Fixed Income Perspective: Preferred Securities

Transcription

1 Fixed Income Perspective: Preferred Securities Market Commentary December 2015 IT S OFTEN SAID BY EXPERIENCED mariners that navigating waterways is equal parts art and science. To safely and quickly reach the destination, one must have the creative vision to see the obstacles and opportunistic waterways well beyond the vessel s bow. Yet, it also requires the methodical temperament to read a nautical chart and steer the right course. Navigating the preferred securities market is similar. And the results will depend heavily on who is steering the ship. As investment professionals, our goal is to steer the ship to generate alpha, to earn risk-adjusted returns in excess of what the client could achieve by merely investing in an unmanaged index. When we look across the ocean of fixed income investment possibilities for a course to set, preferred securities jump out as a direction with potential. We see preferred securities as potentially attractive for three reasons: The market is divided between retail and institutional investors, often creating inefficiencies and opportunities. Credit spreads are still wide versus pre-crisis averages, creating opportunity for capital appreciation. Regulatory changes have increased banks capital levels to multi-decade highs, improving credit quality and providing a catalyst for credit spreads to narrow. In today s environment of low interest rates and heightened volatility, preferred securities appear attractive for their high current yields and their history of lower sensitivity to rising interest rates. They also can help diversify a fixed income portfolio due to their low correlation to other bond and stock asset classes. All told, preferred securities have the potential for what sailors know as good waters, deep enough with potential to veer around dangerous obstacles. What is a Preferred Security? A preferred security has features of both equity and debt instruments. For balance sheet purposes, it can be classified as either a bond or a stock, depending on its mix of features. The easiest way to identify preferred securities is by their placement within the corporate capital structure. Exhibit 1 illustrates how they typically reside on the boundary between debt and equity. In a bankruptcy or liquidation, preferred security owners have a higher priority than common stock owners, but a lower priority than senior debt holders. They will be paid only if there is money left after senior creditors have been made whole. Douglas Baker, CFA Senior Vice President Portfolio Manager Nuveen Asset Management, LLC Brenda Langenfeld, CFA Vice President Portfolio Manager Nuveen Asset Management, LLC NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

2 Exhibit 1: Preferred Securities Straddle Debt and Equity Exhibit 2: Financial Institutions Dominate the Market Debt Equity Class Source: Standard & Poor s. Secured Debt Unsecured Debt Unsecured Subordinate Debt Hybrid Securities & Tier 2 Securities Preferred Stocks & Additional Tier 1 Securities Common Stocks Seniority Preferred securities are not new. They trace their origins back to the 16th century in England and the 1850s in the United States. However, they majorly evolved in the 1980s from a financing tool for highly regulated utilities to an important financing vehicle for financial institutions. 1 Since then, the preferred securities market has experienced significant growth and a change in composition. Once dominated by utilities, financial institutions now make up the lion s share of the universe. Since 2008, banks and brokerage firms (domestic and international) have issued preferreds en masse to replenish capital depleted from housing and subprime losses realized as a result of the financial crisis. Banks 65.3% Insurance Companies 13.9% Utilities 5.6% REITs 5.3% Industrials 5.2% Diversified Financial Services 4.7% Source: BofA Merrill Lynch, Barclays. Data as of 9/30/15. Based on a blend of 65% BofA Merrill Lynch U.S. Preferred Stock Fixed Rate Index/35% Barclays USD Capital Securities Index, which represents a blend of retail $25 par value securities and institutional $1000 par value securities. Types of Preferred Securities A preferred security s combination of features will classify it as either an equity or a fixed income security, but most preferred securities have elements of each. For example, some preferred securities generate income in the form of interest while others generate income in the form of dividends. Other common features are shown in Exhibit 3. Exhibit 3: Multiple Structures Exist in the Preferred Market Feature Senior Notes Trust Preferred Traditional Preferred Stock Additional Tier 1 (AT1) Securities Common Stock Character Debt Debt Equity Equity Equity Priority of Claims Senior to trust preferred, hybrids, preferreds and common equity Senior to hybrids, preferred and common equity; junior to senior and subordinate debt Junior to all debt; senior to common equity and AT1 Junior to all debt; senior to common equity Junior to debt and preferred Nature of Payment Interest Interest Dividend Dividend Dividend U.S. Tax-Advantage None Typically none DRD 2 /QDI 3 DRD 2 /QDI 3 DRD 2 / QDI 3 Term Dated Typically years Typically perpetual Perpetual Perpetual Payment Deferral Option None Yes, typically 5-10 years Yes, typically indefinite Yes, indefinite Yes, indefinite Cumulative/ Non-cumulative N/A Typically cumulative Mostly non-cumulative Non-cumulative Non- cumulative 1 Hybrid Capital, J.P. Morgan, October 14, Dividend Received Deduction allows corporations to deduct 70% of the income received from federal taxable income. Please consult a qualified tax advisor for details on your particular situation. 3 Qualified Dividend Income is taxed at the capital gains rate. Sources: Preferred Securities Quarterly Guide, BofA Merrill Lynch, July 16, 2012; Nuveen Asset Management. 2

