same party (most likely the Democrats) while the House is almost certain to remain with the Republicans.

Municipal bonds are yielding close to or above Treasury bonds and should remain tax advantaged no matter who wins.

TABLE OF CONTENTS

Cover Story

OPEC, Presidents, and Central Bankers

Meeting Your Investment Goals

n Generating Income 4n Managing Volatility 6n Building Long-Term Wealth 8n Tax-Conscious Investing 10

Manager Insights

Election proof your portfolio A conversation with Kim Wallace of Renaissance Macro Research, Jonathan Swaney of New York Life Investment Management, and David Dowden of MacKay Shields 12

MLPs: Attractively valued, yet misunderstood A discussion with Jerry V. Swank of Cushing Asset Management 15

Wealth Matters

Financial ground rules for unmarried couples 17

Source: Thomson Reuters Municipal Market Monitor, as of 9/30/16. Past performance is no guarantee of future results, which will vary.

Tax Advantaged Municipal Bonds are Yielding Close to or Above Treasury Bonds

Years to Maturity

Municipal Yield

Treasury Yield

Municipal/Treasury Yield Ratio Valuation

5 1.02 1.11 92% Fair

10 1.50 1.56 96% Attractive

15 1.89 1.76 107% Attractive

20 2.14 1.95 110% Attractive

30 2.29 2.28 100% Attractive

MainStay Investments Quarterly Navigator 3Q | 2016

OPEC, Presidents, and Central Bankers continued from previous page

2

Central bankersU.S. monetary policy makers plan to raise rates once this year and twice next year. According to the Chicago Mercantile Exchange (CME Group), the market is discounting a 70.2% chance that the Federal Reserve (the Fed) will raise rates by its December 14 meeting. A slow Fed tightening cycle is a widely held view at MainStay Investments’ independent boutiques and investment teams.

Bigger picture, the Fed stands alone as the only major developed country central bank throttling back on its level of policy accommodation. Policy rates are negative in Europe and Japan, and central bank balance sheets are growing in these areas and in the UK.

However, with the economies around the world still growing too slowly and concerns over the limits of monetary policy growing, central bankers have been trying to steer policy conversations toward fiscal stimulus to take some of the pressure off of monetary policy. Federal Reserve Chair Janet Yellen has told the Senate Banking Committee that fiscal policy has not supported the expansion. And the Chief Economist of the European Central Bank (ECB) has said monetary policy cannot be the only remedy for today’s challenges.

Canada’s efforts are garnering attention in the policy world. They include CDN $120 billion dollars over the next decade earmarked for infrastructure, and suggest a different course than the post-financial crisis austerity followed by many countries.

Cautiously optimisticThe S&P 500 Index forward price-to-earnings (P/E) ratio was at 16.6 on September 30, and is now above its 5-year and 10-year averages, according to FactSet, based on the analyst community expectations of S&P 500 earnings per share (EPS) of $116 in 2016 and $134 in 2017.

Opinions vary, but the most common equity view among MainStay Investments’ independent boutiques and investment teams is one of cautious long-term optimism. U.S. P/E ratios are not expected to rise from here and top-line growth may be challenged in the long-term by slower economic growth—around 2% in developed economies and 6.5% in China.*

Stay on course Financial markets have come a long way since the volatility witnessed earlier in the year. Valuation is less compelling for risk assets since the wintertime lows, but a recovery in profit growth looks closer at hand. As a result, the Fed looks likely to raise rates in the coming months. Remembering one’s goals and investing in a manner that takes advantage of opportunities in a diversified and thoughtful manner can keep a smart investor on the right course as events unfold.

Expect some stimulus coming in the form of infrastructure spending.

1. FiveThirtyEight, sometimes referred to as 538, is a web site that focuses on opinion poll analysis, politics, and economics.

* Source: IMF, 9/30/16. Calculations based on population growth and productivity estimates.


3

Source: New York Life Investment Management, Strategic Asset Allocation and Solutions Group, 9/30/16.

Strategic Perspectives on Key Asset ClassesAsset Class Perspectives

Global Equities We remain long-term cautiously optimistic in what we believe is a single-digit per annum return environment but have near-term concerns about growth and Brexit.

Regional Focus

United States Profit growth, rather than rising P/E ratios, should drive future returns. A strong U.S. dollar and an eventual mean reversion in margins could pose headwinds.

Market Cap. Focus

Small A high domestic revenue share should prove favorable, especially if the U.S. dollar rises.

Mid Mid caps are also favorable for the same reason.

Large A high foreign revenue share poses challenges.

International Developed Valuations are attractive but growth remains a challenge. Brexit creates lingering uncertainties, Europe has faced challenges over austerity, and now refugees and the health of the banking sector are top of mind. Japan faces unfavorable demographics colliding with high debt and deflation.

Emerging Markets Attractive valuations, strong growth prospects, and an improving commodity price outlook favor this asset class.

Global Fixed Income Central bank policies remain broadly accomodative but interest rates are low or negative in most of the world. In addition, rates are likely to remain lower for longer, encouraging a reach for yield into riskier asset classes .

Investment-Grade We favor opportunities in credit over those available in developed country sovereign debt.

High-Yield Spreads offer a midrange value proposition versus their history and expected defaults.

Bank Loans The Fed aims to raise rates once in 2016 and twice in 2017. Spreads are attractive and impairments are low relative to other credits.

Emerging Market Commodity prices appear to be firming. We prefer debt denominated in local currencies.

