2017 Investment Outlook
2017 Investment Outlook
Presentation By:
Robert C. Doll, CFA
–
Ten Predictions | February 2017
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
Senior Portfolio Manager Chief Equity Strategist
2016 Recap 1. Recession fears gave way to better economic growth 2. End of 35-year bull market in bonds (10-year Treasury: 1.37% on July 8, 2016) 3. Equities declined -11.4 % to February low and then rose 23.7% to year end 4. Oil bottomed and then doubled in price 5. Rise of nationalism: Brexit, Trump election, Italian referendum 6. Bizarre election cycle 7. To end the year, stocks rose and bonds fell, with better economic data and post-election hopes
Data source: FactSet as of 12/31/16. 10-Year U.S. Treasury Bond: 10-year Treasury Constant Maturity Rate; Equities: S&P 500 Index.
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2
2017: A Year of Transition Moving From… …Moving To Economic & Market Environment
Investment Goals & Preferences
Monetary easing Globalization
Nationalism
Disinflation
Inflation
Safety
Volatility
Beta
Alpha
Yield
Total return
Perceived safety Low volatility
Investment Implications
Fiscal stimulus
More risk Increased volatility
Bonds
Stocks
Sovereign
Credit
Large cap
Small cap
Growth Defensive FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
Value Cyclical 3
2016 Ten Predictions – Scorecard Muddle Through Continues 1. U.S. real GDP remains below 3% and nominal GDP below 5% for an unprecedented tenth year in a row. 2. U.S. Treasury rates rise for a second year, but high yield spreads fall. 3. S&P 500 earnings make limited headway as consumer spending advances are partially offset by oil, the dollar and wage rates. 4. For the first time in almost 40 years, U.S. equities experience a single-digit percentage change for the second year in a row. 5. Stocks outperform bonds for the fifth consecutive year. 6. Non-U.S. equities outperform domestic equities, while non-U.S. fixed income outperforms domestic fixed income. 7. Information technology, financials and telecommunication services outperform energy, materials and utilities. 8. Geopolitics, terrorism and cyberattacks continue to haunt investors but have little market impact. 9. The federal budget deficit rises in dollars and as a percentage of GDP for the first time in seven years. 10. Republicans retain the House and the Senate and capture the White House.
8.5 Correct Scorecard based on Bob Doll's 2016 Ten Predictions with data as of December 2016.
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4
Prediction 1
U.S. and global economic growth improves modestly as the dollar strengthens and reaches parity with the euro Does Rising Confidence Signal an Economic Pickup?
Measure of Confidence (points)
CEO and Consumer Confidence Measures _ CEO Confidence _ Average
_ Consumer Confidence
7
120
5
95
4
70
2
45
_ Average
2016 0
20
11/30/16 8/31/15 11/30/11 8/31/10 5/31/09 2/29/08 Data source: Bloomberg L.P., 12/31/065/31/14 – 11/30/16. 2/28/13 CEO Confidence: Conference Board Measure of CEO Confidence Index. Consumer Confidence: 9/30/15 Conference 5/31/14 Board 1/31/13 Consumer Confidence 9/30/11Index. 5/31/10 FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
1/31/09 9/30/07 5
Prediction 1
U.S. and global economic growth improves modestly as the dollar strengthens and reaches parity with the euro U.S. & Global GDP Remain Subdued but Should Strengthen Modestly U.S. Real GDP
Global
Nominal GDP
Real GDP
Nominal GDP
2010
2.5%
3.8%
4.3%
9.0%
2011
1.6
3.7
3.1
10.6
2012
2.2
4.1
2.4
1.7
2013
1.7
3.3
2.4
2.7
2014
2.4
4.2
2.6
2.4
2015
2.6
3.7
2.5
-5.8
2016E
1.6
3.0
2.9
5.4
2017E
2.0
4.0
3.4
6.1
2018E
2.5
5.0
3.6
6.5
Data sources: Bureau of Economic Analysis, Haver Analytics, Strategas Research Partners for 2010 – 2015. Used with permission. Data for 2016 – 2018 is based on estimates from Nuveen Asset Management, Morgan Stanley, Merrill Lynch and JP Morgan.
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6
Prediction 1
U.S. and global economic growth improves modestly as the dollar strengthens and reaches parity with the euro Why Should the Dollar Continue to Appreciate? 1. Rising interest rate differentials (between U.S. and trading partners) 2. Anticipated widening of economic growth differentials 3. Anticipation of expansive fiscal and reduced regulatory policy 4. Safe haven flows in an increasingly uncertain world
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7
Prediction 2
Unemployment drops to its lowest level in 17 years as wages increase at the fastest pace since the Great Recession Lower Unemployment Will Lead to Increased Wage Inflation _ U.S. Unemployment Rate _ U.S. Average Hourly Earnings
■ Recession Periods
Value Title Rate U.S. Unemployment
1000% 900% 800% 700% 600% 500% 400% 300%
Value Title
U.S. Average Hourly Earnings
450.0% 400.0% 350.0% 300.0% 250.0% 200.0%
Data source:150.0% Cornerstone Macro, 1/31/84 – 11/30/16. Used with permission.
1/31/84 1/31/86 1/31/88 1/31/901/31/92 1/31/94 1/31/96 1/31/98 1/31/00 1/31/021/31/04 1/31/06 1/31/08 1/31/10 1/31/12 1/31/141/31/16 FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
8
Prediction 2
Unemployment drops to its lowest level in 17 years as wages increase at the fastest pace since the Great Recession It Has Been Taking Longer to Fill Jobs Due to Higher Levels of Employment Average Number of Days to Fill Vacant Jobs ■ Recession Periods 30
Number of Days
27
24
21
18
15 Jan-2001 Apr-2002 Jul-2003 Oct-2004 Jan-2006 Apr-2007 Jul-2008 Oct-2009 Jan-2011 Apr-2012 Jul-2013 Oct-2014 Jan-2016
Data source: Deutsche Bank Research, 1/1/01 – 11/30/16. Used with permission.
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9
Prediction 3
Treasury yields move higher for a third consecutive year for the first time in 36 years as the Fed raises rates at least twice How Interest Rates Have Changed Over the Last 15 Years Federal Funds Target Rate 6
Rate
5
3
2
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
0 Data source: Bloomberg L.P., 12/31/01 – 12/31/16. Federal Funds Target Rate Index.
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10
Prediction 3
Treasury yields move higher for a third consecutive year for the first time in 36 years as the Fed raises rates at least twice Bond Bull Market Lasted 35 Years 10-Year U.S. Treasury Bond Yield 1800% 1600% 1400%
Yield (%)
Value Title
1200% 1000% 800% 600% 400% 200%
Yield Trough: 1.37% July 8, 2016
0% 12/30/16 9/30/14 6/30/12 3/31/10 12/31/07 9/30/05 6/30/03 3/31/01 12/31/98 9/30/96 6/30/94 3/31/92 12/31/89 9/30/87 6/30/85 3/31/83 12/31/80
Data source: FactSet, 12/31/79 – 12/31/16. Past performance is no guarantee of future results. 10-Year U.S. Treasury Bond: 10-year Treasury Constant Maturity Rate.
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11
Prediction 3
Treasury yields move higher for a third consecutive year for the first time in 36 years as the Fed raises rates at least twice Likely Path of Rates 1. Overdue rise in yields (normalization has arrived) 2. Moves are seldom smooth and predictable 3. 2017: expect more normalization of rates 4. Base case: modest rise in real growth and inflation 5. Modest rise in rates likely: long rates 50 bp per year; short rates 50-100 bp per year 6. Periods of tantrum possible with offsetting bond rallies 7. Low rates overseas provide some ceiling to U.S. rates
Fed Funds
Forecast
10-year Treasury
Fixed income preferences ▪ Equities
Y/E 2016
0.625%
2.50%
▪ Municipal Bonds
Y/E 2017
1.25
3.00
▪ Credit
Y/E 2018
2.00
3.50
▪ Sovereign Bonds
Forecast is from Nuveen Asset Management.
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12
Prediction 4
Stocks hit their 2017 highs in the first half of the year as earnings rise but price/earnings multiples fall Earnings Are Set to Improve ▪ Improving economic growth ▪ Tax reform/tax cuts
Sparkle and Fade.
▪ Regulatory reform ▪ Pent up demand for housing and capex ▪ Repatriation
Morgan Stanley 2017 Strategy Outlook
▪ Continued share buybacks
Multiples Could Come Under Pressure ▪ Rising inflation ▪ Rising interest rates ▪ Economic acceleration shortens cycle (closer to peak of cycle) ▪ Slower growth in China FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
13
Prediction 4
Stocks hit their 2017 highs in the first half of the year as earnings rise but price/earnings multiples fall Scenario Forecasting 2017 EPS
P/E
S&P 500
% Change
20%
Less Growth/ More Inflation
$130 (+10%)
16.0x
2080
-7%
50%
Base Case
$128 (+8%)
18.0x
2300
+3%
30%
"Transitions" Successful $128 (+8%)
20.0x (18x $140 2018 EPS)
2550
+14%
2350
+5%
Probability
Significant uncertainties
Target (Weighted Average)
▪ Tax reform vs. tax cuts ▪ Timing of tax cuts ▪ Extent of base broadening The forecast data reflects the opinion of the author, Bob Doll, and not the firm. The information provided herein is not intended to be a forecast or guarantee of future events or results. It is not a recommendation to buy or sell any specific securities and should not be considered investment advice of any kind. Investing in securities involves risk of loss that clients should be prepared to bear. There is no assurance that an investment will provide positive performance over any period of time. Past performance is no guarantee of future results and different periods and market conditions may result in significantly different outcomes.
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14
Prediction 5
Stocks outperform bonds for the sixth year in a row for the first time in 20 years while volatility rises Stocks Have a Recent History of Outperforming Bonds S&P 500
Bloomberg Barclays U.S. Aggregate Bond
2012
16.0%
4.2%
2013
32.4%
-2.0%
2014 2015 2016
13.7% 1.4% 12.0% 15.1%
6.0% 0.5% 2.6% 2.3%
5-year Return
Data source: Morningstar Direct as of 12/31/16. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index.
