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Investment Markets and
Insurer Stocks
CAA March Workshops - March 23, 2016
Kirk A. Kreikemeier, CFP®, CFA, FSA
4365 Lawn Avenue, Suite 5
Western Springs, IL 60558
708-246-2366 | [email protected]
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Topics Covered – Investment Markets
Economic Update
Hunt for yield and caution warranted
Taxes as another source of “yield”
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GDP growth positive but sluggish Economic Update
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Unemployment falling but so is participation Economic Update
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Inflation is low but core is trending higher Economic Update
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Oil has fallen hard but gold stabilized; Dollar strong Economic Update
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Rates and curve shapes Economic Update
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Credit spreads and VIX Economic Update
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Fed’s Dot Plots and Global Rates … yes negative Economic Update
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Fed’s Economic projections – watch the change Economic Update
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Cumulative Total Returns – 2/29/2016 Economic Update
(curr hdg)
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Topics Covered
Economic Data
Hunt for yield and caution warranted
Taxes as another source of “yield”
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Hunting for yield or income? Hunt for Yield
Yield is the interest (or dividends) generated divided by current value• Variations – coupon, rate, SEC yield, yield-to-maturity (or to-call)
Income to retiree is after-tax money in pocket from investments and other
When rates were higher, income was yield earned from principal• $1,000,000 x 7% = $70,000/year; at 2% = $20,000/year (> 70% decrease!)
View income as total rate of return = interest (or dividends) + price change• As rebalance portfolio, replenish cash bucket
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Total rate of return approach to retirement income Hunt for Yield
Replenish cash with interest, dividends and portfolio returns• Look for ways to boost interest and dividends… but also price return
• Be mindful of taxes as recognize income (yield and asset sales)Ok, but I still want
to increase this!
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Primer: Bond yield composition Hunt for Yield
By Fred Vosvenieks, Consulting Actuary, Milliman & Russell Ward, Consulting Actuary, Milliman
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Primer: Bond ladder Hunt for Yield
As individual bond matures, buy new 5 year bond (could be longer)
Yield-focus strategy typically held to maturity
Watch diversification, transaction costs (implicit in yield)
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#1 - Extend maturity of bonds Hunt for Yield
Higher yield for longer maturity… but also more price risk
Taper tantrum in 2013 wiped out benefit of higher yield; 2014 repaid
Price risk differs with mutual funds (never mature) and bond ladders
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#2 – Move beyond credit risk-free treasury bonds Hunt for Yield
Get paid extra for chance of not getting paid back in full; diversify a ladder
Default rates vary by quality, phase of economic cycle• Recovery rate expectations also a driver (energy sector)
• 8% default, 40% recovery => 480bps (100x.92 + 40x.08 = 95.2); 10% RR=> 720bp
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#3 – Dividend-paying stocks Hunt for Yield
Low yields and potentially rising rates lead some to dividend-paying stocks
Volatility much greater for stocks; consider low beta/vol
Concept of ladder not applicable but diversification is important
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#4 – Specialty Asset Classes Hunt for Yield
Financial innovation gives you access to even more asset classes
Compare risk relative to aggregate bond fund, know the sector exposure• Preferred funds are heavy in financials
• MLPs in energy; correlations to underlying commodity higher than expected
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#5 – Payout annuities and longevity annuities Hunt for Yield
Enough already - just give me income for life• Annuity advantage over a portfolio – keeps paying as long as alive
Income received includes yield + principal paydown + mortality pool• Like a ‘total rate of return’ withdrawal concept without depletion risk
Annuity purchase locks in current low rates; wait or stagger purchases
Use combination of portfolio and longevity annuity for best of both worlds• Still have issue of locking in current low rates
• Qualifying Longevity Annuity Contracts (QLACs) in IRAs without RMD issues
• Maximum purchase in IRA is smaller of 25% or $125,000
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Topics Covered
Economic Data
Hunt for yield and caution warranted
Taxes as another source of “yield”
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Qualified vs. Ordinary and Short vs. Long Taxes as “Yield”
Most equity dividends are ‘qualified’; taxed at lower rate
Bond, other income and short-term gains taxed as ordinary income
Example shows tax-aware increases after-tax investment income by 5-10%
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Manage your bracket and note Uncle Sam’s share Taxes as “Yield”
Manage income recognition• Delay SS, draw IRAs ‘up to bracket’ before age 70; $75,000 x (.25-.15) = $7,500
• Consider state tax differential if IRA withdrawals are exempt (like IL)
Income thresholds for Medicare premium• Individual < $85k income = $121.80/month; > $160k = 316.70
• Annual difference of $2,338; noticeable for a $75k budget
Consider tax impact of employee benefits in Net Worth• Employee stock options/RSU/NQ Pensions are shown pre-tax on statements
• “What’s your number?” depends if assets in taxable account or IRA