Alternatives Muted expected returns in traditional asset classes should auger well for alternatives.

Trading Strategies The current environment offers alpha generating opportunities.

Commodities Multiple commodity prices appear to be firming.

MLPs Midstream MLPs offer attractive yields and growth prospects.

Thinking opportunistically: Part 1—Dividend paying stocks2

Dividend paying stocks offer one potential solution for income diversification. In addition to providing an attractive yield, historically, dividend paying stocks have achieved higher returns with less volatility than stocks that do not pay dividends. Dividend yields, on average, are higher in international equities than they are in the U.S. As of September 30, the MSCI EAFE Index representing developed international equities was yielding 3.3% versus 2.1% for the S&P 500 Index (see chart below). By way of reference, the

MSCI Emerging Market Index is yielding 2.5%. So, this is a case where expanding one’s opportunity set has the potential to align with one’s goals.

Thinking opportunistically: Part 2— MLPs and REITsMLPs and REITs are other potential sources of income outside of bonds. The chart on the next page shows the yield for several yield-centric investment options including master limited partnerships (MLPs), real estate investment trusts (REITs), and other high yielding sectors of the S&P 500 Index.

4

I N V EST M E N T G OA L : G E N E RAT I N G I N CO M E Using the whole portfolio


2. Source: Ned Davis Research, Inc., 12/31/15.3. Source: Thomson Reuters Datastream, New York Life Investments, 9/30/16. International equities are represented by the MSCI EAFE Index. Developed international market equities (sans U.S.) are represented by the MSCI World Ex U.S. Index. Developed international market equities are represented by the MSCI World Index. Emerging market equities are represented by the MSCI Emerging Markets Index. U.S. equities are represented by the S&P 500 Index.

Thinking opportunistically beyond bonds can help a portfolio generate more total income.

When investors think about generating income, bonds are often the first investment vehicle to come to mind. A thoughtful blend of core, high-yield, and short duration bond exposures can provide the cornerstone of a portfolio designed to generate income. However, with interest rates as low as they are, it has become necessary for many investors to look opportunistically beyond bonds to boost the income generating productivity of their portfolios.

Dividend Paying Stocks Can Help Boost Income3

3.31%

2.52%

2.13%

3.27%

2.57%

International Equities

Developed International Market Equities (sans U.S.)

Developed International Market Equities

Emerging Market Equities

U.S. Equities

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

Take a thoughtful approach Generating income from a portfolio can be challenging in a low interest rate environment. A thoughtful approach may begin with bonds, but seeking yield opportunistically in other asset classes has the potential for improving the income generating capacity of the overall portfolio.

5


I N V EST M E N T G OA L : G E N E RAT I N G I N CO M E

Using the whole portfoliocontinued from previous page

MLPs Have Historically Generated Attractive Yields Relative to Other Investments4

Consumer StaplesMLPs Telecom REITs Utilities

7.2%

4.6% 4.4%

3.5%

2.6%

0

1

2

3

4

5

6

7

8%

4. Source: Bloomberg, 9/30/16. The chart shows the dividend yield for several yield-centric investment options including MLPs, Real Estate Investment Trusts (REITs), and other high yielding sectors of the S&P 500 Index. MLPs are represented by the Alerian MLP Index, which is the leading gauge of energy Master Limited Partnerships (MLPs). The float-adjusted, capitalization-weighted index, whose constituents represent approximately 85% of total float-adjusted market capitalization, is disseminated real-time on a price-return basis and on a total-return basis. The S&P 500 Consumer Staples Index comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer staples sector. The S&P 500 Utilities Index comprises those companies included in the S&P 500 that are classified as members of the GICS® utilities sector. The S&P 500 REITs Index comprises those companies included in the S&P 500 that are classified as members of the GICS® REITs sector. The S&P 500 Telecom Services Index comprises those companies included in the S&P 500 that are classified as members of the GICS® telecommunication services sector.

6


The funny thing about volatility is that it is volatile itself. Sometimes volatility runs high, and at other times it runs low. What’s more, some asset classes, like equities, are inherently more volatile on average than others, such as fixed income. That’s why portfolios designed for more conservative investors generally have a higher allocation to fixed income and a lower one to equities than portfolios designed for more aggressive investors.

Are commodities the right choice for you?Even within an asset class, different approaches can be more or less volatile by nature. Let’s take the case of commodities. Investors often allocate to commodities to diversify a traditional portfolio of stocks and bonds, and reduce the risk rising inflation could potentially impart on a portfolio. But many investors shun commodity investments altogether because of their inherent volatility. However, more diversified and dynamic exposures within the commodity asset class may be less volatile than more concentrated and static ones.

The three indices shown in the chart below all represent broad-based commodity exposures. As you can see in the chart below, the IQ Global Resources Index has experienced less volatility than the Bloomberg Commodity Index and the S&P GSCI Index since 2007. The lower volatility in the former is attributed to its dynamic and more diversified exposure to commodity sectors. Since the IQ Global Resources Index uses momentum and valuation factors to identify opportunities, its variable exposure to energy was a key element to maintaining lower risk levels versus other indices from 2014—2016.

I N V EST M E N T G OA L : M A N A G I N G V O L AT I L I T Y Positioning your portfolio for a volatile market

Diversify your asset class exposures and trading strategies to reduce long-term volatility.