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15
Prediction 5
Stocks outperform bonds for the sixth year in a row for the first time in 20 years while volatility rises Bond Yields and Stock Prices Often Rise Concurrently Dates 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Bond Yield Increase (Basis Points)
May 2, 1958 — July 31, 1959 January 11, 1963 — February 11, 1966 January 27, 1967 — November 29, 1968 November 5, 1971 — January 5, 1973 March 3, 1978 — November 28, 1980 November 5, 1982 — July 22, 1983 April 18, 1986 — August 21, 1987 October 2, 1998 — January 14, 2000 June 13, 2003 — May 5, 2006 March 20, 2009 — April 2, 2010 June 1, 2012 — December 27, 2013
Average Increase* July 8, 2016 — December 31, 2016
Stock Market Increase (%)
152 bp 106 131 70 468 95 168 238 199 131 155
38.5% 44.7 25.8 26.8 60.1 19.1 38.9 46.1 34.1 53.3 44.1
174 bp 108
39.2% 5.1
Data source: The Leuthold Group and FactSet as of 12/31/16. Past performance is no guarantee of future results. Bond Yields: 10-year U.S. Treasury; Stock Market: S&P 500 Index. Indicates all periods where bond yields and stock prices rallied concurrently. *Average Increase does not include 2016 performance. It is not possible to invest directly in an index. Used with permission.
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16
Prediction 5
Stocks outperform bonds for the sixth year in a row for the first time in 20 years while volatility rises Issues Increasing Stock and Bond Volatility 1. Policy uncertainties – details and timing 2. Change in Fed path, dollar pattern, election cycles in Europe, China issues 3. Low volatility stocks are failing and will likely fail again in 2017 4. High beta stocks are cheap relative to low volatility investments 5. Distribution of possible outcomes is wider than it has been (boom and bust tails have non-zero probabilities) 6. Economic conditions ▪Slow growth Faster growth ▪Slow reflation Faster reflation ▪Slow policy normalization Faster policy normalization
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17
Prediction 6
Small caps, cyclical sectors and value styles beat large caps, defensive and growth areas
Why Small > Large?
Why Cyclical > Defensive?
Why Value > Growth?
▪ U.S. dollar appreciation
▪ Growth acceleration
▪ GDP acceleration
▪ Effective tax rates for corporations - R2000: 32% - S&P 500: 26%
▪ Yield to underperform
▪ Inflation increases
▪ Valuation
▪ Valuation
▪ Domestic focus (weak global trade)
Data source for tax rates: Credit Suisse.
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18
Prediction 6
Small caps, cyclical sectors and value styles beat large caps, defensive and growth areas Strong One-Month Performance for Value Has Led to Strong Next 12 Months Monthly and Forward One-Year Return Differential for Value vs Stable ■ Monthly Return: Value — Stable ■ Forward One-Year Return: Value — Stable 4000%
40% 35%
33%
Total Return Differential (%)
29%
Value Title
2875%
25% 20% 17% 14%
1750%
23%
21% 16%
14%
12%
12% 10%
13% 10%
10%
9%
9%
8%
8%
Apr 2003
Nov 2016
625% -3%
-500%
Apr 2009
Nov 2002 Jan 1975
Jan 2001
Jan 1974
Jan 1991
Jan 1992
Dec 2008 Oct 2011
Jan 1976
Data source: Empirical Research Partners Analysis. Past performance is no guarantee of future results. Used with permission. Illustrates historical 1-month return spreads between Value and Stable, during periods when the monthly return differential was greater than November 2016. Also indicates the spread for the subsequent 12 months. Chart is sorted from largest to smallest 1-month spread. Stable stocks are defined as the top 20% by stability score selected from the largest 400 stocks. Stability is based on a 6 factor model that takes into account the stock’s ROE, variability, stability of earnings growth, dispersion of earnings estimates, financial leverage and beta. This is run across the large cap universe, and on average there are around 100 names. Value is defined as names that rank in the top quintile of valuation in the core model framework.
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19
Prediction 7
The financials, health care and information technology sectors outperform energy, utilities and materials Overweights
Underweights
Financials
Energy
▪ Beneficiary of asset reflation
▪ Persistent oversupply
▪ Higher interest rates, regulation easing
▪ Oil prices in a low trading range
▪ Stocks cheap, despite recent rise
▪ Stocks expensive relative to price of oil
Risk: Global financial accident
Risk: OPEC agreement holds, oil trades higher
Health Care ▪ Revenue and earnings growth strong
Utilities ▪ Rising rates
▪ Innovation and expenditure growth
▪ Little earnings growth expected in 2017
▪ Discount valuations
▪ Elevated valuations, despite recent underperformance
Risk: Political and headline risk
Risk: Economy weakens, rates fail to rise
Information Technology ▪ Good growth and value characteristics
Materials ▪ Slowing China
▪ Strong balance sheets and free cash flow
▪ Rising dollar
▪ Beneficiary of improved capital spending outlook
▪ Infrastructure rally overdone
Risk: Dollar rising farther, hampering earnings growth
Risk: Dollar weakness, massive infrastructure spending
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20
Prediction 7
The financials, health care and information technology sectors outperform energy, utilities and materials Strength of Defensive Sectors Began Waning in Second Half of 2016 Sector Performance Has Shifted Since Mid 2016 ■ First Half of 2016
■ Second Half through December 31 28%
30%
Total Return (%)
24%
24%
15%
19%
12% 10%
10%
14%
12% 9% 9%
8%
6%
6%
4%
8%
1%
0%
0%
-4%
-5%
Utilities
-6%
Telecom- munications
Energy
Real Estate
-4%
Consumer Staples
-3%
0% -5%
Materials
Industrials Russell 1000 Consumer Index Discretionary
Health Care
Technology
Financials
-15% Data source: FactSet, 1/1/16 – 12/31/16. Past performance is no guarantee of future results. Sector performance based on the Russell 1000 Index.
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21
Prediction 8
Active managers’ performance improves as flows into equities rise Environments When Active Managers Perform Well Expected 2017 Small > Large International > U.S.
Yes ?*
Value > Growth
Yes
Equal Weight > Cap Weight
Yes
Correlations Low
Yes
Interest Rates Rise
Yes
Credit Spreads Fall
Yes
* While not one of our ten predictions, the U.S. equity market has tailwinds compared to the rest of the world, including better domestic economic growth, more effective monetary policy, rising relative earnings and a healthier financial sector. However, valuations reflect these realities.
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22
Prediction 8
Active managers’ performance improves as flows into equities rise A Stock-Pickers Market: Equities Reach Lowest Correlations in 10 Years Stock-to-Stock Correlation of the S&P 500 Index 0.9
Correlation
0.8
0.6
0.5
2016 0.3 12/29/06 7/26/07 2/19/08 9/10/08 4/3/09 10/26/09 5/20/1012/10/10 7/6/11 1/27/12 8/20/12 3/18/13 10/8/13 5/1/14 11/20/14 6/17/15 1/8/16 8/2/16 Data sources: Strategas Research Partners, Bloomberg, 12/29/06 – 12/16/16. Past performance is no guarantee of future results. Correlation is a statistical measure of how two securities move in relation to each other. Perfect positive
correlation (a correlation co-efficient of +1) implies that as one security moves the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation (a correlation co-efficient of –1) means that securities will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; their movements in relation to one another are completely random. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index.
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23
Prediction 9
Nationalist and protectionist trends rise as pro-domestic policies are pursued globally Thoughts on Nationalism, Populism, Protectionism and Foreign Trade 1. A new breed of populist leaders is hardening national borders, resulting in fewer exports, less migration and reduced capital flows 2. Since 2015, global exports have been almost flat and have lagged GDP growth 3. A proposal that all imports be subject to a border tax to help pay for a U.S. corporate tax cut has protectionist overtones 4. The momentum of global trade is perhaps the single most reliable indicator of emerging market asset performance 5. The 1930 Smoot-Hawley tariff was disastrous in part because it contributed to the Great Depression, but also because it led to a breakdown of international relations when fascism was on the rise
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24
Prediction 9
Nationalist and protectionist trends rise as pro-domestic policies are pursued globally Global Trade Is Important to GDP, but Imports May Be Declining Imports as a Percent of GDP ■ Recession Periods 3000%
2250%
1500%
750%
0% 1840
1860
1880
1900
1920
1940
1960
1980
2000
Data source: BCA Research, 1795 – 2015. Used with permission. Note: Calculated as imports as percentage of GDP for 148 countries, weighted by population.
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25
Prediction 9
Nationalist and protectionist trends rise as pro-domestic policies are pursued globally Observations About Why China Concerns Continue to Lurk 1. The starting point for China’s problems is overinvestment Investments as % of GDP: ▪China: 47% ▪Emerging Markets: 28% (average) ▪Developed Markets: 19% (average) 2. Beijing tightening capital controls, a sign outflows have increased again 3. China is more economically dependent on the U.S. than the U.S. is on China ▪% of U.S. exports to China: 7.7% ▪% of China exports to U.S.: 20.1% 4. A trade war between China and the U.S. would have negative short-term consequences for both countries, but these consequences would be more readily overcome by the U.S. than China
Data Source: Cornerstone Macro for investments as a percentage of GDP.
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26
Prediction 10
Initial optimism about the Trump agenda fades in light of slow legislative progress Implications of a Trump Victory Opportunities
Risks
1. More real growth
1. More inflation/higher interest rates
2. Tax cuts
2. Higher deficits
3. Less regulation
3. Protectionism threats
4. Stronger dollar
4. Higher geopolitical risks
5. More M&A
5. Potential improper business dealing risks
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27
Prediction 10
Initial optimism about the Trump agenda fades in light of slow legislative progress The U.S. Has Become More Divided 3000%
2004 MEDIAN MEDIAN Democrat Republican
2250%
3000%
2014 MEDIAN Democrat
MEDIAN Republican
2250%
1500%
Polarization in the U.S. today 1. Income inequality and immobility
1500%
2. Generational warfare 750%
750%
0%
0%
Consistently Liberal
Consistently Conservative
3. Geographical segregation 4. Immigration Consistently Liberal
Source: Pew Research Center, June, 2014, "Political Polarization in the American Public."
