Economic Investment Outlook John Pesce, Chief Executive Officer - - PowerPoint PPT Presentation

Economic Investment Outlook

John Pesce, Chief Executive Officer Blake Rhodes, Fixed Income Specialist

About TCG

2

TCG Mission Statement:

We deliver long-term investment and benefit solutions that provide peace of mind.

Remember all investing involves risk and past performance is not a guarantee of future returns.

Recent Headlines

3 Remember all investing involves risk and past performance is not a guarantee of future returns.

2017 Q1 Review

• Over-Arching Themes
• Trump First 100 Days
• “Repeal & Replace” Failure
• Election Season in EU
• Brexit Officially Triggered
• One Rate Hike by Fed, Two More Expected

Remember all investing involves risk and past performance is not a guarantee of future returns. 4

2017 – What to Watch

• Key Factors
• Tax & Regulation Reform
• EU Elections
• Brexit Negotiations
• Federal Reserve Rate Hikes
• Wage, Inflation, Corporate Earnings Growth

5 Remember all investing involves risk and past performance is not a guarantee of future returns.

French Elections

• On April 23rd, 2017, France will vote to elect a new leader
• Candidate polling in 1st promises to leave the EU
• Victory may end French participation in the EU
• Likely signal the end of the EU
• The European Central Bank has currently commenced to signal future rate hikes, but this

would likely be further delayed

• Flight to safety: Delay in European Central Bank interest rate hikes would likely slow the

pace of US Federal Reserve rate hikes and keep a “lid” on US rates as foreign investors move money to the US for safety

Remember all investing involves risk and past performance is not a guarantee of future returns. 7

Current Yield Curve

• Since Great Recession, Fed has raised rates three times
• December 2015, December 2016, and March 2017.
• The Fed raises Target Funds Rate: from 0.0-0.25% to 0.25-0.50% and then to .50%-.75%, now rates

sit at .75% - 1%

• This created immediate an rise in the very short-term portion of the yield curve each time
• Considered “long overdue” by the market—long-term rates have not moved with short-term rates
• Since the election, yields rose significantly, then leveled off at year-end
• Inflation concerns, faster rate hike path, and potential increased budget deficits are considered

contributing factors to rates moving

• If growth and earnings outlook continues to improve, rates are likely to rise via market forces

quicker than Federal Reserve action

• Uncertainty in equities = uncertainty in rates

Remember all investing involves risk and past performance is not a guarantee of future returns. 8

Interest Rate Movement

3/31/2017 3/31/2016 3/31/2015 3/31/2014

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%

Treasury Yield Curve

3/31/2017 3/31/2016 3/31/2015 3/31/2014

Source: Bloomberg Professional Services, LP. Remember all investing involves risk and past performance is not a guarantee of future returns. 9

Interest Rates Range-Bound

• Interest rates have moved dramatically higher, then leveled off
• Uncertainty around previous expectations of inflation & growth

1.7% 1.8% 1.9% 2.0% 2.1% 2.2% 2.3% 2.4% 2.5% 2.6% 2.7% 11/4 11/18 12/2 12/16 12/30 1/13 1/27 2/10 2/24 3/10 3/24

US 10 Year Treasury Yield – Post Election

10 Year

Source: Bloomberg Professional Services, LP. Remember all investing involves risk and past performance is not a guarantee of future returns. 10

Global Interest Rate Movements

• Have moved higher, remain below levels seen in Q1 2016
• Many Remain negative
• Germany
• Japan
• Future rates will be dependent upon many factors
• Policy direction in the US
• Central Bank actions
• Election results in France and Italy in 2017
• Brexit negotiations
• Global trade and growth
• Some of this has been “priced-in” already, will in unwind?

Remember all investing involves risk and past performance is not a guarantee of future returns. 11

Where is the Stock Market Relatively?

• US markets have been able to take advantage of the low IR environment

whereas international markets have not done as well

• 500.00

1,000.00 1,500.00 2,000.00 2,500.00 3,000.00 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17

S&P 500 Index

• 50.00

100.00 150.00 200.00 250.00 300.00 350.00 400.00 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17

MSCI ACWI Excluding United States Index

Source: Bloomberg Professional Services, LP. Remember all investing involves risk and past performance is not a guarantee of future returns. 12

Why does the Stock Market matter for Bonds? Interest rates move in response to expectations for economic growth Expectations of higher economic growth increases likelihood of inflation Expectations of higher economic growth makes Fed hikes more likely

• As economic news improves, investors reach for growth
• Divesting of bonds, further pushing prices lower and yields higher.
• Interest rates have moved on expectations, not necessarily concrete

changes/improvements

• There still is much future uncertainty.

