A NEW GAME PLAN FOR
INCOME-FOCUSED INVESTORS
INVESTING CONCEPTS
2017
THE SUCCESS OF THE GOLDEN STATE WARRIORS, recent NBA champions with
back-to-back NBA Finals appearances and the record for most regular season wins,
provides an interesting and instructive lesson for income-focused investors (sports
fans or not). Although Golden State’s Steph Curry understandably garnered the
lion’s share of headlines with his MVP-worthy offensive accomplishments during the
team’s impressive seasons, perhaps the more interesting Warriors story was the team’s
embracing and successfully putting into practice a creative, flexible and productive
“new NBA” defensive strategy.
Unlike the “old NBA,” in which dominant big men like Kareem and Shaq anchored
their respective teams on offense and defense, the “new NBA” is characterized by
increasingly flexible, “positionless” defensive strategies that allow any one player to guard
multiple players on the opposing team. These strategies allow one team to quickly and
efficiently adapt to whatever challenges the other team presents and, as a subsequent
bonus on offense, to create more opportunities to exploit mismatches. The results: better
defensive and offensive performance – and, in the case of the Warriors, a path to an
NBA championship.
We believe there is a compelling parallel between the “old” and “new” NBAs and old and
new strategies and opportunities for income-focused investors. As NBA teams have had
to adjust to the realities of the “new” NBA — fewer traditional, dominant big men and
more agile, “longer” men — investors have had to similarly adjust to the seismic shift
from a 30-year bull market in bonds to the new reality of a persistent low interest rate
environment with expectations of rising rates.
The “New” Interest Rate Reality
10-Year Treasury Yields, 12/31/1965 Through 12/31/2016
20%
15%
10%
5%
0%
1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Source: Bloomberg L.P.
NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE
A New Game Plan for Income-Focused Investors
2017
How best, then, for income-focused investors to take a page out of the Warriors’ playbook
and apply it to portfolio construction? In the following chart, we present a traditional line-up
of income-generating asset classes and their yields as of 12/31/16. We believe these asset
classes might broadly and figuratively represent members of an income-generating “team” (or
one’s portfolio), each contributing its own performance over time, each likely to be more or
less successful depending on the market environment (or opposing “team”) it faces.
Diverse Income Opportunities
Yield Comparisons Across Select Asset Classes
Yield
10%
5.3%
5%
7.1%
6.1%
3.4%
2.1%
0.5%
0%
3.3%
4.6%
0.5%
U.S.
Investment Preferred Non-Investment Equities
Treasuries Grade Bonds Stock Grade Bonds
Convertibles
REITs
MLPs
Cash &
Equivalents
Data sources: Bloomberg L.P. as of 12/31/16. Past performance is no guarantee of future results. Index Yields: For U.S.
Treasuries, Investment Grade Bonds, Non-Investment Grade Bonds, Preferred Stock, and Cash & Equivalents, yield is yield-to-worst.
For Convertibles: current yield. For Equities, REITs and MLP’s: dividend yield. Asset class yields are represented by yields of the
following indices: U.S. Treasuries: BofA Merrill Lynch U.S. Treasury Index, Investment Grade Bonds: Bloomberg Barclays U.S.
Corporate Investment Grade Index; Preferred Stock: BofA Merrill Lynch Preferred Stock Fixed Rate Index Non-Investment Grade
Bonds: Bloomberg Barclays Corporate High Yield 2% Issuer Capped Index; Equities: S&P 500® Index; Convertibles: Bloomberg
Barclays U.S. Convertible Bond Index; REITs: MSCI US REIT GR Index; MLPs: Alerian MLP Index; Cash & Equivalents: BofA Merrill
Lynch U.S. 3-Month Treasury Bill. The chart does not represent the past performance of any Nuveen strategy or product. Different
benchmarks, economic periods, methodologies and market conditions will produce different results. There is no assurance that
any asset class or index will provide positive performance over time. It is not possible to invest directly in an index.
Each asset class has its own strengths and weaknesses, so we believe being flexible allows
an investor to adjust to various market environments and to capitalize on opportunities
created by investor over-reaction, misperception and short-term focus, ultimately
maximizing risk-reward. In essence, a “positionless” basketball strategy is comparable to
this “boxless” investment strategy. In a future environment that will likely be far different
from the past 30 years, such flexibility may prove to be a significant benefit, especially for
income-focused investors.
To further our analogy to a holdings-specific level, we introduce a specific team, Team
General Electric. GE’s capital structure comprises the following variety of selected
security types (and their returns over time).
Example: General Electric – Varying Returns Across the Capital Structure
Annual Returns of Selected General Electric Company Securities (2008 – 2016)
2008
2009
2010
2011
2012
2013
2014
2015
2016
Corporate Bond
2.9%
10.6%
9.5%
8.0%
7.2%
2.1%
1.3%
1.2%
1.9%
Preferred Stock
-3.0%
19.0%
12.9%
8.0%
8.1%
-15.6%
27.7%
10.1%
0.5%
-54.0%
-1.7%
24.3%
1.3%
21.2%
37.9%
-6.7%
27.5%
4.6%
Equity
Data source: Factset as of 12/31/16. This example is provided for illustrative purposes only. The information provided above should
not be deemed as a recommendation to buy or sell. Past performance is no guarantee of future results. Corporate Bond: General
Electric Capital Corporation Senior Unsecured Bond, issued 10/17/06 with a maturity date of 10/20/16, fixed coupon of 5.375%.