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Consistently Conservative
5. Media polarization
Source: BCA Research.
28
Prediction 10
Initial optimism about the Trump agenda fades in light of slow legislative progress Eventually Debt Becomes a Problem U.S. Federal Government Debt vs GDP
Debt as a % U.S. Nominal GDP
90
73
55
38
20 3/31/55 9/30/58 3/31/62 9/30/65 3/31/69 9/30/72 3/31/76 9/30/79 3/31/83 9/30/86 3/31/90 9/30/93 3/31/97 9/30/00 3/31/04 9/30/07 3/31/11 9/30/14 Data source: Cornerstone Macro, 3/31/55 – 9/30/16. Used with permission.
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29
2017 Outlook 1. Overweight equities (but could be bumpy) 2. The average stock beats its benchmark (small > large | equal weighted portfolio > cap weighted portfolio | active outperforms) 3. Underweight bonds (Fed funds rate and longer-term rates should rise) 4. Fed raises rates two (or three) times 5. Dollar moves unevenly higher 6. Keep a careful eye on inflation 7. Overall returns are likely to be mediocre
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Risks 1. Policy changes are less bold and successful than expectations 2. Policy changes don’t take effect until 2018 3. Inflation increases 4. Fed tightens more than expected 5. Interest rates increase too much 6. Dollar rises too much (weighs on earnings) 7. China stumbles
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31
Portfolio Construction Views Asset Allocation
Cash Bonds Stocks Commodities
Overweight
Neutral
Underweight
X
Comment
X
Return rising, alternative to bonds Rates creep higher Earnings improve Volatile, perhaps higher
X X X
Not cheap, but growth improving Some improvement, structural problems Cyclical market and cheap, but structural problems Very bumpy – suffering from poor global trade and rising dollar
X X
Equities by Geography
U.S. Europe Japan Emerging Markets
X
U.S. Equities by Common Factors Capitalization Style Economic Exposure Source of Earnings
Small Value Cyclicals Domestic
Large Growth Defensive Multinational
Sector Preferences
Reflation beneficiaries, cheap 1. Financials Good fundamentals and valuation; headline risk 2. Health Care 3. Information Technology Good cyclical and secular trends, strong financials 4. Telecommunication Services Cheapest yield sector Good fundamentals, but stocks have run 5. Industrials 6. Consumer Discretionary Healthy consumer; mixed outlook Mixed fundamentals; further de-rating unlikely 7. Consumer Staples Not expensive, but rising bond yields hurt 8. Real Estate 9. Materials Strong dollar and slowing China hurt The information provided herein is not a recommendation to buy or sell any specific securities and should not be considered investment advice of any kind. Investing in securities involves risk of loss that clients should be prepared to bear. There is no assurance an investment will provide positive performance over any period of time. Past performance is no guarantee of future results and different Expensive periods and andmarket little conditions growth prospects may result in significantly different outcomes. 10.thatUtilities 11. Energy Oversupply of oil; not cheap FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
32
Think About the Long-Term and Remain Diversified
10-Year Return Forecast By Asset Class
Forecasted Return Range
Equities
5 – 7%
U.S.
5 – 7%
Non-U.S. Developed Markets
4 – 6%
Emerging Markets Bonds
7 – 9% 2 – 4%
U.S. Government
0 – 2%
U.S. Investment Grade
2 – 4%
U.S. High Yields
4 – 6%
Emerging Market Sovereign
5 – 7%
Cash
2 – 3%
Inflation
2 – 3%
Diversified Portfolios Conservative
3 – 5%
Balanced
4 – 6%
Aggressive
5 – 7%
Data sources: MRB Partners, Nuveen Asset Management as of December 2016. The forecast data reflects the opinion of the author, Bob Doll, and not the firm. The information provided herein is not intended to be a forecast or guarantee of future events or results. It is not a recommendation to buy or sell any specific securities and should not be considered investment advice of any kind. Investing in securities involves risk of loss that clients should be prepared to bear. There is no assurance that an investment will provide positive performance over any period of time. Past performance is no guarantee of future results and different periods and market conditions may result in significantly different outcomes.
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33
Where Are We in the Market Cycle?
Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.
Sir John Templeton
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34
Set Your Sights Higher 20-Year Annualized Returns by Asset Class 1996 ‒ 2015 1200%
Value Title
Average Annualized Total Returns (%)
1089.5%
900%
818.7% 756.3%
600%
533.7%
517.1%
483.1% 421.4% 324.7%
300%
0%
210.0%
REITs
U.S. Equities
60/40 U.S. Bonds Gold Non-U.S. Equities Homes Oil Inflation Average Portfolio Investor Data sources: Morningstar Direct, Bloomberg L.P., Federal Reserve Bank of St. Louis, Nuveen Asset Management and DALBAR, Inc. “Quantitative Analysis of Investor Behavior (QAIB), 2016.” Data from 1/1/96 - 12/31/15. Past performance is no guarantee of future results. Used with permission. REITs: FTSE NAREIT Equity REIT Index; U.S. Equities: S&P 500 Index; 60/40 Portfolio: 60% S&P 500 / 40% Bloomberg Barclays U.S. Aggregate Bond Index; U.S. Bonds: Bloomberg Barclays U.S. Aggregate Index; Gold: USD/troy oz.; Non-U.S. Equities: MSCI EAFE Index; Homes by the median sale price of existing single-family homes; Oil: West Texas Intermediate (WTI) Index; Inflation: Consumer Price Index; Average Asset Allocation Fund Investor by DALBAR, Inc. “Quantitative Analysis of Investor Behavior (QAIB), 2016,” www.dalbar.com. Average Asset Allocation Fund Investor performance results are calculated using data supplied by the Investment Company Institute. Investor returns are represented by the change in total mutual fund assets after excluding sales, redemptions and exchanges.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
35
Important Disclosures This presentation is for general information purposes only and should not be construed as specific tax or investment advice. The statements contained in this presentation are the opinions of Nuveen Asset Management, LLC and data available at the time of publication, and is not intended to be a forecast or guarantee of future events or results. It contains information from third party sources believed to be reliable but are not guaranteed as to accuracy and not intended to be all inclusive. It does not constitute an offer, solicitation, or recommendation regarding securities or investment strategy and is not intended to predict or depict performance of any investment. Past performance is no guarantee of future results. A Word on Risk Equity investments are subject to market risk, active management risk, and growth stock risk; dividends are not guaranteed. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. The use of derivatives involves additional risk and transaction costs. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, derivatives risk, income risk, and other investment company risk. As interest rates rise, bond prices fall. Credit risk refers to an issuer’s ability to make interest payments when due. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Foreign investments involve additional risks as noted above. Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
36
Index Definitions One basis point equals .01%, or 100 basis points equal 1%. The Bloomberg Barclays U.S. Aggregate Bond Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index tracks the performance of U.S. non-investment-grade bonds and limits each issuer to 2% of the index. The Bloomberg Barclays U.S. Treasury Bellwethers 10-Year Index is a universe of Treasury bonds, and used as a benchmark against the market for long-term maturity fixed-income securities. The index assumes reinvestment of all distributions and interest payments. The BofA Merrill Lynch 3-Month U.S. Treasury Bill Index is an unmanaged index of Treasury securities maturing in 90 days that assumes reinvestment of all income. Capital expenditures (capex) are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. The CEO Confidence Index is based on a monthly survey of 100 CEOs that seeks to gauge the economic outlook of CEOs. The Chicago Board Options Exchange Volatility Index (VIX) shows the market’s expectation of 30-day volatility. It is often referred to as the "investor fear gauge." Consumer Confidence Index (CCI) measures how optimistic or pessimistic consumers are about to the economy in the near future. The Consumer Price Index (CPI) is an inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of common stock, serving as an indicator of a company's profitability. The federal funds rate is the interest rate at which U.S. depository institutions lend reserve balances to other depository institutions overnight, on an uncollateralized basis. The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. It is composed of the board of governors, which has seven members and five reserve bank presidents. The FTSE NAREIT Equity REIT Index is an unmanaged index reflecting performance of the U.S. real estate investment trust market. Gross domestic product (GDP) is a primary indicator used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period. Real GDP is adjusted for inflation. Nominal GDP is not adjusted for inflation.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
37
Index Definitions The Merrill Lynch Option Volatility Estimate (MOVE) Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options that are weighted on the 2, 5, 10, and 30 year contracts. The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. The MSCI Emerging Markets Index captures large and mid cap representation across 23 Emerging Markets countries. 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. The MSCI World Index ex-U.S. is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets minus the United States. The Russell 1000® Index is a large-cap index measuring the performance of the largest 1,000 U.S. incorporated companies. The Russell 1000® Growth Index is a market-capitalization-weighted index that measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
The S&P 500® Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. The Thomson Reuters/CoreCommodity CRB Index tracks the performance of 19 different commodities. The troy ounce is used in the pricing of metals such as gold, platinum and silver. There are 14.58 troy ounces in a pound. The Trade Weighted U.S. Dollar Index: measures the value of the U.S. dollar relative to other world currencies. The U.S. Treasury T-Bill Constant Maturity Rate 10 Yr. Index is published by the Federal Reserve Board based on the average yield of a range of Treasury securities, all adjusted to the equivalent of a 10-year maturity. The West Texas Intermediate (WTI) Index is used as a benchmark for pricing much of the world’s crude oil production.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
GPP-10PREDL-0118D
The Russell 2000® Index is composed of the 2,000 smallest stocks in the Russell 3000® Index and is widely regarded in the industry as the premier measure of small cap stock performance.