IQ Global Resource Index has Experienced Less Volatility Since 20075

5. Sources: Bloomberg, New York Life/MainStay Investments, 9/22/16. Returns are indexed for comparison purposes (10/01/2007 = 100). Performance is based on daily returns. Member weightings in each index are as of 8/31/16 and reflect the values as provided by Bloomberg and Index IQ. Weightings for IQ Global Resources Index are subject to monthly rebalancing. Fees and expenses may be applicable. Past performance is no guarantee of future results. An investment cannot be made directly into an index.

IQ Global Resources Index Bloomberg Commodity Index S&P Global Commodities Index

2007 2014201320122011201020092008 20150

20

40

60

80

100

120

140

160

180

I N V EST M E N T G OA L : M A N A G I N G V O L AT I L I T Y

Positioning your portfolio for a volatile marketcontinued from previous page

And yet, investing is not a one-size-fits-all endeavor. Energy bulls may prefer a higher energy exposure than the IQ Global Resources Index can offer, being that it is capped at 22%. In that case, an investor may seek additional energy exposure, either passively or through a skilled active manager with the resources to manage risk and identify potential opportunities as they arise.

Today’s environment—Look beyond the traditionalIn a slow growth, low yield regime, stocks and bonds might produce returns that come in below their long-term historical averages. Meanwhile, occasional spikes in volatility can still pose difficulties for investors seeking to manage the risk of their portfolios. Adding to the mix, as seen in the chart below, the correlation between stocks and bonds is not constant. Trading and alternative strategies with low correlations to stocks and bonds can help manage the volatility of a portfolio. What’s more, today’s liquid alternative and ETF options can also help reduce fees.

7


6. Sources: Morningstar, National Bureau of Economic Research, New York Life/MainStay, 6/30/2016. The analysis uses monthly return data beginning in January 1926. Stocks are represented by the IA SBBI U.S. Large Stock Total Return Index. Bonds are represented by the IA SBBI U.S. Corporate Total Return Index. Past performance is no guarantee of future results. An investment cannot be made directly into an index.

The Correlation Between Stocks and Bonds Rises and Falls as Does the Volatility of a 60/40 Stock/Bond Portfolio6

Recession Periods Rolling 1-Year Correlation between Stocks and Bonds Rolling 1-Year Standard Deviation of a 60-40 Portfolio

1926

2010

2007

2004

2001

1998

1995

1992

1989

1986

1983

1980

1977

1974

1971

1968

1965

1962

1959

1956

1953

1950

1947

1944

1941

1938

1935

1932

1929

2013

2016

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0 50%

40%

30%

20%

10%

0%

Vo

lati

lity

Co

rrel

atio

n

Managing volatility is an ongoing effortFor investors seeking to manage the volatility of their portfolios via diversification, a lower volatility commodity exposure may possibly achieve that goal. Trading strategies also offer potential diversification benefits from stocks and bonds, and liquid versions, which would include ETFs, can also help lower fees.

8


Historically, it would have been a challenging endeavor to build wealth without the contribution of equities. In the table below, large- or small-cap stocks were the top performing asset classes among those shown in six different decades since the 1930s. By comparison, gold topped the rankings twice and corporate bonds did so once. Past performance is not a guarantee of future results.

I N V EST M E N T G OA L : B U I L D I N G LO N G -T E R M W E A LT H Stocks have been a clear winner over time

For Six of the Last Nine Decades, Stocks Have Been the Top Performing Asset Class7 (Based on Total Real Annualized Returns by Decade)

Decade Large-Cap Stocks Small-Cap Stocks Corporate Bonds Government Bonds Gold

1920s 9.00% - - - -0.01%

1930s 2.04% 3.50% 9.18% 6.77% 5.07%

1940s 3.57% 14.49% -2.57% -3.40% 0.25%

1950s 16.78% 14.38% -1.17% -0.84% 0.16%

1960s 5.15% 12.69% -0.83% 0.94% 0.21%

1970s -1.40% 3.84% -1.06% -0.36% 32.81%

1980s 11.86% 10.22% 7.55% 6.49% -4.61%

1990s 14.85% 11.82% 5.27% 4.15% -3.13%

2000s -3.39% 3.68% 5.00% 3.56% 15.94%

2010s 10.87% 11.37% 7.72% 2.06% 1.17%

7. Sources: Schiller Stock Market Data, Morningstar, Ibbotson, World Gold Council, New York Life/MainStay Investments, 6/30/2016. (1) Annualized total returns are CAGRs based on monthly returns, which are compounded over the given decade and annualized. (2) Data in the 1920s are based on data compiled by Robert J. Schiller and are equal to the given index price plus the full dividend payment re-invested monthly. (3) Gold data is provided by the World Gold Council database and is annual data—price appreciation. (4) Data is calculated and annualized through 6/30/16. There is no assurance that the investment objectives will be met.

Headwinds and tailwindsToday’s slow economic growth and geopolitical uncertainties are likely to limit the rewards of taking unnecessary risks. However, it is hard to argue these investment challenges are any greater than those of the aforementioned periods that saw stock market crashes, panics, hot and cold wars, bouts of inflation, the Great Depression, the Great Recession, and several not-so-great recessions, too.

Domestically, we believe U.S. stocks appear to offer a mid single-digit long-term return profile potential driven by profit growth and dividends, rather than expanding price-to-earnings multiples. The analyst community currently expects earnings growth to return in Q4 2016, with S&P 500 earnings per share coming in at 5.8% above prior year levels. A continuation of improving earnings is also expected in 2017.