Remember all investing involves risk and past performance is not a guarantee of future returns. 13

Where are we economically?

• Tracking unemployment
• 100

200 300 400 500 600 700 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

US Initial Jobless Claims SA

0% 2% 4% 6% 8% 10% 12% Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

US Unemployment Rate (%)

Source: Bloomberg Professional Services, LP. Remember all investing involves risk and past performance is not a guarantee of future returns. 14

Where are Rates Relatively?

• Tracking Rates

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

US Treasury Yield Curve Rate T Note Constant Maturity 2 Year

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

US Treasury Yield Curve Rate T Note Constant Maturity 10 Year

Source: Bloomberg Professional Services, LP. Remember all investing involves risk and past performance is not a guarantee of future returns. 15

Fed Rate Hikes—Will 2017 finally be THE year?

• Fed Hiked once in 2015, after predicting multiple hikes
• Fed Hiked once in 2016, after predicting multiple hikes
• Fed Hikes ???? in 2017, after predicting multiple hikes
• The Case for Higher Rates
• Unemployment rates near all time lows
• Valuations creeping higher
• Fed running out of excuses to keep rates below low
• GDP Growth improving
• Employment numbers strong
• Inflation beginning to rise
• Should rates rise faster than expectations, could cause ripple effect in fixed income

markets and will keep yields low

Source: Bloomberg Professional Services, LP. Remember all investing involves risk and past performance is not a guarantee of future returns. 16

When will the Fed raise rates?

• Fed meeting in March hiked rates once

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Oct-16 Nov-16 Nov-16 Dec-16 Dec-16 Dec-16 Jan-17 Jan-17 Feb-17 Mar-17 Mar-17 Mar-17

Fed Funds Rate Forecast May 2017

No Hike 1 Hike

Source: Bloomberg Professional Services, LP. Remember all investing involves risk and past performance is not a guarantee of future returns. 17

Probability of Rate Hike in December 2017

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17

Fed Funds Rate Forecast December 2017

No Hike 1 Hike 2 Hikes 3 Hikes

Source: Bloomberg Professional Services, LP. Remember all investing involves risk and past performance is not a guarantee of future returns. 18

What do the Experts Say?

Source: Fidelity via Philadelphia Federal Reserve. Remember all investing involves risk and past performance is not a guarantee of future returns. 19

Short-Term Interest Rates Historically

• Investment Pool returns track short term Government Bonds

0% 1% 2% 3% 4% 5% Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Short-Term Rates - Last 15 Years

Tex Pool Tex Pool Prime Texas Class 2 Year Treasury 3 Month Treasury

Source: Bloomberg Professional Services, LP. Remember all investing involves risk and past performance is not a guarantee of future returns. 20

What does this mean for your district’s investment strategy?

Yield Curve

• Normal, upward-sloping yield curve-

implies investors expect the economy to grow in the future

• Leads to higher inflation
• Creates higher interest rates

Investors will not commit to purchasing longer-term securities without getting a higher interest rate than those offered by shorter- term securities.

Remember all investing involves risk and past performance is not a guarantee of future returns. 22

Yield Curve

• Steepening Yield Curve—A steep

positively sloped curve results from the Fed maintaining low short-term rates, but investors are expecting rates to rise

• Occurs towards the end of a recession
• An indication that the economy is about to

turn around

• Previously the yield curve has been steep

with longer term rates being higher than short term rates

Remember all investing involves risk and past performance is not a guarantee of future returns. 23

Yield Curve

• Flattening Yield Curve—spreads

between short-term treasuries and long-term treasuries are narrowing

• Can be the transition stage from a

steep yield curve to an inverted yield curve

• In this environment, traders will buy

longer term treasuries, and sell shorter term treasuries

Remember all investing involves risk and past performance is not a guarantee of future returns. 24

Yield Curve

• Inverted Yield Curve—the result of

the Fed pushing short-term rates to very high levels; 2 year returns are greater than 10 year returns

• Indication that the economy is heading

into a recession

• Typically happens when people become

scared of the equity markets and invest in longer term government bonds for a flight of safety

Remember all investing involves risk and past performance is not a guarantee of future returns. 25

Investment Strategies

• Ladder—Portfolio is invested equally in bonds maturing periodically
• As the bonds mature, money is reinvested to maintain the maturity ladder.