21704-INV-Y-01/18
The Russell 1000® Value Index is a large-cap value index measuring the performance of the largest 1,000 U.S. incorporated companies with lower price-to-book ratios and lower forecasted growth values.
38
Large Cap Equity Series
January 2017
Not FDIC Insured May Lose Value No Bank Guarantee FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
Important Information This presentation may include information on strategies that may be available within different product types: institutional separate accounts, separately managed accounts, mutual funds and unit investment trusts. Financial advisors should understand the differences of each product type — especially the impact of fees, which may affect performance when evaluating investment products. It is important to review your client’s investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. Financial advisors should consider the suitability of the manager, strategy and program for its clients on an initial and ongoing basis. Separately managed accounts provide investors with access to specialized investment managers and the ability to own individual securities in the portfolio. Separately managed accounts typically require a minimum investment of $100,000 or more and are fee-based. The portfolios can provide investment flexibility and tax planning features, based on individual investor preferences. Separately managed accounts are subject to different regulatory guidelines than mutual funds. Mutual funds pool assets from many investors and develop professionally managed portfolios of securities based on specific investment goals. Investors own shares, representing a portion of the fund’s holdings. The minimum investment requirements tend to be relatively low. Mutual funds can offer investors diversification, daily pricing and a. variety of investment strategies and styles, with different fees, expenses and risks.
Large Cap Equities Series Risk: Risks may include: equity security risk, large cap stock `risk, non-diversification risk, smaller company risk, growth stock risk, and value stock risk. Non-U.S. investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. A portfolio's use of futures contracts involves transaction costs and the potential for negative impact on performance. A portfolio engaging in frequent trading of securities may result in taxable gains to investors and involve trading costs that may impact fund performance. A portfolio’s use of short selling is a form of leverage and involves additional expense and risks including market loss and increased volatility of returns. Investing in securities involves risk of loss that clients should be prepared to bear. There is no assurance that an investment will provide positive performance over any period of time. Past performance is no guarantee of future results and different periods and market conditions may result in significantly different outcomes. Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc. Nuveen Investments Advisers, LLC (“NIA”), a registered investment adviser, provides separately managed accounts marketing services for its affiliates that are registered investment advisers, including Nuveen Asset Management, LLC. All such affiliates are also affiliates of Nuveen Investments, Inc. Funds distributed by Nuveen Securities, LLC, a subsidiary of Nuveen Investments, Inc.
This information represents the opinion of Nuveen Asset Management, LLC, and is not intended to be a forecast or guarantee of future events or results. It is not intended to provide specific advice and should not be considered investment advice of any kind. Information was obtained from sources we believe to be reliable, but are not guaranteed as to their accuracy or completeness. This report contains no recommendations to buy or sell specific securities or investment products. All investments carry a certain degree of risk, including possible loss of principal. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
40
Large Cap Equity Series One investment process is applied to nine strategies in U.S. large cap equities.
Mutual Funds
Separately Managed Accounts
Large Cap Core
✓
✓
Large Cap Value
✓
✓
Large Cap Growth
✓
✓
Concentrated Core
✓
✓
Core Dividend
✓
✓
Stable Growth
✓
✓
Traditional
Specialty
Alternative Large Cap Core Plus
✓
Equity Long/Short
✓
Equity Market Neutral
✓
Open-End Mutual Funds and Separately Managed Accounts are different types of investment vehicles with different expense structures and different inflows/outflows and distribution requirements.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
41
Why Large Cap Equity Series? 1 Process ▪
Research platform combines quantitative and fundamental inputs
▪
Investment approach has existed for more than 30 years
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42
Why Large Cap Equity Series? 1 Process
2 People
▪
Research platform combines quantitative and fundamental inputs
▪
Experienced portfolio manager with more than 35 years of investment experience
▪
Investment approach has existed for more than 30 years
▪
18 research analysts
▪
Average 20 years of experience
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
43
Why Large Cap Equity Series? 1 Process
2 People
3 Performance
▪
Research platform combines quantitative and fundamental inputs
▪
Experienced portfolio manager with more than 35 years of investment experience
▪
6 of 9 funds achieved top quintile Morningstar rankings over the 1-year period1
▪
Investment approach has existed for more than 30 years
▪
18 research analysts
▪
Overall Morningstar RatingTM
▪
Average 20 years of experience
• 5-Stars Nuveen Equity/Long Short Fund • 4-Stars • Nuveen Large Cap Core Fund Nuveen Equity Market Neutral Fund Nuveen Large Cap Growth Fund Morningstar rankings and ratings based on I shares as of 12/31/16
1 Morningstar rankings based on the 1-year time period as of 12/31/16 for Class I shares. Specific product types have different fees and expenses, as well as minimum investment thresholds that affect performance. Additionally, the different strategies within the product types have different investment objectives that also affect characteristics, holding periods, limits on sectors, number of holdings, type of holdings, etc., which affect performance. Morningstar data only applies to open-end mutual funds and should not be used as an indication of performance for separately managed accounts. Please note that not all strategies are available at all firms. Please check with your firm for availability.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
44
Mutual Fund Performance Manager Inception Date to December 31, 2016
Morningstar Rankings
Average Annualized Total Returns
Symbol
Fund Manager Inception Inception Date Date1
Without Sales Charge
With Sales Charge
Benchmark
Excess Return (Difference Morningstar Classification )
Morningstar Absolute Rank
Morningstar Percentile Rank
Traditional Nuveen Large Cap Value Fund
NNGAX
8/7/96
6/24/13
13.28
12.03
12.24
1.04
Large Value
210/1172
18%
Nuveen Large Cap Core Fund
NLACX
6/17/13
6/17/13
12.81
10.94
11.46
1.35
Large Blend
16/1347
2%
Nuveen Large Cap Growth Fund
NLAGX
6/17/13
6/17/13
11.95
10.09
12.02
-0.07
Large Growth
218/1443
15%
Nuveen Core Dividend Fund
NCDAX
6/17/13
6/17/13
9.97
8.15
11.46
-1.49
Large Value
201/1172
17%
Nuveen Concentrated Core Fund
NCADX
6/17/13
6/17/13
10.71
8.88
11.46
-0.75
Large Value
432/1172
37%
Nuveen Growth Fund
NSAGX
3/28/06
3/31/14
9.35
8.09
8.93
0.42
Large Growth
269/1449
19%
Nuveen Large Cap Core Plus Fund
NLAPX
6/17/13
6/17/13
12.36
10.50
11.46
0.90
Large Blend
37/1347
3%
Nuveen Equity Long/Short Fund
NELAX
12/30/08
2/12/13
11.45
8.88
12.73
-1.28
Long/Short Equity
10/130
7%
Nuveen Equity Market Neutral Fund
NMAEX
6/17/13
6/17/13
4.97
3.23
0.13
4.84
Market Neutral
5/103
4%
Specialty
Alternative
1 Manager inception date is the date Bob Doll became portfolio manager for each Fund, and the date he became sole portfolio manager for the Nuveen Growth Fund. Returns quoted represent past performance which is no guarantee of future results. Investment returns and principal value will fluctuate so that when shares are redeemed, they may be worth more or less than their original cost. Current performance may be higher or lower than the performance shown. Returns without sales charges would be lower if the sales charge were included. Fund returns assume reinvestment of dividends and capital gains. For performance current to the most recent month-end visit www.nuveen.com or call 800.257.8787. Additional performance for each of the Funds immediately follows in this presentation and is available at nuveen.com. Morningstar Ranking/Number of Funds in Category displays the Fund’s actual rank within its Morningstar Category based on average annual total return and number of funds in that Category. The returns assume reinvestment of dividends and do not reflect any applicable sales charge. Absent expense limitation, total return would be less. Morningstar Percentile Rankings are the Fund’s total return rank relative to all the funds in the same Morningstar category, where 1 is the highest percentile rank and 100 is the lowest percentile rank. The Funds’ benchmarks include: Nuveen Large Cap Value Fund: Russell 1000® Value Index; Nuveen Large Cap Core Fund, Nuveen Core Dividend Fund, Nuveen Concentrated Core Fund, Nuveen Large Cap Core Plus Fund and Nuveen Equity Long/Short Fund: Russell 1000® Index; Nuveen Large Cap Growth Fund and Nuveen Growth Fund: Russell 1000® Growth Index; Nuveen Equity Market Neutral Fund: BofA Merrill Lynch 3-Month Treasury Bill Index.
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45
Themes and Sector Highlights
SECTOR PREFERENCES | STOCK EXAMPLES
Themes ▪ Pro
▪ Con
- Risk-On
- Risk-Off
- Free cash flow
- Bond-like equities
- Unit growth
- Sectors requiring pricing power
- Cyclical
- Defensive
- Domestic earnings
- Multinationals
▪ Financials
- BankAmerica - Citicorp
▪ Health Care
- Aetna - Express Scripts
▪ Information Technology
- MasterCard
▪ Miscellaneous
- UAL
- VMware
- CBS
Source: FactSet, as of 12/31/16. See nuveen.com for more information.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
46
Determinants of Active Manager Performance
Active Share
Fund Size
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
Portfolio Manager Ownership
47
Thoughts to Rethink and Ponder 1.
Jesus Christ said more about money and possessions than heaven and hell combined.
2.
You can tell volumes about a person if you can examine their checkbook and calendar.
3.
How much did John D. leave? “He left all of it.”
4.
You can’t take it with you, but you can send it on ahead.
5.
Jesus said “where your treasure is, there your heart will be also.”
6.
God owns everything. I am his money manager. (Not, how much should I give, but how much should I keep?)
7.
God prospers us in order to raise our standard of giving, not our standard of living.
8.
Conformed vs. Transformed? (Romans 12:2)
9.
Generosity and wealth are best handled if we really believe we are “passing through.”