9


Within the U.S. equity market, an unclear global outlook coupled with a strengthening U.S. economy and a stronger dollar presents an interesting case for small- and mid-cap U.S. stocks (see table on page 3). In general, these stocks rely more on domestic sales than U.S. large caps, so they are more insulated from currency movements and slow foreign economic growth. Additionally, while exposure to small caps can add volatility to a portfolio, investors have historically benefited from their long-term performance, as displayed in the previous chart. Past performance is not indicative of future results.

International equity markets are attractively valuedInternationally, global developed equity markets appear to depict attractive valuations, as shown in the chart below. Monetary policies at the European Central Bank (ECB) and Bank of Japan (BOJ) are also supportive. But post-Brexit uncertainty and soft economic growth and other concerns pose headwinds. Global economic challenges like these will provide both opportunities and risks over time. If suitable, a partial currency hedge may help manage some of the risk-factors that could impact a portfolio with developed international equity exposure.

I N V EST M E N T G OA L : B U I L D I N G LO N G -T E R M W E A LT H

Stocks have been a clear winner over timecontinued from previous page

The emerging markets are still the growth envy of the world even if expectations have been reduced in recent years (see table on page 3). As of September 30, the MSCI Emerging Markets Index was up 16% for the year, as many factors have turned positive for the space: commodity prices have stabilized, currencies and trade balances have adjusted, and the risk of a sharp rise in the U.S. dollar has waned amid a more cautious Federal Reserve Board than earlier this year.

In conclusion, when constructing portfolios designed to help with the goal of building long-term wealth, canvassing the equity market remains a logical step.

MSCI EAFE P/E Ratio* 13.76 Average 1988 16.65* Based on EPS forecased 12M ahead

5

10

15

20

25

30

1990 2010200520001995 2015

International Equities are Attractively Priced8

8. Source: Thomson Reuters Datastream, New York Life Investments, 8/31/16. There is no assurance that the investment objectives will be met.

10


Municipal bonds represent an attractive value that should continue no matter who wins the Presidential election in November due to tax equivalent yields that exceed those of similarly rated taxable bonds (see page 1). This is especially true in California and New York, which both have relatively high tax rates and wealth— a mix that creates in-state demand for issuers.

I N V EST M E N T G OA L : TA X - CO N S C I O U S I N V EST I N G

Is your portfolio election ready?

California and New York Have Relatively High Tax Rates and Wealth—Enhancing the Potential Opportunities Afforded Through Municipal Bonds9

Texas Louisiana

Oklahoma Arkansas

Kansas Missouri

Nevada

California

Utah

Oregon

Washington

Montana

Idaho

Wyoming

Colorado

North Dakota

South Dakota

Nebraska

Minnesota

Iowa

Wisconsin

Illinois

Michigan

IndianaOhio

Kentucky

Tennessee

Mississippi AlabamaGeorgia

Florida

South Carolina

North Carolina

VirginiaWest Virginia

Pennsylvania

New York

Maryland 2.0 - 5.8%

Delaware 2.2 - 6.6%

New Jersey 1.4- 9.0%

Connecticut 3.0 - 6.7%Rhode Island 3.8 - 6.0%

Massachusetts 5.2%

New Hampshire 5.0%

Maine

VermontNo State Tax

No State Tax

No State

Tax

No State Tax

No State Tax

No State Tax

5.0 - 9.9%1.6 - 7.4%

1.0 - 6.9% 1.2 - 3.2%

2.5 - 6.8%

2.7 - 4.6%

0.5 - 5.3%

5.4 - 9.9%

4.0 - 7.7%

3.8%

1.5 - 6.0%

0.9 - 6.9%

2.0 - 6.0%

3.0 - 5.0% 2.0 - 5.0%

6.0%

2.0 - 6.0%

3.3%0.5 - 5.3%

3.1%

3.0 - 6.5%

5.8%

2.0 - 5.8%

0.0 - 7.0%

1.0 - 6.0%

1.0 - 13.3%

2.6 - 4.5% 1.7 - 4.9%

5.0%4.6%

1.4 - 11.0%

5.8 - 7.2%Vermont

3.6 - 9.0%

4.3%

4.0 - 8.8%

0.4 - 9.0%

No State Tax

Greater than 10%

Between 8% and 10%

Between 6% and 8%

Between 4% and 6%

Less than 4%

0.00%Alaska

Hawaii

Arizona New Mexico

9. Source: Tax-Rates.org — Income Tax Rates by State, 2016.

11


California and New York have high tax rates and wealth. They also have improving economic prospects.

A favorable state of affairs in California and New YorkThe financial picture in California has improved greatly since the Great Recession. In the years since, California, with its well-rounded economy, has played its familiar role of leading the municipal bond market in recovery. The state’s economy—the largest in the nation—has expanded by almost a third in terms of nominal gross domestic product since 2009 and its unemployment rate has fallen from over 12% to 5.5% as of July 2016. Along the way, residents passed a “rainy day fund” called Proposition 2.10

The picture in New York is also favorable. The state pension plan ranks high in the nation for its funding status, at 91% according to their most recent 2015 actuarial report. The Empire State has consolidated its number of issuers, reduced the use of one-off budget fixes, curbed spending, and helped local and municipal governments improve their positions too. The state’s unemployment rate of 4.7%, as of July 2016, is slightly below the national average and state revenues rose 13% in 2015.

