Opportunities in Low Interest Rate Environment. Kevin Dickey & Larry Wright. Private Wealth Advisors. October 18, 2012. CRC 456822 – 1/2012. Morgan Stanley Dallas Private Wealth Management Team. Kevin T. Dickey, Executive Director, Private Wealth Advisor - PowerPoint PPT Presentation
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This is not a research report and was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. It was prepared by Morgan Stanley Smith Barney sales, trading or other non-research personnel. Unless otherwise indicated, these views (if any) are the author’s and may differ from those of the aforementioned research departments or others in the firms. Past performance is not necessarily a guide to future performance. Please see additional important information and qualifications at the end of this material.
Opportunities in Low Interest Rate Environment
Kevin Dickey & Larry Wright
Private Wealth Advisors
October 18, 2012
CRC 456822 – 1/2012
2This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
Morgan Stanley Dallas Private Wealth Management Team
• Kevin T. Dickey, Executive Director, Private Wealth Advisor
• Larry K. Wright, Senior Vice President, Private Wealth Advisor
• Benjamin J. Sweeney, Vice President, Financial Advisor
• Diana Nuñez, Registered Marketing Associate
• Teresa L. Hall, Registered Client Service Associate
3This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
. If Things are So Good
Why Do I Feel So Bad?
4This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
5This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
• Early 1900, the average life expectancy was 47 yrs
• The infant mortality rate was 10%
• 8% of the homes had telephones
• Three-minute call from San Francisco to New York cost $21
• The average wage was $0.22 per hour
• Less than 1% of households earned the equivalent of $75,000 today
6This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
• 25% of the households had running water
• There were 8,000 cars, 144 miles of paved road and a maximum speed limit in most cities of 10-mph.
• Top 3 killers were:
pneumonia
tuberculosis
diarrhea
• The average manufacturing workweek was six, twelve hour days
• The percentage of households with air-conditioning was zero
7This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
. But This Time,
It’s Different…
8This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
• The economy is in full-scale retreat, with the purchasing power of the dollar less than half what it was five years earlier. Professional and salaried workers are worse off than any time in the last 50 years. Many blame mass advertising and easy credit for these problems.
• While Americans take pride in the country's remarkable growth over the past century, many are convinced the old moral and spiritual values are being undermined by industrialization, standardization, globalization and a mass consumer society.
• Newspapers and magazines move from objective purveyors of the news to commentators who take positions. Entertainment begins to replace journalism and gossip replaces the news.
9This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
• The largest ponzi scheme in the nation's history robs 40,000 people of much of their life savings.
• Democrats want to increase taxes on the wealthiest Americans while Republicans believe this would curtail job growth and increase prices thus hurting the average American.
• The cult of celebrity is sweeping the nation, Fame is conferred more on notoriety than achievement and distinction.
• The number of newspapers decline by 2,000 over a 15 year period.
10This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
11This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
Why So Serious?
12This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
. 24 Hours a Day
Seven Days a Week
13This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
. Sale of Fear
In Popular Press
14This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
.
Material Want
vs.
Meaning Want
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. Understanding
Your Risk Exposure
16This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
Where Do We Stand?
2012 Economic Assumption: Sluggish Growth at best, recession odds have increased
Themes for 2012:
The two speed global economy: Developed Markets vs. Emerging Markets.
Policy-related mistakes both in the US and Euro Zone represent risks
Managing through the “Headlines” risks
Known headwinds:
Financial contagion from the Euro Zone
Stubbornly high unemployment
Housing
Dwindling fiscal support for state & local governments
Bottom line: Sluggish economy, a peak in inflation and ‘safety premiums’ should keep US interest rates low on a historical basis
So how does this impact fixed income markets?
17This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
Morgan Stanley Smith Barney Fixed Income Strategy 2012 Outlook*
* See Basis Points, by Chief Fixed Income Strategist Kevin Flanagan, for current outlook and portfolio strategy recommendations.
• Fed likely to remain overly accommodative – The Fed will finish ‘Operation Twist’ and may consider other unconventional easing measures
• EuroZone ‘headline risk’ to remain a factor
• Fundamental backdrop (sluggish growth, low inflation) should keep US Treasuries yield historically low
In terms of rates, the most attractive yield curve locations include:Municipal Bonds: 6-14 year maturitiesTaxable Bonds:
- Investment Grade: 7-10 year maturities- High Yield: 3-5 year maturities- Treasuries: 3-7 year maturity
Given heightened uncertainty, our Strategists emphasis is on the following Fixed Income strategies:
18This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
Investment Strategies for Fixed Income in 2012
1 Asset Allocation and Diversification does not assure a profit or eliminate the risk of loss.
Consider the opportunity costs of being overweight in cash and cash alternatives.
Balance the risk profile of your portfolio with fixed income.
Asset allocation strategies may allow you to potentially reduce volatility in your portfolio without sacrificing return.1
Diversify your fixed income portfolio by maturity dates, asset class, credit quality, currency, etc.1
Focus on opportunities in improved corporate credit profiles and relative value in higher credit quality municipals – yield curve location will be a key to maximizing fixed income opportunities
Consider constructing a laddered portfolio to help meet future goals.
A barbell strategy is one method of balancing flexibility and income.
19This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
Inflation and Real Rates of Return*
1980
1985
1990
1995
2000
2005
2006
2007
2008
2009
2010
2011
11.43
10.62
8.55
6.57
6.03
4.29
4.80
4.63
3.66
3.26
3.22
2.78
10-Year T-Note
13.5
3.6
5.4
2.8
3.4
2.3
3.2
2.8
3.8
-0.4
1.6
3.2
CPI
(2.07)%
7.02
3.15
3.77
2.63
1.99
1.60
1.83
(0.14)
3.66
1.62
(0.42)
Real Rate of ReturnYear
Sources: Federal Reserve Board, Bureau of Labor Statistics and Morgan Stanley Research*All rates above reflect 12-month averages for the given year and are for illustrative purposes only. Past performance is no guarantee of future results.