10. What are you doing with your hyphen?
–Randy Alcorn
Presentation By:
Robert C. Doll, CFA
–
Ten Predictions | February 2017
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
Senior Portfolio Manager Chief Equity Strategist
2016 Recap 1. Recession fears gave way to better economic growth 2. End of 35-year bull market in bonds (10-year Treasury: 1.37% on July 8, 2016) 3. Equities declined -11.4 % to February low and then rose 23.7% to year end 4. Oil bottomed and then doubled in price 5. Rise of nationalism: Brexit, Trump election, Italian referendum 6. Bizarre election cycle 7. To end the year, stocks rose and bonds fell, with better economic data and post-election hopes
Data source: FactSet as of 12/31/16. 10-Year U.S. Treasury Bond: 10-year Treasury Constant Maturity Rate; Equities: S&P 500 Index.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
2
2017: A Year of Transition Moving From… …Moving To Economic & Market Environment
Investment Goals & Preferences
Monetary easing Globalization
Nationalism
Disinflation
Inflation
Safety
Volatility
Beta
Alpha
Yield
Total return
Perceived safety Low volatility
Investment Implications
Fiscal stimulus
More risk Increased volatility
Bonds
Stocks
Sovereign
Credit
Large cap
Small cap
Growth Defensive FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
Value Cyclical 3
2016 Ten Predictions – Scorecard Muddle Through Continues 1. U.S. real GDP remains below 3% and nominal GDP below 5% for an unprecedented tenth year in a row. 2. U.S. Treasury rates rise for a second year, but high yield spreads fall. 3. S&P 500 earnings make limited headway as consumer spending advances are partially offset by oil, the dollar and wage rates. 4. For the first time in almost 40 years, U.S. equities experience a single-digit percentage change for the second year in a row. 5. Stocks outperform bonds for the fifth consecutive year. 6. Non-U.S. equities outperform domestic equities, while non-U.S. fixed income outperforms domestic fixed income. 7. Information technology, financials and telecommunication services outperform energy, materials and utilities. 8. Geopolitics, terrorism and cyberattacks continue to haunt investors but have little market impact. 9. The federal budget deficit rises in dollars and as a percentage of GDP for the first time in seven years. 10. Republicans retain the House and the Senate and capture the White House.
8.5 Correct Scorecard based on Bob Doll's 2016 Ten Predictions with data as of December 2016.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
4
Prediction 1
U.S. and global economic growth improves modestly as the dollar strengthens and reaches parity with the euro Does Rising Confidence Signal an Economic Pickup?
Measure of Confidence (points)
CEO and Consumer Confidence Measures _ CEO Confidence _ Average
_ Consumer Confidence
7
120
5
95
4
70
2
45
_ Average
2016 0
20
11/30/16 8/31/15 11/30/11 8/31/10 5/31/09 2/29/08 Data source: Bloomberg L.P., 12/31/065/31/14 – 11/30/16. 2/28/13 CEO Confidence: Conference Board Measure of CEO Confidence Index. Consumer Confidence: 9/30/15 Conference 5/31/14 Board 1/31/13 Consumer Confidence 9/30/11Index. 5/31/10 FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
1/31/09 9/30/07 5
Prediction 1
U.S. and global economic growth improves modestly as the dollar strengthens and reaches parity with the euro U.S. & Global GDP Remain Subdued but Should Strengthen Modestly U.S. Real GDP
Global
Nominal GDP
Real GDP
Nominal GDP
2010
2.5%
3.8%
4.3%
9.0%
2011
1.6
3.7
3.1
10.6
2012
2.2
4.1
2.4
1.7
2013
1.7
3.3
2.4
2.7
2014
2.4
4.2
2.6
2.4
2015
2.6
3.7
2.5
-5.8
2016E
1.6
3.0
2.9
5.4
2017E
2.0
4.0
3.4
6.1
2018E
2.5
5.0
3.6
6.5
Data sources: Bureau of Economic Analysis, Haver Analytics, Strategas Research Partners for 2010 – 2015. Used with permission. Data for 2016 – 2018 is based on estimates from Nuveen Asset Management, Morgan Stanley, Merrill Lynch and JP Morgan.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
6
Prediction 1
U.S. and global economic growth improves modestly as the dollar strengthens and reaches parity with the euro Why Should the Dollar Continue to Appreciate? 1. Rising interest rate differentials (between U.S. and trading partners) 2. Anticipated widening of economic growth differentials 3. Anticipation of expansive fiscal and reduced regulatory policy 4. Safe haven flows in an increasingly uncertain world
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
7
Prediction 2
Unemployment drops to its lowest level in 17 years as wages increase at the fastest pace since the Great Recession Lower Unemployment Will Lead to Increased Wage Inflation _ U.S. Unemployment Rate _ U.S. Average Hourly Earnings
■ Recession Periods
Value Title Rate U.S. Unemployment
1000% 900% 800% 700% 600% 500% 400% 300%
Value Title
U.S. Average Hourly Earnings
450.0% 400.0% 350.0% 300.0% 250.0% 200.0%
Data source:150.0% Cornerstone Macro, 1/31/84 – 11/30/16. Used with permission.
1/31/84 1/31/86 1/31/88 1/31/901/31/92 1/31/94 1/31/96 1/31/98 1/31/00 1/31/021/31/04 1/31/06 1/31/08 1/31/10 1/31/12 1/31/141/31/16 FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
8
Prediction 2
Unemployment drops to its lowest level in 17 years as wages increase at the fastest pace since the Great Recession It Has Been Taking Longer to Fill Jobs Due to Higher Levels of Employment Average Number of Days to Fill Vacant Jobs ■ Recession Periods 30
Number of Days
27
24
21
18
15 Jan-2001 Apr-2002 Jul-2003 Oct-2004 Jan-2006 Apr-2007 Jul-2008 Oct-2009 Jan-2011 Apr-2012 Jul-2013 Oct-2014 Jan-2016
Data source: Deutsche Bank Research, 1/1/01 – 11/30/16. Used with permission.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
9
Prediction 3
Treasury yields move higher for a third consecutive year for the first time in 36 years as the Fed raises rates at least twice How Interest Rates Have Changed Over the Last 15 Years Federal Funds Target Rate 6
Rate
5
3
2
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
0 Data source: Bloomberg L.P., 12/31/01 – 12/31/16. Federal Funds Target Rate Index.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
10
Prediction 3
Treasury yields move higher for a third consecutive year for the first time in 36 years as the Fed raises rates at least twice Bond Bull Market Lasted 35 Years 10-Year U.S. Treasury Bond Yield 1800% 1600% 1400%
Yield (%)
Value Title
1200% 1000% 800% 600% 400% 200%
Yield Trough: 1.37% July 8, 2016
0% 12/30/16 9/30/14 6/30/12 3/31/10 12/31/07 9/30/05 6/30/03 3/31/01 12/31/98 9/30/96 6/30/94 3/31/92 12/31/89 9/30/87 6/30/85 3/31/83 12/31/80
Data source: FactSet, 12/31/79 – 12/31/16. Past performance is no guarantee of future results. 10-Year U.S. Treasury Bond: 10-year Treasury Constant Maturity Rate.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
11
Prediction 3
Treasury yields move higher for a third consecutive year for the first time in 36 years as the Fed raises rates at least twice Likely Path of Rates 1. Overdue rise in yields (normalization has arrived) 2. Moves are seldom smooth and predictable 3. 2017: expect more normalization of rates 4. Base case: modest rise in real growth and inflation 5. Modest rise in rates likely: long rates 50 bp per year; short rates 50-100 bp per year 6. Periods of tantrum possible with offsetting bond rallies 7. Low rates overseas provide some ceiling to U.S. rates
Fed Funds
Forecast
10-year Treasury
Fixed income preferences ▪ Equities
Y/E 2016
0.625%
2.50%
▪ Municipal Bonds
Y/E 2017
1.25
3.00
▪ Credit
Y/E 2018
2.00
3.50
▪ Sovereign Bonds
Forecast is from Nuveen Asset Management.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
12
Prediction 4
Stocks hit their 2017 highs in the first half of the year as earnings rise but price/earnings multiples fall Earnings Are Set to Improve ▪ Improving economic growth ▪ Tax reform/tax cuts
Sparkle and Fade.