Leveling the playing field with the tax-equivalent yieldFor tax conscious investors, municipal securities offer advantages that increase with marginal tax rates. The higher an investor’s tax bracket, the greater the taxable income needed to produce the same tax-free income stream. For example, an investor in the highest current federal tax bracket of 39.6%, who also pays the 3.8% Medicare surcharge, would generate a tax-equivalent yield of 3.9% on a municipal investment yielding just 2.2%.

The popular vote points to municipal bondsAttractive valuations, improving fundamentals, and six years in a row of negative “net” issuance alongside positive mutual fund inflows year-to-date make for a constructive municipal bond investment environment in our view.

10. California Proposition 2, the Rainy Day Budget Stabilization Fund Act (Assembly Constitutional Amendment 1), was on the November 4, 2014 ballot in California as a legislatively referred constitutional amendment. The measure was approved. The measure was formerly known as Proposition 44.

continued from previous page

I N V EST M E N T G OA L : TA X - CO N S C I O U S I N V EST I N G

Is your portfolio election ready?

12


Charlie: Heading into the home stretch of the election, what states matter most for each Presidential candidate?

Kim: Mr. Trump will have to secure Florida and for Mrs. Clinton the importance of Pennsylvania cannot be over emphasized. It is a traditional red and blue state with some purple in the middle, but it is becoming increasingly purple, which makes it very unpredictable. At the same time it is an important electoral haul. The ultimate outcome is likely to be determined by voter turnout.

Charlie: What will Washington look like next year?

Kim: Mrs. Clinton has a lead in the Presidential election. In terms of the U.S. legislature, the Senate majority leader will likely be of the President’s party, largely because of the impact of voter turnout in the key states. The margin in the Senate could be tight, perhaps only a couple of people. In the case of a 50/50 tie, of course, the Vice President serves as the President of the Senate, so the majority would go to the Democrats. It is very unlikely, bordering on impossible, that the Republicans lose the House.

Charlie: How do you think the markets will react to ongoing election news?

Jon: There are many variables that affect security pricing at any point in time. Perhaps, at times, we exaggerate the importance of political events on day-to-day market activity, but politics remains a factor. Given the considerable uncertainty as to how the elections will play out and the challenge anticipating its impact, it is not unreasonable to expect that as we push closer to Election Day volatility will become a bit more elevated.

Charlie: How does an investor deal with this environment?

Jon: In such an environment, I would reiterate the importance of maintaining portfolio discipline and a long-term investment perspective, which includes diversified asset allocation and remaining true to it through the bouts of volatility.

Charlie: Are municipal bonds at risk under election-driven volatility?

David: When volatility picks up we often see inopportune selling throughout the markets. Individual investors tend to make the wrong decisions at the wrong time. And the municipal market, which is heavily weighted to individual investors, is certainly no stranger to panic. But our deep knowledge and understanding of technical and credit fundamentals give us comfort to be on the other side of those trades and to make decisions quickly when we have to.

Charlie: What about the relative valuation of municipal bonds?

David: Municipal bonds are so attractively priced that regardless of where tax rates go in the next administration, investors shouldn’t be worried about the impact of a decline in pricing as they reset based on taxes. Our expectation is that municipal bonds will remain attractively priced relative to Treasury securities, until we truly see a secular rise in interest rates.

M A N A G E R I N S I G H TS

Election proof your portfolio

A conversation with Kim Wallace of Renaissance Macro Research, Jonathan Swaney of New York Life Investment Management, and David Dowden of MacKay Shields.

13

Charlie: How does your approach help you locate value along the yield curve or in specific credits?

David: Our view is to maneuver around the curve finding the best value. So now, our view is that the sweet spot has shifted. More specifically, we moved from longer dated 20-30 year bonds to a shorter range of 10-18 year bonds, in steps. By comparison, many investors who ladder municipal bonds tend to have elevated exposures in the 1-10 year range of the yield curve, which today looks expensive to us. As a professional active management team, we are in a good position to conduct a proper analysis on each credit. Bonds that are more credit sensitive will tend to trade closer to their credit fundamentals than their interest-rate sensitivity.

Charlie: How do you view opportunities in taxable credit versus government bonds?

Jon: Under realistic economic growth assumptions of about 2% in the U.S. and 3% globally with tame inflation, we think investment-grade and high-yield credit have more to offer than developed country sovereign debt. That said, one has to have modest expectations—low single digits per annum—about the total return possibilities because we are starting from such low interest rates.

Charlie: Both candidates have talked about fiscal stimulus. In your view, what are the challenges and what is possible?

Kim: The challenges are to cobble together a macro economic program on the fiscal side that convinces members of Congress that fiscal stimulus is both needed and advisable. However, you have to put together a program that you think might work for the economy. There will be an economic program proposed by the President, and Congress will have a tough time saying, “No—we give you nothing.”

People will look for immediate job creation. The key will be to avoid getting bogged down in the debate over the infrastructure priorities. Instead, the proposal should address the infrastructure system throughout the country and work on ones that have been under-maintained. I immediately think of the Mississippi Locke system and deep water shipping ports.

Charlie: What does that mean for the municipal bond market?

David: We see a strong need for infrastructure financing, and there is a tremendous gap in the financing needs. One thing worth mentioning is the possible resurrection of Build America Bonds (BABs) for schools in inner-cities and infrastructure projects. BABs could take some burden off state and local government issuance. Every dollar that is issued in BABs is a dollar not issued in tax-exempt bonds. The secondary effect of BABs could be to suppress the issuance of municipal bonds, making existing municipal bonds more attractive.