1 2 3 4 5 6 7 8 9

10 11 12 13 14 15 16 17 18 19 20

Remember all investing involves risk and past performance is not a guarantee of future returns. 26

Investment Strategies

• Bullet: Stagger purchase dates on bonds that all mature at the same time.
• Use when you expect the yield curve to steepen
• If rates rise in the intervening time, the investor will earn a higher rate than

if he or she invested the entire portfolio in the first year

1 2 3 4 5 6 7 8 9

10 11 12 13 14 15 16 17 18 19 20

Remember all investing involves risk and past performance is not a guarantee of future returns. 27

Investment Strategies

• Barbell: Maturities are concentrated at two extreme maturities
• Use when you expect a flat yield curve
• Short term maturities can be reinvested locking in higher rates
• Long term maturities will be locked in at the higher rate you got when initially

invested and offers protection from falling interest rates

• The bet is that, over time, the difference between the two will narrow

1 2 3 4 5 6 7 8 9

10 11 12 13 14 15 16 17 18 19 20

Remember all investing involves risk and past performance is not a guarantee of future returns. 28

Investment Strategies—Barbell

• Example: What If, Two Years Ago (2015)
• Need $20 Million in 3 Years
• Can invest $20 Million at .25% in 1 Year Bonds, Or…
• Use Barbell Strategy
• 50% 5 Year Bonds = 1.40% | 50% 1 Year Bonds = .25% | Total = .83%

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 3M 6M 1Y 2Y 3Y 4Y 5Y

Treasury Yield Curve - Then

3/31/2015

Blue = Barbell Yellow = Short-Term

Remember all investing involves risk and past performance is not a guarantee of future returns. 29

Investment Strategies—Barbell

• Example: What If, Two Years Ago (2015)
• 5 year bonds are now 3 year bonds, still paying rates of 1.40% vs current market of 1.57%
• Re-invest 1 year portion of the Barbell at higher rates in 2016 (1 year ago), .56%
• Barbell generated .83% 1st year, .98% 2nd year vs rolling short-term .25% 1st year, .56% 2nd year.

Total difference on $20MM = $183,337 or .91%.

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 3M 6M 1Y 2Y 3Y 4Y 5Y

Treasury Yield Curve - Now

3/31/2017 3/31/2016 3/31/2015

Blue = Barbell Yellow = Short-Term Remember all investing involves risk and past performance is not a guarantee of future returns. 30

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 3M 6M 1Y 2Y 3Y 4Y 5Y

Treasury Yield Curve - Then

3/31/2014

Investment Strategies—Ladder

• Example: What If, Three Years Ago (2014)
• Need $10 Million in 3 Years, but concerned rates will rise
• Buy 1 Year bond = .14%, Or…
• Ladder maturities, 33% 1 Year & 33% 2 Year & 33% 3 Year = .49%

Blue = Barbell Yellow = Short-Term Remember all investing involves risk and past performance is not a guarantee of future returns. 31

Investment Strategies – Ladder

• Example: What If, Three Years Ago (2014)
• After 3 Years, rates have risen
• By rolling your 1 Year Bond, you made .14% 1st year, .25% 2nd year, and .56% 3rd year
• Your Ladder paid .49% 1st year, .53% 2nd year, and .68% 3rd year, Total Difference on $10

Million = $75,701

Blue = Ladder Yellow = Short-Term

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 3M 6M 1Y 2Y 3Y 4Y 5Y

Treasury Yield Curve - Now

3/31/2017 3/31/2016 3/31/2015

Remember all investing involves risk and past performance is not a guarantee of future returns. 32

Protecting Yourself — Stress Test

• Recommend 200 bps stress test over 2 year period

Remember all investing involves risk and past performance is not a guarantee of future returns. 33

Understanding Risk

Remember all investing involves risk and past performance is not a guarantee of future returns. 34

Interest Rate Risk Downgrade Risk Reinvestment Risk Default Risk Liquidity Risk Political Risk

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Measuring the Risk of Inaction

• Current interest rate environment is a

significant, and costly, problem for taxpayers and districts

• Not meeting Inflation IS losing money

Average Annual Inflation Rate of 3.19%.