▪ Regulatory reform ▪ Pent up demand for housing and capex ▪ Repatriation
Morgan Stanley 2017 Strategy Outlook
▪ Continued share buybacks
Multiples Could Come Under Pressure ▪ Rising inflation ▪ Rising interest rates ▪ Economic acceleration shortens cycle (closer to peak of cycle) ▪ Slower growth in China FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
13
Prediction 4
Stocks hit their 2017 highs in the first half of the year as earnings rise but price/earnings multiples fall Scenario Forecasting 2017 EPS
P/E
S&P 500
% Change
20%
Less Growth/ More Inflation
$130 (+10%)
16.0x
2080
-7%
50%
Base Case
$128 (+8%)
18.0x
2300
+3%
30%
"Transitions" Successful $128 (+8%)
20.0x (18x $140 2018 EPS)
2550
+14%
2350
+5%
Probability
Significant uncertainties
Target (Weighted Average)
▪ Tax reform vs. tax cuts ▪ Timing of tax cuts ▪ Extent of base broadening The forecast data reflects the opinion of the author, Bob Doll, and not the firm. The information provided herein is not intended to be a forecast or guarantee of future events or results. It is not a recommendation to buy or sell any specific securities and should not be considered investment advice of any kind. Investing in securities involves risk of loss that clients should be prepared to bear. There is no assurance that an investment will provide positive performance over any period of time. Past performance is no guarantee of future results and different periods and market conditions may result in significantly different outcomes.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
14
Prediction 5
Stocks outperform bonds for the sixth year in a row for the first time in 20 years while volatility rises Stocks Have a Recent History of Outperforming Bonds S&P 500
Bloomberg Barclays U.S. Aggregate Bond
2012
16.0%
4.2%
2013
32.4%
-2.0%
2014 2015 2016
13.7% 1.4% 12.0% 15.1%
6.0% 0.5% 2.6% 2.3%
5-year Return
Data source: Morningstar Direct as of 12/31/16. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
15
Prediction 5
Stocks outperform bonds for the sixth year in a row for the first time in 20 years while volatility rises Bond Yields and Stock Prices Often Rise Concurrently Dates 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Bond Yield Increase (Basis Points)
May 2, 1958 — July 31, 1959 January 11, 1963 — February 11, 1966 January 27, 1967 — November 29, 1968 November 5, 1971 — January 5, 1973 March 3, 1978 — November 28, 1980 November 5, 1982 — July 22, 1983 April 18, 1986 — August 21, 1987 October 2, 1998 — January 14, 2000 June 13, 2003 — May 5, 2006 March 20, 2009 — April 2, 2010 June 1, 2012 — December 27, 2013
Average Increase* July 8, 2016 — December 31, 2016
Stock Market Increase (%)
152 bp 106 131 70 468 95 168 238 199 131 155
38.5% 44.7 25.8 26.8 60.1 19.1 38.9 46.1 34.1 53.3 44.1
174 bp 108
39.2% 5.1
Data source: The Leuthold Group and FactSet as of 12/31/16. Past performance is no guarantee of future results. Bond Yields: 10-year U.S. Treasury; Stock Market: S&P 500 Index. Indicates all periods where bond yields and stock prices rallied concurrently. *Average Increase does not include 2016 performance. It is not possible to invest directly in an index. Used with permission.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
16
Prediction 5
Stocks outperform bonds for the sixth year in a row for the first time in 20 years while volatility rises Issues Increasing Stock and Bond Volatility 1. Policy uncertainties – details and timing 2. Change in Fed path, dollar pattern, election cycles in Europe, China issues 3. Low volatility stocks are failing and will likely fail again in 2017 4. High beta stocks are cheap relative to low volatility investments 5. Distribution of possible outcomes is wider than it has been (boom and bust tails have non-zero probabilities) 6. Economic conditions ▪Slow growth Faster growth ▪Slow reflation Faster reflation ▪Slow policy normalization Faster policy normalization
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
17
Prediction 6
Small caps, cyclical sectors and value styles beat large caps, defensive and growth areas
Why Small > Large?
Why Cyclical > Defensive?
Why Value > Growth?
▪ U.S. dollar appreciation
▪ Growth acceleration
▪ GDP acceleration
▪ Effective tax rates for corporations - R2000: 32% - S&P 500: 26%
▪ Yield to underperform
▪ Inflation increases
▪ Valuation
▪ Valuation
▪ Domestic focus (weak global trade)
Data source for tax rates: Credit Suisse.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
18
Prediction 6
Small caps, cyclical sectors and value styles beat large caps, defensive and growth areas Strong One-Month Performance for Value Has Led to Strong Next 12 Months Monthly and Forward One-Year Return Differential for Value vs Stable ■ Monthly Return: Value — Stable ■ Forward One-Year Return: Value — Stable 4000%
40% 35%
33%
Total Return Differential (%)
29%
Value Title
2875%
25% 20% 17% 14%
1750%
23%
21% 16%
14%
12%
12% 10%
13% 10%
10%
9%
9%
8%
8%
Apr 2003
Nov 2016
625% -3%
-500%
Apr 2009
Nov 2002 Jan 1975
Jan 2001
Jan 1974
Jan 1991
Jan 1992
Dec 2008 Oct 2011
Jan 1976
Data source: Empirical Research Partners Analysis. Past performance is no guarantee of future results. Used with permission. Illustrates historical 1-month return spreads between Value and Stable, during periods when the monthly return differential was greater than November 2016. Also indicates the spread for the subsequent 12 months. Chart is sorted from largest to smallest 1-month spread. Stable stocks are defined as the top 20% by stability score selected from the largest 400 stocks. Stability is based on a 6 factor model that takes into account the stock’s ROE, variability, stability of earnings growth, dispersion of earnings estimates, financial leverage and beta. This is run across the large cap universe, and on average there are around 100 names. Value is defined as names that rank in the top quintile of valuation in the core model framework.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
19
Prediction 7
The financials, health care and information technology sectors outperform energy, utilities and materials Overweights
Underweights
Financials
Energy
▪ Beneficiary of asset reflation
▪ Persistent oversupply
▪ Higher interest rates, regulation easing
▪ Oil prices in a low trading range
▪ Stocks cheap, despite recent rise
▪ Stocks expensive relative to price of oil
Risk: Global financial accident
Risk: OPEC agreement holds, oil trades higher
Health Care ▪ Revenue and earnings growth strong
Utilities ▪ Rising rates
▪ Innovation and expenditure growth
▪ Little earnings growth expected in 2017
▪ Discount valuations
▪ Elevated valuations, despite recent underperformance
Risk: Political and headline risk
Risk: Economy weakens, rates fail to rise
Information Technology ▪ Good growth and value characteristics
Materials ▪ Slowing China
▪ Strong balance sheets and free cash flow
▪ Rising dollar
▪ Beneficiary of improved capital spending outlook
▪ Infrastructure rally overdone
Risk: Dollar rising farther, hampering earnings growth
Risk: Dollar weakness, massive infrastructure spending
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
20
Prediction 7
The financials, health care and information technology sectors outperform energy, utilities and materials Strength of Defensive Sectors Began Waning in Second Half of 2016 Sector Performance Has Shifted Since Mid 2016 ■ First Half of 2016
■ Second Half through December 31 28%
30%
Total Return (%)
24%
24%
15%
19%
12% 10%
10%
14%
12% 9% 9%
8%
6%
6%
4%
8%
1%
0%
0%
-4%
-5%
Utilities
-6%
Telecom- munications
Energy
Real Estate
-4%
Consumer Staples
-3%
0% -5%
Materials
Industrials Russell 1000 Consumer Index Discretionary
Health Care
Technology
Financials
-15% Data source: FactSet, 1/1/16 – 12/31/16. Past performance is no guarantee of future results. Sector performance based on the Russell 1000 Index.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
21
Prediction 8
Active managers’ performance improves as flows into equities rise Environments When Active Managers Perform Well Expected 2017 Small > Large International > U.S.
Yes ?*
Value > Growth
Yes
Equal Weight > Cap Weight
Yes
Correlations Low
Yes
Interest Rates Rise
Yes
Credit Spreads Fall
Yes
* While not one of our ten predictions, the U.S. equity market has tailwinds compared to the rest of the world, including better domestic economic growth, more effective monetary policy, rising relative earnings and a healthier financial sector. However, valuations reflect these realities.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
22
Prediction 8
Active managers’ performance improves as flows into equities rise A Stock-Pickers Market: Equities Reach Lowest Correlations in 10 Years Stock-to-Stock Correlation of the S&P 500 Index 0.9
Correlation
0.8
0.6
0.5
2016 0.3 12/29/06 7/26/07 2/19/08 9/10/08 4/3/09 10/26/09 5/20/1012/10/10 7/6/11 1/27/12 8/20/12 3/18/13 10/8/13 5/1/14 11/20/14 6/17/15 1/8/16 8/2/16 Data sources: Strategas Research Partners, Bloomberg, 12/29/06 – 12/16/16. Past performance is no guarantee of future results. Correlation is a statistical measure of how two securities move in relation to each other. Perfect positive
correlation (a correlation co-efficient of +1) implies that as one security moves the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation (a correlation co-efficient of –1) means that securities will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; their movements in relation to one another are completely random. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
23
Prediction 9
Nationalist and protectionist trends rise as pro-domestic policies are pursued globally Thoughts on Nationalism, Populism, Protectionism and Foreign Trade 1. A new breed of populist leaders is hardening national borders, resulting in fewer exports, less migration and reduced capital flows 2. Since 2015, global exports have been almost flat and have lagged GDP growth 3. A proposal that all imports be subject to a border tax to help pay for a U.S. corporate tax cut has protectionist overtones 4. The momentum of global trade is perhaps the single most reliable indicator of emerging market asset performance 5. The 1930 Smoot-Hawley tariff was disastrous in part because it contributed to the Great Depression, but also because it led to a breakdown of international relations when fascism was on the rise
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
24
Prediction 9
Nationalist and protectionist trends rise as pro-domestic policies are pursued globally Global Trade Is Important to GDP, but Imports May Be Declining Imports as a Percent of GDP ■ Recession Periods 3000%
2250%
1500%
750%
0% 1840
1860
1880
1900
1920
1940
1960
1980
2000
Data source: BCA Research, 1795 – 2015. Used with permission. Note: Calculated as imports as percentage of GDP for 148 countries, weighted by population.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
25
Prediction 9
Nationalist and protectionist trends rise as pro-domestic policies are pursued globally Observations About Why China Concerns Continue to Lurk 1. The starting point for China’s problems is overinvestment Investments as % of GDP: ▪China: 47% ▪Emerging Markets: 28% (average) ▪Developed Markets: 19% (average) 2. Beijing tightening capital controls, a sign outflows have increased again 3. China is more economically dependent on the U.S. than the U.S. is on China ▪% of U.S. exports to China: 7.7% ▪% of China exports to U.S.: 20.1% 4. A trade war between China and the U.S. would have negative short-term consequences for both countries, but these consequences would be more readily overcome by the U.S. than China
Data Source: Cornerstone Macro for investments as a percentage of GDP.
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26
Prediction 10
Initial optimism about the Trump agenda fades in light of slow legislative progress Implications of a Trump Victory Opportunities
Risks
1. More real growth
1. More inflation/higher interest rates
2. Tax cuts
2. Higher deficits
3. Less regulation
3. Protectionism threats
4. Stronger dollar
4. Higher geopolitical risks
5. More M&A
5. Potential improper business dealing risks
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
27
Prediction 10
Initial optimism about the Trump agenda fades in light of slow legislative progress The U.S. Has Become More Divided 3000%
2004 MEDIAN MEDIAN Democrat Republican
2250%
3000%
2014 MEDIAN Democrat
MEDIAN Republican
2250%
1500%
Polarization in the U.S. today 1. Income inequality and immobility
1500%
2. Generational warfare 750%
750%
0%
0%
Consistently Liberal
Consistently Conservative
3. Geographical segregation 4. Immigration Consistently Liberal
Source: Pew Research Center, June, 2014, "Political Polarization in the American Public."