“ We see a strong need for infrastructure financing.”

—DavidDowden



Interviewed by Charles Reinhard, Head of Portfolio Strategy at MainStay Investments


14

“Proposition 53 on the California ballot could democratize spending on large projects.” —DavidDowden




Charlie: How is the health of some of the biggest municipal bond markets?

David: We are very pleased with the performance of New York and California. New York Governor Andrew Cuomo has had six balanced budgets in a row. In addition to fixing the financial balance sheet at the state level, he has moved into the local levels while maintaining an impressive 91% funded status in the pension. We also see some very big projects coming to New York, including LaGuardia International Airport. For a New York investor whose tax rate is over 8.8%, municipal bonds can be a great investment.

California is a much different economy than most other states. It’s like a country. And Governor Jerry Brown has been able to achieve some great changes in the state. Notably, he removed the super majority in the legislative branch, speeding up the time it takes to push through legislature. He worked to regain control of the rail financing from the local level to the state level. Additionally, Proposition 53 will be on the ballot this year. If passed, no financing for a project greater than $200 billion can come to market without a vote by the people. This could put a limit on bond issuance, which will reduce the supply of future issuance.

Charlie: What about a word on U.S. and global equities?

Jon: In the near term, one can certainly point to things that can keep an investor up at night, such as Brexit, slower-than-desired economic growth, and the Fed signaling it is moving toward another interest rate increase. Beyond these events, the U.S. market is likely in an era where price-to-earnings (P/E) ratios and profit margins don’t change much and therefore earnings growth, dividends, and modest share repurchases amount to mid single-digit per annum total returns.

Looking outside the U.S., the mix of valuations and growth prospects are more attractive in emerging market equities in our view than for developed international equities. In addition, Brexit offers hard to calculate uncertainties and Europe faces other challenges, such as immigration, too.

15


Charlie: When we last spoke in June, you stated that oil had reached its bottom. Since then, oil has had a bumpy ride as it increased to around $50 a barrel. The Organization of Petroleum Exporting Countries (OPEC) has proposed production cuts starting in November. What is your energy outlook now?

Jerry: We think Brent/West Texas Intermediate (WTI) crude oil could reach $55 a barrel this year as the supply and demand calculus continues to balance out and sentiment improves. Next year, oil could spend time in the $60s.

We have seen a flattening out in production through a reduced number of drilling rigs for oil and natural gas. Additionally, we have the proposed OPEC production cuts which should act as a temporary put on crude oil prices. Meanwhile, natural gas—a large portion of our midstream portfolio—appears to be at its trough following a nearly two year bear market and is poised to see price gains. For the first time in four and a half years we have a positive price outlook for natural gas.

Charlie: What does this mean for midstream master limited partnerships (MLPs)?

Jerry: For midstream MLPs, we are in a sweet spot as volumes are increasing and the exploration and production companies enter a position where they feel comfortable to go forth into new geographic areas and basins.

Charlie: This sweet spot came after a rough and tumble adjustment process. Can you explain it?

Jerry: A large, seven quarter decline in oil prices forced a number of flagship MLPs to curtail their capital spending, renegotiate contracts, and lower distributions to more sustainable levels. It was painful. But the result was an attractively valued and terribly misunderstood asset class.

Charlie: Misunderstood in what way?

Jerry: MLPs are now up 26% from their February 11 lows and yield 7.20%, as of September 20, 2016, but they continue to move in tandem with crude prices rather than their cash flows and revenues.

MLPs are a volume business, but the market often treats them like a price times volume business. Demand actually grew for cheap refined products during the energy swoon of 2014-2016, and MLPs move energy products or their feedstock to where they are needed.

Charlie: What should we be looking for when investing in MLPs?

Jerry: MLPs as an asset class yield near 7.20% with an enterprise value (EV)/earnings before interest, taxes, depreciation, and amortization (EBITDA) multiple of 17.7 according to Bloomberg. But not every MLP will be a winner. We focus on three important determinants for success: (1) distribution sustainability, (2) contract sanctity, and (3) access to capital for growth. Because MLPs pay out most of their cash flow in the form of distributions to investors, they need access to capital to expand their pipeline infrastructure to connect new supply centers with refiners and ports.


MLPs: Attractively valued, yet misunderstood

A conversation with Jerry V. Swank of Cushing Asset Management

Interviewed by Charles Reinhard, Head of Portfolio Strategy at MainStay Investments

16


Charlie: What is your take on the growth outlook?

Jerry: Opportunities are created as the transportation of energy changes. In 2013-2014, a large focus was on crude delivery by rail. Since that time, an emphasis has been placed on liquefied natural gas (LNG). As the number of facilities exporting natural gas grows to five in the next four years, shipping could be an increasingly interesting form of transportation to utilities around the world. Generally speaking, if one follows the supply chain and identifies potential bottlenecks, there are often investment opportunities in the companies possessing the capabilities to relieve those bottlenecks.

Charlie: As investors weigh the pros and cons of active versus passive investing, what are some things to consider with respect to MLPs?

Jerry: The pros and cons largely depend on one’s investment goals, tax sensitivity, and holding period. The most notable advantage of an active fund in this space concerns its ability to maintain distribution levels. When you owned an index fund earlier this year, yields fell as certain MLPs cut dividends. In an actively managed portfolio, managers are able to position the portfolio to avoid a big cut—maintaining its distributions. Additionally, volume growth may be larger or smaller in certain basins and geographical favorites. Active management can monitor these factors and track fundamentals and valuations. That said, a rising tide tends to raise all boats.