Preferred Stock: General Electric Capital Corporation $25 Par Preferred security, issued 2/13/03 with a maturity date of 2/18/33, fixed
coupon of 5.875%. Called 1/18/13. Replaced with General Electric Capital Corporation $25 Par Preferred security, issued 10/10/12
with a maturity date of 10/15/53, fixed coupon of 4.875%. Equity: NYSE: GE. The example was selected based on the following
criteria: Largest market capitalization in the Dow Jones offering debt, preferred and equity tiers in the capital structure.
2
A New Game Plan for Income-Focused Investors
2017
As certain players will match up better against certain teams, so will certain asset classes
in the financial structure of an individual firm “match up” (perform) better in differing
economic and market environments. In short (not a word lightly used when discussing
the NBA): No single player (asset class) is going to provide all the offense or defense
needed all the time. Golden State found great success in a flexible strategy. Incomefocused investors may find parallel success by employing a flexible investment strategy
that allows – nay, encourages – the agile shifting of investments among asset classes in
their portfolios. ▪
For more information, please consult with your financial advisor and visit nuveen.com.
Alerian MLP Index is the leading gauge of large- and mid-cap energy Master Limited
Partnerships (MLPs). The float-adjusted, capitalization-weighted index, which includes 50
prominent companies and captures approximately 75% of available market capitalization,
is disseminated real-time on a price-return basis (AMZ) and on a total-return basis (AMZX).
Bloomberg Barclays Corporate High Yield 2% Issuer Capped Index is an unmanaged
index that tracks the performance of U.S. non-investment grade bonds and limits each issuer
to 2% of the index.
Bloomberg Barclays U.S. Convertible Bond Index represents the market of U.S. convertible
bonds. Convertible bonds are bonds that can be exchanged, at the option of the holder, for a
specific number of shares of the issuer’s preferred stock or common stock.
Bloomberg Barclays U.S. Corporate Index is a broad based unmanaged benchmark that
measures the investment grade, fixed-rate, taxable, corporate bond market.
BofA Merrill Lynch Preferred Stock Fixed Rate Index is designed to replicate the total return
of a diversified group of investment grade preferred securities.
BofA Merrill Lynch U.S. Treasury Index measures the total return performance of
U.S. Treasury bonds with an outstanding par that is greater than or equal to $25 million.
BofA Merrill Lynch U.S. 3-Month Treasury Bill measures returns of three-month
Treasury Bills.
MSCI U.S. REIT Index tracks the performance of real estate investment trusts.
S&P 500® Index is an unmanaged index generally considered representative of the U.S.
stock market.
GLOSSARY
Current Yield is the actual income rate of return as opposed to the yield-to-maturity.
Dividend Yield for a company’s stock is the ratio of the dividends paid out by the company
each year per share to the share’s current market price.
MLP: A master limited partnership (MLP) is a limited partnership that is publicly traded.
The limited partner provides capital to the MLP and receives periodic income distributions.
The general partner is responsible for managing the MLP’s affairs and receives compensation
linked to performance.
Preferred Stock: Traditionally, a class of non-voting stock with a dividend that is paid at a rate
which is fixed for some period. Although preferred stock ranks below most debt, it has preference
over a company’s common stock in the payment of dividends and the liquidation of assets.
Preferred securities are rated by credit rating agencies such as Fitch, Moody’s and Standard & Poors.
REIT: A real estate investment trust (REIT) is a company that owns and, usually, operates
income-producing real estate, such as apartments, shopping centers, offices, hotels and
warehouses.
Yield-to-Worst is the lowest potential yield that can be received on a bond without the
issuer defaulting.
This material is not intended to be a recommendation or investment advice, does not constitute
a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The information
provided does not take into account the specific objectives or circumstances of any particular
investor, or suggest any specific course of action. Investment decisions should be made based
on an investor’s objectives and circumstances and in consultation with his or her advisors.
RISKS AND OTHER IMPORTANT CONSIDERATIONS
The statements contained herein reflect opinions of NWQ Investment
Management Company, LLC (“NWQ”) as of the date written. Certain
statements are forward looking or based on current expectations,
projections and information currently available to NWQ and are subject
to change without notice. There is no assurance that any predicted results
will actually occur. Different indices and economic periods will produce
different results. All investments carry a certain degree of risk, including
possible loss of principal, and there is no assurance that an investment will
provide positive performance over any period of time. Dividend yield is
one component of performance and should not be the only consideration
for investment. Dividends are not guaranteed and will fluctuate. REIT
performance is linked to the performance of the commercial real estate
market. Property values and rents may fall due to economic, legal, or
cultural developments. In addition, REITs depend on liquid credit markets,
and there may also be special risks associated with particular sectors of
the commercial real estate market. Preferred securities are subordinated
to bonds and other debt instruments in a company’s capital structure
and therefore are subject to greater credit risk. Fixed income investments
emphasize U.S. Government and agency debt securities. Fixed income
securities may be sensitive to changes in prevailing interest rates. When
rates rise, the value generally declines. There is no assurance that the private
guarantors or insurers will meet their obligations. An investment in taxable
fixed income securities may be subject to certain additional risks, including
credit risk, foreign risk, and currency risk. High yield bonds are speculative
and are subject to liquidity risk and heightened credit risk. This information
should not be relied upon as investment advice or recommendations,
and is not intended to predict or depict performance of any investment.
All information used reflects the most current data available. Statistical
data was taken from sources which we deem to be reliable, but are not
guaranteed. Past performance is no guarantee of future results.
NWQ Investment Management Company, LLC is an affiliate of Nuveen Investments, Inc.
©2017 Nuveen Investments, Inc. All rights reserved.
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INDEX DEFINITIONS