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
Consistently Conservative
5. Media polarization
Source: BCA Research.
28
Prediction 10
Initial optimism about the Trump agenda fades in light of slow legislative progress Eventually Debt Becomes a Problem U.S. Federal Government Debt vs GDP
Debt as a % U.S. Nominal GDP
90
73
55
38
20 3/31/55 9/30/58 3/31/62 9/30/65 3/31/69 9/30/72 3/31/76 9/30/79 3/31/83 9/30/86 3/31/90 9/30/93 3/31/97 9/30/00 3/31/04 9/30/07 3/31/11 9/30/14 Data source: Cornerstone Macro, 3/31/55 – 9/30/16. Used with permission.
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29
2017 Outlook 1. Overweight equities (but could be bumpy) 2. The average stock beats its benchmark (small > large | equal weighted portfolio > cap weighted portfolio | active outperforms) 3. Underweight bonds (Fed funds rate and longer-term rates should rise) 4. Fed raises rates two (or three) times 5. Dollar moves unevenly higher 6. Keep a careful eye on inflation 7. Overall returns are likely to be mediocre
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30
Risks 1. Policy changes are less bold and successful than expectations 2. Policy changes don’t take effect until 2018 3. Inflation increases 4. Fed tightens more than expected 5. Interest rates increase too much 6. Dollar rises too much (weighs on earnings) 7. China stumbles
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31
Portfolio Construction Views Asset Allocation
Cash Bonds Stocks Commodities
Overweight
Neutral
Underweight
X
Comment
X
Return rising, alternative to bonds Rates creep higher Earnings improve Volatile, perhaps higher
X X X
Not cheap, but growth improving Some improvement, structural problems Cyclical market and cheap, but structural problems Very bumpy – suffering from poor global trade and rising dollar
X X
Equities by Geography
U.S. Europe Japan Emerging Markets
X
U.S. Equities by Common Factors Capitalization Style Economic Exposure Source of Earnings
Small Value Cyclicals Domestic
Large Growth Defensive Multinational
Sector Preferences
Reflation beneficiaries, cheap 1. Financials Good fundamentals and valuation; headline risk 2. Health Care 3. Information Technology Good cyclical and secular trends, strong financials 4. Telecommunication Services Cheapest yield sector Good fundamentals, but stocks have run 5. Industrials 6. Consumer Discretionary Healthy consumer; mixed outlook Mixed fundamentals; further de-rating unlikely 7. Consumer Staples Not expensive, but rising bond yields hurt 8. Real Estate 9. Materials Strong dollar and slowing China hurt The information provided herein is not a recommendation to buy or sell any specific securities and should not be considered investment advice of any kind. Investing in securities involves risk of loss that clients should be prepared to bear. There is no assurance an investment will provide positive performance over any period of time. Past performance is no guarantee of future results and different Expensive periods and andmarket little conditions growth prospects may result in significantly different outcomes. 10.thatUtilities 11. Energy Oversupply of oil; not cheap FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
32
Think About the Long-Term and Remain Diversified
10-Year Return Forecast By Asset Class
Forecasted Return Range
Equities
5 – 7%
U.S.
5 – 7%
Non-U.S. Developed Markets
4 – 6%
Emerging Markets Bonds
7 – 9% 2 – 4%
U.S. Government
0 – 2%
U.S. Investment Grade
2 – 4%
U.S. High Yields
4 – 6%
Emerging Market Sovereign
5 – 7%
Cash
2 – 3%
Inflation
2 – 3%
Diversified Portfolios Conservative
3 – 5%
Balanced
4 – 6%
Aggressive
5 – 7%
Data sources: MRB Partners, Nuveen Asset Management as of December 2016. The forecast data reflects the opinion of the author, Bob Doll, and not the firm. The information provided herein is not intended to be a forecast or guarantee of future events or results. It is not a recommendation to buy or sell any specific securities and should not be considered investment advice of any kind. Investing in securities involves risk of loss that clients should be prepared to bear. There is no assurance that an investment will provide positive performance over any period of time. Past performance is no guarantee of future results and different periods and market conditions may result in significantly different outcomes.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
33
Where Are We in the Market Cycle?
Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.
Sir John Templeton
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34
Set Your Sights Higher 20-Year Annualized Returns by Asset Class 1996 ‒ 2015 1200%
Value Title
Average Annualized Total Returns (%)
1089.5%
900%
818.7% 756.3%
600%
533.7%
517.1%
483.1% 421.4% 324.7%
300%
0%
210.0%
REITs
U.S. Equities
60/40 U.S. Bonds Gold Non-U.S. Equities Homes Oil Inflation Average Portfolio Investor Data sources: Morningstar Direct, Bloomberg L.P., Federal Reserve Bank of St. Louis, Nuveen Asset Management and DALBAR, Inc. “Quantitative Analysis of Investor Behavior (QAIB), 2016.” Data from 1/1/96 - 12/31/15. Past performance is no guarantee of future results. Used with permission. REITs: FTSE NAREIT Equity REIT Index; U.S. Equities: S&P 500 Index; 60/40 Portfolio: 60% S&P 500 / 40% Bloomberg Barclays U.S. Aggregate Bond Index; U.S. Bonds: Bloomberg Barclays U.S. Aggregate Index; Gold: USD/troy oz.; Non-U.S. Equities: MSCI EAFE Index; Homes by the median sale price of existing single-family homes; Oil: West Texas Intermediate (WTI) Index; Inflation: Consumer Price Index; Average Asset Allocation Fund Investor by DALBAR, Inc. “Quantitative Analysis of Investor Behavior (QAIB), 2016,” www.dalbar.com. Average Asset Allocation Fund Investor performance results are calculated using data supplied by the Investment Company Institute. Investor returns are represented by the change in total mutual fund assets after excluding sales, redemptions and exchanges.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
35
Important Disclosures This presentation is for general information purposes only and should not be construed as specific tax or investment advice. The statements contained in this presentation are the opinions of Nuveen Asset Management, LLC and data available at the time of publication, and is not intended to be a forecast or guarantee of future events or results. It contains information from third party sources believed to be reliable but are not guaranteed as to accuracy and not intended to be all inclusive. It does not constitute an offer, solicitation, or recommendation regarding securities or investment strategy and is not intended to predict or depict performance of any investment. Past performance is no guarantee of future results. A Word on Risk Equity investments are subject to market risk, active management risk, and growth stock risk; dividends are not guaranteed. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. The use of derivatives involves additional risk and transaction costs. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, derivatives risk, income risk, and other investment company risk. As interest rates rise, bond prices fall. Credit risk refers to an issuer’s ability to make interest payments when due. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Foreign investments involve additional risks as noted above. Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
36
Index Definitions One basis point equals .01%, or 100 basis points equal 1%. The Bloomberg Barclays U.S. Aggregate Bond Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index tracks the performance of U.S. non-investment-grade bonds and limits each issuer to 2% of the index. The Bloomberg Barclays U.S. Treasury Bellwethers 10-Year Index is a universe of Treasury bonds, and used as a benchmark against the market for long-term maturity fixed-income securities. The index assumes reinvestment of all distributions and interest payments. The BofA Merrill Lynch 3-Month U.S. Treasury Bill Index is an unmanaged index of Treasury securities maturing in 90 days that assumes reinvestment of all income. Capital expenditures (capex) are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. The CEO Confidence Index is based on a monthly survey of 100 CEOs that seeks to gauge the economic outlook of CEOs. The Chicago Board Options Exchange Volatility Index (VIX) shows the market’s expectation of 30-day volatility. It is often referred to as the "investor fear gauge." Consumer Confidence Index (CCI) measures how optimistic or pessimistic consumers are about to the economy in the near future. The Consumer Price Index (CPI) is an inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of common stock, serving as an indicator of a company's profitability. The federal funds rate is the interest rate at which U.S. depository institutions lend reserve balances to other depository institutions overnight, on an uncollateralized basis. The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. It is composed of the board of governors, which has seven members and five reserve bank presidents. The FTSE NAREIT Equity REIT Index is an unmanaged index reflecting performance of the U.S. real estate investment trust market. Gross domestic product (GDP) is a primary indicator used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period. Real GDP is adjusted for inflation. Nominal GDP is not adjusted for inflation.
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37
Index Definitions The Merrill Lynch Option Volatility Estimate (MOVE) Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options that are weighted on the 2, 5, 10, and 30 year contracts. The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. The MSCI Emerging Markets Index captures large and mid cap representation across 23 Emerging Markets countries. 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. The MSCI World Index ex-U.S. is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets minus the United States. The Russell 1000® Index is a large-cap index measuring the performance of the largest 1,000 U.S. incorporated companies. The Russell 1000® Growth Index is a market-capitalization-weighted index that measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
The S&P 500® Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. The Thomson Reuters/CoreCommodity CRB Index tracks the performance of 19 different commodities. The troy ounce is used in the pricing of metals such as gold, platinum and silver. There are 14.58 troy ounces in a pound. The Trade Weighted U.S. Dollar Index: measures the value of the U.S. dollar relative to other world currencies. The U.S. Treasury T-Bill Constant Maturity Rate 10 Yr. Index is published by the Federal Reserve Board based on the average yield of a range of Treasury securities, all adjusted to the equivalent of a 10-year maturity. The West Texas Intermediate (WTI) Index is used as a benchmark for pricing much of the world’s crude oil production.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
GPP-10PREDL-0118D
The Russell 2000® Index is composed of the 2,000 smallest stocks in the Russell 3000® Index and is widely regarded in the industry as the premier measure of small cap stock performance.