MLPs: Attractively valued, yet misunderstood

“ MLPs are a volume business, but the market often treats them like a price times volume business.”

—JerrySwank

17


This material is provided for educational purposes only and should not be construed as investment advice, an offer to sell, or the solicitation of offers to buy any security. Opinions expressed herein are current opinions as of the date appearing in this material only.

10 Financial Tips for Unmarried Couples

1 Agree on how recurring monthly expenses will be shared or allocated. Planning regular date nights together is necessary for a healthy relationship, but it’s also expensive, so it may be beneficial to discuss how entertainment expenses will be managed, too.

2 Keep existing bank accounts, assets, and other financial accounts separate. If you choose to establish a joint account to cover household expenses, remember that any overdraft fees are a joint responsibility.

3 Maintain the ability to support yourself financially, should the relationship end for some reason.

4 Be open and honest with each other about your financial habits and history.

5 Discuss each of your attitudes toward money, including how it should be spent and saved.

6 While you are unmarried, avoid creating joint debt or accepting one another’s.

7 Establish and maintain a monthly personal and household budget. Review each on a regular basis.

8 Keep good financial records that clearly detail household expenses and each of your contributions toward them. It’s also a good idea to maintain this practice for your personal finances.

9 Own individual credit cards to help preserve your personal credit rating.

10 Decide who gets the house. It may not be a pleasant thought, but should your relationship dissolve, it’s best to have details about living arrangements hashed out in advance.

Relationships bring many firsts—a first date, a first argument, and in some cases, a first shared address. Whether a step toward marriage or as an alternative to marriage, more couples are choosing to live together. A joint household can offer a glimpse into a couple’s future and shed some light on each other’s personal and financial habits. Before sharing a life and home with someone, it’s important to be prepared.

Marriage affords couples legal and practical benefits not generally granted to unmarried couples, including estate planning and inheritance benefits; the ability to receive Social Security, Medicare, and disability payments for their spouse; the right to make medical decisions for each other; and certain

tax benefits. Couples who live together outside of marriage are legally classified as unrelated individuals and as a result, they have limited rights when compared with married couples. Unfortunately, most make this discovery too late—when a relationship dissolves or when one partner passes away.

Establish financial ground rulesEstablishing financial ground rules and exploring estate planning are essential activities for everyone, but particularly important for unmarried couples. Without the legal protection of marriage, even people who have lived together for decades in a committed, loving relationship can find themselves suddenly vulnerable, unable to participate in end-of-life medical

decisions, be turned away from a joint home, or excluded from consideration when an estate is dissolved. To protect yourself and your partner, consider establishing some financial ground rules before moving in together.

Don’t skip the money talkMillions of Americans are in loving, committed relationships, living with their partners. And there are many reasons why people choose to live together without being married, ranging from personal preference to finances. Couples shouldn’t skip the money talk or put off planning for their personal and joint future just because no rings were exchanged. A little planning can strengthen your connection and protect both of your interests.

W E A LT H M AT T E RS

Financial ground rules for unmarried couples


18

The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index distributed by Bloomberg Indexes. The index tracks prices of futures contracts on physical commodities on the commodity markets.

The IA SBBI U.S. Large Stock Total Return Index was created by Ibbotson as a broad based, capitalization-weighted index which measures the total return performance of U.S. equities.

The IA SBBI U.S. Corporate Total Return Index was created by Ibbotson as a market value-weighted index which measures the performance of long-term U.S. corporate bonds.

The IQ Global Resources Index uses momentum and valuation factors to identify global companies that operate in commodity-specific market segments and whose equity securities trade in developed markets, including the U.S.

The MSCI EAFE Index serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia, and Southeast Asia.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 23 emerging economies designed to measure equity market performance in global emerging markets.

The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. As of June 2007 the MSCI World Index consisted of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

The Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector.

The S&P 500® Index is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock market performance.

The S&P GSCI Index (formerly the Goldman Sachs Commodity Index) serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time.

Past performance is no guarantee of future results. An investment cannot be made directly in an index.

Index definitions

Active management is an investment strategy involving ongoing buying and selling actions by the manager. Active managers purchase investments and continuously monitor their activity in order to exploit profitable conditions. Active management typically charges higher fees than passive management.

Brent/West Texas Intermediate Crude is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide.

Brexit is an abbreviation for “British exit,” which refers to the June 23, 2016, referendum whereby British citizens voted to exit the European Union.

CME Group Inc. is an American futures company and one of the largest options and futures exchanges.

A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type; commodities are most often used as inputs in the production of other goods or services.

Correlation is a statistic that measures the degree to which two securities move in relation to each other.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

Build America Bonds (BABs) are taxable municipal bonds that feature tax credits and/or federal subsidies for bondholders and state and local government bond issuers.

Earnings-per-share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. Earnings-per-share serves as an indicator of a company’s profitability.

The EBITDA/EV Multiple is a financial ratio that measures a company’s return on investment (ROI).

A Master Limited Partnership (MLP) is a type of business organization that exists in the form of a publicly traded limited partnership. There are two classes of partners in a master limited partnership: limited partners and general partners. Limited partners are investors that purchase units in the MLP that provide the capital for the MLP’s operation and that receive periodic income distributions from the MLP’s cash flow, whereas the general partners are responsible for managing the day to day operation of the MLP and that receive compensation based on the performance of the MLP’s business venture.