Rate 3 Years 5 Years 7 Years 2.00% $9,647,231.45 $9,418,993.48 $9,196,155.26 1.00% $9,357,283.27 $8,951,922.11 $8,564,121.35 0.50% $9,214,513.65 $8,725,440.53 $8,262,325.64 0.25% $9,143,676.68 $8,613,931.92 $8,114,878.26

Does $10,000,000 equal $10,000,000?

This graph can be found at: http://www.usinflationcalculator.com/inflation/current-inflation-rates/ Rates are for calendar years 2007-2017

0% 1% 2% 3% 4% 5% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Inflation Rates Graph

Remember all investing involves risk and past performance is not a guarantee of future returns. Hypothetical projection to show the effects of inflation (3.19%) on low interest growth.

The Cost of Waiting—$10M Investment

• Bond Investor—1.50% per year for 5 years
• Cash Investor—0.45% for 2 years, 1.75% years 3-5

Hypothetical example to show the effects of waiting to invest. Remember all investing involves risk and past performance is not a guarantee of future returns. 36

Actually have to earn 2.20% in years 3 to 5 to cross over

$- $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 1 2 3 4 5 TOTAL

Income

Years

Interest Income by Year

Bond Investor Cash Investor

Investment Risks

• Credit Risk
• Mitigated by the control of the PFIA
• US Treasuries, agencies, AAA, AA, A

Maturity

• Controlled by local policy

Investment Pools

• Allow investments as low as A under the A-1 Credit Rating

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Do you consider your school bonds risky investments?

Remember all investing involves risk and past performance is not a guarantee of future returns.

Duty of Best Execution

• Due Diligence
• Bloomberg, MarketAxxes & TMCBonds Pricing Sources
• Documentation
• Competitive pricing log
• Post-Trade review of pricing quality
• Multiple broker/dealers
• Industry consolidation
• Pricing is fluid

Remember all investing involves risk and past performance is not a guarantee of future returns. 38

Duty of Best Execution

In the context of fixed-income securities, the TCG’s intent is to ensure that all customer transactions are executed at prices that are “as favorable as possible under prevailing market conditions.” Below are the steps followed by TCG and integrated broker-dealer firm. Step 1: Pre-Trade Price Discovery Uses a combination of institutional sources and alternative trading systems, including Bloomberg, MarketAxess, and TMCBonds for seeking pre-trade pricing information from counterparty dealers. All three systems offer competing markets, and thus, have dealers competing for the same securities

• ften at different prices. Using the pre-trade pricing information from electronic sources combined with

market intelligence obtained direct from dealers using Bloomberg IMs or through direct conversations, Representatives select the best price. In many cases, Representatives may negotiate directly with a particular counterparty that has shown an appetite for certain issues, in these instances the Representative may execute a trade direct (broker-to-broker), but only after validating the price using Bloomberg, MarketAxess and/or TMCBonds.

Remember all investing involves risk and past performance is not a guarantee of future returns. 39

Duty of Best Execution

Step 2: Post-Trade Review The SEC and FINRA both require “regular and rigorous reviews” of execution quality or order-by-order trade reviews. The reviews include an assessment of bond prices using both market and trade data

• btained through multiple sources:
• Bloomberg’s ALLQ and BVAL function,
• MarketAxess, Trade Evaluation Prices by IDC and SPSE, Market Axess Trade Analytics;
• TMCBonds

Bloomberg’s ALLQ function, MarketAxess, and TMCBonds provide traders with live indications of

• interest. Bloomberg’s Valuation Service or “BVAL” provides independent price valuations for fixed-

income securities by comparing bond characteristics and direct trade observations to estimate a bond’s price. BVAL will also rate the quantity and quality of the data used on a scale from 1 to 10. The higher the score, the more reliable the price. BVAL is used in price discovery and post-trade review— which is intended to either support execution quality or identify trades with outlying prices.