21704-INV-Y-01/18
The Russell 1000® Value Index is a large-cap value index measuring the performance of the largest 1,000 U.S. incorporated companies with lower price-to-book ratios and lower forecasted growth values.
38
Large Cap Equity Series
January 2017
Not FDIC Insured May Lose Value No Bank Guarantee FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
Important Information This presentation may include information on strategies that may be available within different product types: institutional separate accounts, separately managed accounts, mutual funds and unit investment trusts. Financial advisors should understand the differences of each product type — especially the impact of fees, which may affect performance when evaluating investment products. It is important to review your client’s investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. Financial advisors should consider the suitability of the manager, strategy and program for its clients on an initial and ongoing basis. Separately managed accounts provide investors with access to specialized investment managers and the ability to own individual securities in the portfolio. Separately managed accounts typically require a minimum investment of $100,000 or more and are fee-based. The portfolios can provide investment flexibility and tax planning features, based on individual investor preferences. Separately managed accounts are subject to different regulatory guidelines than mutual funds. Mutual funds pool assets from many investors and develop professionally managed portfolios of securities based on specific investment goals. Investors own shares, representing a portion of the fund’s holdings. The minimum investment requirements tend to be relatively low. Mutual funds can offer investors diversification, daily pricing and a. variety of investment strategies and styles, with different fees, expenses and risks.
Large Cap Equities Series Risk: Risks may include: equity security risk, large cap stock `risk, non-diversification risk, smaller company risk, growth stock risk, and value stock risk. Non-U.S. investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. A portfolio's use of futures contracts involves transaction costs and the potential for negative impact on performance. A portfolio engaging in frequent trading of securities may result in taxable gains to investors and involve trading costs that may impact fund performance. A portfolio’s use of short selling is a form of leverage and involves additional expense and risks including market loss and increased volatility of returns. Investing in securities involves risk of loss that clients should be prepared to bear. There is no assurance that an investment will provide positive performance over any period of time. Past performance is no guarantee of future results and different periods and market conditions may result in significantly different outcomes. Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc. Nuveen Investments Advisers, LLC (“NIA”), a registered investment adviser, provides separately managed accounts marketing services for its affiliates that are registered investment advisers, including Nuveen Asset Management, LLC. All such affiliates are also affiliates of Nuveen Investments, Inc. Funds distributed by Nuveen Securities, LLC, a subsidiary of Nuveen Investments, Inc.
This information represents the opinion of Nuveen Asset Management, LLC, and is not intended to be a forecast or guarantee of future events or results. It is not intended to provide specific advice and should not be considered investment advice of any kind. Information was obtained from sources we believe to be reliable, but are not guaranteed as to their accuracy or completeness. This report contains no recommendations to buy or sell specific securities or investment products. All investments carry a certain degree of risk, including possible loss of principal. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
40
Large Cap Equity Series One investment process is applied to nine strategies in U.S. large cap equities.
Mutual Funds
Separately Managed Accounts
Large Cap Core
✓
✓
Large Cap Value
✓
✓
Large Cap Growth
✓
✓
Concentrated Core
✓
✓
Core Dividend
✓
✓
Stable Growth
✓
✓
Traditional
Specialty
Alternative Large Cap Core Plus
✓
Equity Long/Short
✓
Equity Market Neutral
✓
Open-End Mutual Funds and Separately Managed Accounts are different types of investment vehicles with different expense structures and different inflows/outflows and distribution requirements.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
41
Why Large Cap Equity Series? 1 Process ▪
Research platform combines quantitative and fundamental inputs
▪
Investment approach has existed for more than 30 years
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42
Why Large Cap Equity Series? 1 Process
2 People
▪
Research platform combines quantitative and fundamental inputs
▪
Experienced portfolio manager with more than 35 years of investment experience
▪
Investment approach has existed for more than 30 years
▪
18 research analysts
▪
Average 20 years of experience
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
43
Why Large Cap Equity Series? 1 Process
2 People
3 Performance
▪
Research platform combines quantitative and fundamental inputs
▪
Experienced portfolio manager with more than 35 years of investment experience
▪
6 of 9 funds achieved top quintile Morningstar rankings over the 1-year period1
▪
Investment approach has existed for more than 30 years
▪
18 research analysts
▪
Overall Morningstar RatingTM
▪
Average 20 years of experience
• 5-Stars Nuveen Equity/Long Short Fund • 4-Stars • Nuveen Large Cap Core Fund Nuveen Equity Market Neutral Fund Nuveen Large Cap Growth Fund Morningstar rankings and ratings based on I shares as of 12/31/16
1 Morningstar rankings based on the 1-year time period as of 12/31/16 for Class I shares. Specific product types have different fees and expenses, as well as minimum investment thresholds that affect performance. Additionally, the different strategies within the product types have different investment objectives that also affect characteristics, holding periods, limits on sectors, number of holdings, type of holdings, etc., which affect performance. Morningstar data only applies to open-end mutual funds and should not be used as an indication of performance for separately managed accounts. Please note that not all strategies are available at all firms. Please check with your firm for availability.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
44
Mutual Fund Performance Manager Inception Date to December 31, 2016
Morningstar Rankings
Average Annualized Total Returns
Symbol
Fund Manager Inception Inception Date Date1
Without Sales Charge
With Sales Charge
Benchmark
Excess Return (Difference Morningstar Classification )
Morningstar Absolute Rank
Morningstar Percentile Rank
Traditional Nuveen Large Cap Value Fund
NNGAX
8/7/96
6/24/13
13.28
12.03
12.24
1.04
Large Value
210/1172
18%
Nuveen Large Cap Core Fund
NLACX
6/17/13
6/17/13
12.81
10.94
11.46
1.35
Large Blend
16/1347
2%
Nuveen Large Cap Growth Fund
NLAGX
6/17/13
6/17/13
11.95
10.09
12.02
-0.07
Large Growth
218/1443
15%
Nuveen Core Dividend Fund
NCDAX
6/17/13
6/17/13
9.97
8.15
11.46
-1.49
Large Value
201/1172
17%
Nuveen Concentrated Core Fund
NCADX
6/17/13
6/17/13
10.71
8.88
11.46
-0.75
Large Value
432/1172
37%
Nuveen Growth Fund
NSAGX
3/28/06
3/31/14
9.35
8.09
8.93
0.42
Large Growth
269/1449
19%
Nuveen Large Cap Core Plus Fund
NLAPX
6/17/13
6/17/13
12.36
10.50
11.46
0.90
Large Blend
37/1347
3%
Nuveen Equity Long/Short Fund
NELAX
12/30/08
2/12/13
11.45
8.88
12.73
-1.28
Long/Short Equity
10/130
7%
Nuveen Equity Market Neutral Fund
NMAEX
6/17/13
6/17/13
4.97
3.23
0.13
4.84
Market Neutral
5/103
4%
Specialty
Alternative
1 Manager inception date is the date Bob Doll became portfolio manager for each Fund, and the date he became sole portfolio manager for the Nuveen Growth Fund. Returns quoted represent past performance which is no guarantee of future results. Investment returns and principal value will fluctuate so that when shares are redeemed, they may be worth more or less than their original cost. Current performance may be higher or lower than the performance shown. Returns without sales charges would be lower if the sales charge were included. Fund returns assume reinvestment of dividends and capital gains. For performance current to the most recent month-end visit www.nuveen.com or call 800.257.8787. Additional performance for each of the Funds immediately follows in this presentation and is available at nuveen.com. Morningstar Ranking/Number of Funds in Category displays the Fund’s actual rank within its Morningstar Category based on average annual total return and number of funds in that Category. The returns assume reinvestment of dividends and do not reflect any applicable sales charge. Absent expense limitation, total return would be less. Morningstar Percentile Rankings are the Fund’s total return rank relative to all the funds in the same Morningstar category, where 1 is the highest percentile rank and 100 is the lowest percentile rank. The Funds’ benchmarks include: Nuveen Large Cap Value Fund: Russell 1000® Value Index; Nuveen Large Cap Core Fund, Nuveen Core Dividend Fund, Nuveen Concentrated Core Fund, Nuveen Large Cap Core Plus Fund and Nuveen Equity Long/Short Fund: Russell 1000® Index; Nuveen Large Cap Growth Fund and Nuveen Growth Fund: Russell 1000® Growth Index; Nuveen Equity Market Neutral Fund: BofA Merrill Lynch 3-Month Treasury Bill Index.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
45
Themes and Sector Highlights
SECTOR PREFERENCES | STOCK EXAMPLES
Themes ▪ Pro
▪ Con
- Risk-On
- Risk-Off
- Free cash flow
- Bond-like equities
- Unit growth
- Sectors requiring pricing power
- Cyclical
- Defensive
- Domestic earnings
- Multinationals
▪ Financials
- BankAmerica - Citicorp
▪ Health Care
- Aetna - Express Scripts
▪ Information Technology
- MasterCard
▪ Miscellaneous
- UAL
- VMware
- CBS
Source: FactSet, as of 12/31/16. See nuveen.com for more information.
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
46
Determinants of Active Manager Performance
Active Share
Fund Size
FOR FINANCIAL ADVISOR or INSTITUTIONAL investor USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
Portfolio Manager Ownership
47
Thoughts to Rethink and Ponder 1.
Jesus Christ said more about money and possessions than heaven and hell combined.
2.
You can tell volumes about a person if you can examine their checkbook and calendar.
3.
How much did John D. leave? “He left all of it.”
4.
You can’t take it with you, but you can send it on ahead.
5.
Jesus said “where your treasure is, there your heart will be also.”
6.
God owns everything. I am his money manager. (Not, how much should I give, but how much should I keep?)
7.
God prospers us in order to raise our standard of giving, not our standard of living.
8.
Conformed vs. Transformed? (Romans 12:2)
9.
Generosity and wealth are best handled if we really believe we are “passing through.”
10. What are you doing with your hyphen?
–Randy Alcorn