The Organization of Petroleum Exporting Countries (OPEC) is an organization founded in 1960 to coordinate the petroleum policies of its members, and consists of the world’s major oil-exporting nations.

The price-earnings ratio (P/E Ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.

The price/earnings to growth ratio (PEG ratio) is a stock’s price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period.

Proposition 53 was a California ballot proposition on the October 7, 2003, special recall election ballot, which failed to get passed.

A Real Estate Investment Trust (REIT) is a type of security that invests in real estate through property or mortgages and often trades on major exchanges like a stock. REITs provide investors with an extremely liquid stake in real estate. They receive special tax considerations and typically offer high dividend yields. Investment in REITs carries with it many of the risks associated with direct ownership of real estate, including decline in property values, extended vacancies, increases in property taxes, and changes in interest rates.

The S&P 500 Forward Price-to-Earnings (P/E) Ratio uses estimated net earnings over next 12 months. Estimates are typically derived as the mean of those published by the analysts at S&P.

A share repurchase is a program by which a company buys back its own shares from the marketplace, usually because management thinks the shares are undervalued, reducing the number of outstanding shares.

Standard deviation is a measure of the dispersion of a set of data from its mean.

The S&P 500 Energy Sector is a category of stocks that relate to producing or supplying energy. This sector includes companies involved in the exploration and development of oil or gas reserves, oil and gas drilling, or integrated power firms.

Sovereign debt refers to bonds issued by a national government in a foreign currency, in order to finance the issuing country’s growth.

Valuation is the process of determining the current worth of an asset or company.

Definitions


19

All investments are subject to market risk, including possible loss of principal.

Bonds are subject to interest rate risk and can lose principal value when interest-rates rise. Bonds are also subject to credit risk, which is the possibility that the bond issuer may fail to pay interest and principal in a timely manner.

Diversification cannot assure a profit or protect against loss in a declining market.

Foreign securities can be subject to greater risks than U.S. investments, including currency fluctuations, less liquid trading markets, greater price volatility, political and economic instability, less publicly available information, and changes in tax or currency laws or monetary policy. These risks are likely to be greater for emerging markets than in developed markets.

High-yield securities (junk bonds) have speculative characteristics and present a greater risk of loss than higher quality debt securities. These securities can also be subject to greater price volatility. There is no assurance that investment objectives will be met. It is possible to lose money while investing in securities.

Municipal bond interest is exempt from federal income tax and, in many states, interest from municipal bonds issued in an investor’s state of residence is exempt from state income tax.

Small and mid-cap stocks are often more volatile than large-cap stocks. Smaller companies generally face higher risks due to their limited product lines, markets, and financial markets.

Stocks are considered to be at greater risk during times of extremely high valuations than at times of low or moderate valuations. The other risks associated with investing in stocks are economic risk, inflation, and market value risk. There are also additional risks associated with investing in small, international, and high-yield stocks. Dividends are not guaranteed.

Treasury securities are backed by the full faith and credit of the U.S. government as to payment of principal and interest if held to maturity. Interest income on these securities is exempt from state and local taxes.

Before you invest

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. The MainStay Funds® are managed by New York Life Investment Management LLC and distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC. New York Life Investments engages the services of MacKay Shields LLC, an affiliated and federally registered advisor and Cushing® Asset Management, LP, an unaffiliated, federally registered advisor, to subadvise several MainStay Funds. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of the mutual fund.

Not FDIC/NCUA Insured Not a Deposit May Lose Value No Bank Guarantee Not Insured by Any Government Agency

1677339 ME082-16 ME09a-10/16

The MainStay Investments AdvantageWe believe our multi-boutique structure and thought leadership give us a competitive advantage, and we seek to deliver long-term results to our clients.

Multi-boutique investments—access to institutional asset managersWith our multi-boutique structure, investors can access independent and highly specialized investment managers through MainStay Funds, exchange-traded funds, closed-end funds, nontraditional strategies, and separately managed accounts.

Long-term perspective—maintaining a disciplined approach through all market cyclesWhile MainStay’s investment boutiques are autonomous and independent, they all share a long-term perspective, a focus on quality, and a commitment to excellence.

Thought leadership—helping you make informed investment decisionsWe provide investment insights and unique perspectives, as well as wealth-building and wealth-preservation educational tools.

For more information about MainStay Funds®, call 800-MAINSTAY (624-6782) for a prospectus or summary prospectus. For more information about IndexIQ® Funds, call 888-934-0777 for a prospectus or summary prospectus. Investors are asked to consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus or summary prospectus contains this and other information about the investment company. Please read the prospectus or summary prospectus carefully before investing.


This issue’s contributors:

Lead Contributor: Charles Reinhard, Managing Director

Article Contributors: Laura McCarron, Director, Robert Serenbetz, Senior Associate

Editors: Charles Reinhard, Managing Director, Christine Maurer, Managing Director, Christopher Simmons, Director, and Richard Miller, Managing Director

The information contained herein is general in nature and provided solely for educational and informational purposes. New York Life does not provide legal, accounting, or tax advice. You should obtain advice specific to your circumstances from your own legal, accounting, and tax advisors. Use of a financial professional does not guarantee investment success.

Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sale of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

3q | 2016 quarterly navigator · investment trusts (reits), and other high yielding sectors of the...

Documents