20This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
Changing Interest Rates: A Historical Look at Average Short-Term Yields
Average Short-Term Yields*
Source: Federal Reserve Board, Jan 2012 * Past performance is no guarantee of future results.
Fed Funds rate is the interest rate at which depository institutions lend balances to each other overnight
21This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
Overview of Fixed Income Securities
Bonds are debt obligations of governments, agencies and corporations. The issuer is obligated to pay the investor interest at a specified interest rate over the life of the bond and to return the bond principal at maturity.
Certificates of Deposit (CDs), also known as “time deposits” and issued by a bank, provide investors with interest in return for allowing the bank to use the funds over a specified time period.
Preferred Securities are investments with both equity and debt characteristics.
Fixed Income Sectors:
Interest Sensitive Credit Sensitive Municipal Treasury Securities Corporate Bonds General Obligation
US Agency Securities High Yield Bonds Revenue Bonds Agency & GSE Mortgage- Foreign Currency Bonds Pre-Refunded Bonds Backed Securities (MBS) Emerging Markets Debt Taxable (incl. BABs) Zero Coupon Bonds Preferred Securities High Yield BondsCertificates of Deposit (CD) Non-Traditional Munis
22This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
Investment Strategy: Barbell Portfolio
Barbell strategies concentrate holdings at each end of the maturity spectrum with little to no exposure in the intermediate maturity ranges
Investing a large portion of funds in long-term securities, investors can take significant advantage of higher yields; by simultaneously investing a large portion in short-term securities, investors can benefit from liquidity.
A barbell strategy can offer protection and flexibility in the event of a considerable rise or decline in interest rates.
Hypothetical illustration. Not representative of any specific investment.
The barbell strategy of income investment strategy involves buying a mix of short and long-term bonds so that the portfolio has the same prices sensitivity to interest-rate.
23This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
Investment Strategy: Laddered Portfolio A laddered strategy involves dividing investment money among bonds that mature at
different set intervals.
Can provide structure, stability and a predictable flow of principal while potentially reducing exposure to reinvestment risk
Designed to meet your individual financial objectives including those related to time horizon, risk tolerance, income and principal preservation:
Time Horizon Asset Class Interest Payments
Short-term Federal Agency Monthly
Intermediate-term Corporate Bonds Quarterly
Long-term Municipal Bonds Semiannually
(or any combination) US Treasuries
Preferred Securities
Zero Coupon BondsWhether you are interested in balancing your portfolio, reducing your reinvestment risk or planning for future needs, the laddered portfolio investment strategy may help you meet your financial goals. A laddered portfolio, however, may result in a lower return than a non-laddered portfolio.
24This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
The Cost of Waiting
Assumptions
1. $500,000 investment in municipal bonds
2. 0.65% increase in intermediate-term (10yr) municipal rates over the next 12 months
3. 0.01% money market account rates over the last 12 months
Scenario 1
Purchase a 10-yr tax-exempt “AA” rated municipal bond yielding 2.15%
Scenario 2
Remain in a tax-exempt money market account for one year at 0.01%, and then invest in a 10-year tax-exempt
municipal bond hypothetically yielding 2.80%, or 0.65% higher than prevailing intermediate-term (10yr)
municipal rate.
25This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
The Cost of Waiting
Year Annual Income Cumulatvie (A) Annual Income Cumulatvie (B)
Tax-Exempt Money Market account at 0.01% for 1 Year, then reinvest in a
2.80% 10-Year Muni Bond
Scenario 2
26This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
27This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
How we are different?
• Over 14 years of experience working with Telephone cooperatives. Help design and implement investment policy statements for Telephone Cooperatives. Oversee $200,000,000 of telephone cooperative investment assets.
• Our practice has a combined 75+ years of experience.
• We advise approximate 72 entities. Managing fewer relationships allows us to tailor service to focus on individual needs.
• Our team focuses on customizing complex financial solutions for affluent families, business owners and corporate executives.
• Every client has specific objectives. We align our expertise and resources to achieve their financial goals.
28This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
Private Wealth Management Global Footprint
Notes
1. Includes PWM US, LatAm, EMEA, and Asia (as of June 2010)
2. As of 10/31/2010
3. PWM Latin America Coverage based out of Miami and New York
Morgan Stanley Private Wealth Management
Over 580 Private Wealth
Advisors globally in more
than 25 offices worldwide
with over $205 billion in
assets under management1
Focus on families with
$10mm+ in investable assets
Cover 20% of Forbes 4002
Generally co-located
generally in the same offices
as other Morgan Stanley
businesses such as
Investment Banking,
Equities, Fixed Income and
Investment Management
providing strong linkage to
other parts of the firm
3
Global Footprint—60 Offices in Key Metropolitan Areas Across 4 Continents
San Francisco Milan
Philadelphia
Hong Kong
BostonChicago
Los Angeles
London
Zurich
Singapore
Menlo Park GenevaNew York3
Houston
Atlanta
Dubai
Munich
Miami3
Washington, DCRiyadh
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Delhi
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Dallas
Introduction to Morgan Stanley Private Wealth Management
29This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the research departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. Please refer to important information and qualifications at the end of this material.
Investment & Risk Management
Introduction to Morgan Stanley Private Wealth Management
6
In addition to the deep resources of Morgan Stanley’s Investment Management and Research platforms, the PWM offering includes a range of sophisticated solutions provided through an unparalleled open architecture platform