Remember all investing involves risk and past performance is not a guarantee of future returns. 40

Bloomberg ALLQ Price Discovery

Remember all investing involves risk and past performance is not a guarantee of future returns. 41

Market Axess Live Auctions

Remember all investing involves risk and past performance is not a guarantee of future returns. 42

Muni Bond Pre-Trade Price Discovery

Remember all investing involves risk and past performance is not a guarantee of future returns. 43

Market Axess Pre-Trade Analytics

Remember all investing involves risk and past performance is not a guarantee of future returns. 44

Market Axess - Agencies - Dealer Inventories

Remember all investing involves risk and past performance is not a guarantee of future returns. 45

Market Axess - Agencies - Active Bid/Offer List

Remember all investing involves risk and past performance is not a guarantee of future returns. 46

Market Axess—Muni Bid/Offer List & Dealer Inventories

Remember all investing involves risk and past performance is not a guarantee of future returns. 47

Market Axess—Trade Confirmation and Best Execution

Remember all investing involves risk and past performance is not a guarantee of future returns. 48

DOL Fiduciary Rule – Advising or Selling

• Advice in your best interest
• Fiduciaries are legally required to recommend investments that are in the

client's best interest, not their own

Remember all investing involves risk and past performance is not a guarantee of future returns. 50

Important Disclosures

TCG Advisors is a registered investment advisor regulated by the U.S. Securities and Exchange Commission (SEC) and registered municipal advisor, subject to the Rules and Regulations of the Investment Advisor Act of 1940 and the rules

• f the Municipal Securities Rulemaking Board (MSRB), and is a part of TCG Group Holdings, LLP. Registration does not

imply a certain level of skill or training. TCG Advisors’ parent company, TCG Group Holdings, LLP, owns and operates several other entities which provide various services to employers across the U. S. Those affiliates (wholly‐owned subsidiaries of TCG Group Holdings, LLP) sometimes provide services to TCG Advisors’ Clients. These affiliates are Total Compensation Group Consulting, LP; TCG Administrators, LP (f/k/a JEM Resource Partners, LP); TCG Benefits (f/k/a The Paragon Group, LP; Paragon National, LP; and Paragon Benefits, LP, collectively). The business activities of these companies are discussed in its ADV Part 2A. TCG Advisors is located in Austin, Texas, and a copy of its Form ADV Part 2 is available upon request. This presentation is not authorized for use as an offer of sale or a solicitation of an offer to purchase investments. This presentation is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, or as an offer to provide advisory or other services in any jurisdiction in which such

• ffer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.

Past performance may not be indicative of any future results. No current or prospective client should assume that the future performance of any investment or investment strategy referenced directly or indirectly in this presentation will perform in the same manner in the future. Different types of investments and investment strategies involve varying degrees of risk—all investing involves risk—and may experience positive or negative growth. Nothing in this presentation should be construed as guaranteeing any investment performance.

51 Remember all investing involves risk and past performance is not a guarantee of future returns.

Important Disclosures (continued)

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An investment in the plans discussed will involve a significant degree of risk, and there can be no assurance that the investment objectives will be achieved or that an investment therein will be profitable. Investors will experience individual returns that vary materially from those illustrated in this presentation depending on various factors, including but not limited to, the timing of their investment, the level of fees, and the effects of additions and withdrawals from their capital accounts. Past performance is not necessarily indicative of the future performance or the profitability of an investment in a plan. This presentation includes forward-looking statements. All statements that are not historical facts are forward-looking statements, including any statements that relate to future market conditions, results, operations, strategies or other future conditions or developments and any statements regarding objectives, opportunities, positioning or prospects. Forward-looking statements are necessarily based upon speculation, expectations, estimates and assumptions that are inherently unreliable and subject to significant business, economic and competitive uncertainties and contingencies. Forward-looking statements are not a promise or guaranty about future events.

Remember all investing involves risk and past performance is not a guarantee of future returns.

Important Disclosures (continued)

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Any discussion of liquid or illiquid investments is qualified by the fact that the liquidity of an investment depends largely

• n market conditions, which change from time to time. An investment that is currently liquid could prove to be

completely or substantially illiquid at any time in the future. No assurances can be given regarding the time at which it may be possible or reasonably practical to sell any investment, regardless of the degree of liquidity or illiquidity currently associated with the investment. Any statements about the likely timing for the future disposition or maturity of any investment or group of investments are forward-looking statements that are inherently unreliable and should not be relied upon for any purpose. The projections or other information generated herein regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Hypothetical performance results have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There are frequently substantial differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.

Remember all investing involves risk and past performance is not a guarantee of future returns.

Thank You

900 South Capital of Texas Highway, Suite 350 Austin, Texas 78746 512.600.5200 www.tcgservices.com

John Pesce jpesce@tcgservices.com Blake Rhodes brhodes@tcgservices.com

Remember all investing involves risk and past performance is not a guarantee of future returns. 54