3 Potential Benefits of Preferred Securities In today s low rate environment, preferred securities potentially offer relatively attractive yields. They may also provide portfolio diversification and less sensitivity to interest rates. This combination has created significant interest in the asset class, especially from retail investors. Attractive Relative Yields Because they are lower in the capital structure and thus carry more subordination risk, preferred securities generally contain wider credit spreads and pay a higher level of income than their more senior debt counterparts. These high absolute and relative spreads and yields offer investors two distinct advantages: Additional income potential. Capital gains potential should spreads compress, all else equal. As shown in Exhibit 4, preferred securities have had attractive yields relative to other asset classes. They have offered more income generating power than equities and most fixed income asset classes, with the exception of high yield bonds. Exhibit 4: Preferred Securities Have Offered Attractive Yields 5% 4% 3% 2% 1% 0% 4.29% Preferred Blended Benchmark 2.31% Barclays U.S. Aggregate Index 1.95% Barclays U.S. Treasury: 7-10 Year Index 2.95% Barclays U.S. Corporate Financials Index 2.21% S&P 500 Index 0.01% Citi 3-Month T-Bill Index Sources: BofA Merrill Lynch; Barclays; S&P; Citi Velocity; Nuveen. Data as of 9/30/15. The Preferred Blended Index is composed of 65% Bank of America Merrill Lynch Fixed Rate Preferred Securities Index and 35% Barclays USD Capital Securities Index. Investors cannot invest in an index. Past performance does not guarantee future results. Not only are preferred yields attractive in an absolute sense, but they are also compelling compared to the broader bond universe as represented above by the Barclays U.S. Aggregate Index. As noted in Exhibit 1, bank-issued securities constitute over half of the preferred universe. Financial institutions, particularly the large banks, have experienced significant improvements in their asset quality, leverage, liquidity and capital levels since the credit crisis. We believe that banks are healthier than they have ever been from a creditor s perspective. However, this potential does not appear to be reflected in their current valuations. Exhibit 5 shows that yield spreads are currently wide versus pre-crisis levels. The yield spread (difference) between a preferred security and an investment grade corporate bond represents the additional yield investors are paid to take on the risk of buying a more subordinate form of debt. When yield spreads decrease, the relative price of preferred securities versus senior corporate bonds rises, and vice versa. Given that banks are in better shape than ever, we believe that this spread will continue to narrow, all other things being equal. If the yield spread narrows, the relative price of preferred securities will rise which may create additional total return for investors. Exhibit 5: Preferreds are Undervalued Versus Corporate Bonds Yield Spread (bps) Spread to Barclays U.S. Corporate Index bps bps Source: Barclays. Data as of 9/30/15. Preferred securities represented by 65% Bank of America Merrill Lynch Fixed Rate Preferred Securities Index and 35% Barclays USD Capital Securities Index. Corporate bonds by Barclays U.S. Corporate Index. Investors cannot invest in an index. Past performance does not guarantee future results. A High Quality Investment Preferred securities are generally issued by high quality companies. Due to their subordinate capital structure position, preferreds may be rated 3 to 5 quality notches lower than the senior debt of the same issuer. For instance, an entity issuing a preferred/hybrid security rated BB would typically have investment grade senior unsecured debt rated BBB or higher. Although preferred securities are lower in the capital structure than traditional bonds, many are investment grade in nature, as shown in Exhibit 6. They may produce a higher yield than investment grade corporate bonds without the credit risk of a below-investment-grade, high yield bonds. 3

4 Exhibit 6: Preferreds Have Offered High Relative Credit Quality Preferred Securities Corporate Bonds 80% 70% 60% 64.6% 50% 40% 30% 49.1% 31.7% 32.9% 20% 16.6% 10% 0.0% 1.3% 3.3% 0.0% 0.1% 0% AAA AA A BBB BB and below Sources: Barclays, BofA Merrill Lynch and Nuveen Asset Management. Data as of 9/30/15. Breakdown of the credit quality of the constituent components of each of the indices being compared. Preferred Securities represented by the Preferred Blended Index, which is composed of 65% Bank of America Merrill Lynch Fixed Rate Preferred Securities Index and 35% Barclays USD Capital Securities Index. Corporate Bonds represented by Barclays U.S. Investment Grade Corporate Index. Based on the highest ranking of Standard & Poor s, Moody s or Fitch (including intra-rating gradations like A2/A3). AA, A and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. Investors cannot invest in an index. Past performance does not guarantee future results. Increased Diversification Since preferred securities include features of both bonds and stocks, it is not surprising that the asset class exhibits relatively low correlation to both traditional fixed income and equity categories, as shown in Exhibit 7. This means that adding a slice of preferred securities to a portfolio may improve overall portfolio diversification. Exhibit 7: Preferreds May Improve Portfolio Diversification 10-Year Correlation Stocks 0.35 Broad Bond Market 0.63 Investment Grade Corporates 0.56 High Yield Corporates 0.36 Municipal Bonds 0.08 Intermediate- Term Treasuries Sources: Barclays; BofA Merrill Lynch; Bloomberg; Nuveen Asset Management. Data from 9/30/05 to 9/30/15. Preferred Securities represented the Preferred Blended Index, which is composed of 65% BofA Merrill Lynch U.S. Preferred Stock Fixed Rate Index and 35% Barclays USD Capital Securities Index; Stocks by the S&P 500 Index; Broad Bond Market by the Barclays U.S. Aggregate Bond Index; Investment Grade Corporates by the Barclays Investment Grade Corporate Index; High Yield Corporates by the Barclays U.S. High Yield Bond Index; Municipal Bonds by the Barclays Municipal Bond Index; Intermediate-Term Treasuries by the Barclays 7-10 Year U.S. Treasury Index. Investors cannot invest in an index. Past performance does not guarantee future results. Correlation ranges between 1 and +1. A correlation co-efficient of +1 implies that as one security moves, either up or down, the other security will move in the same direction. A correlation co-efficient of 1 means that if one security moves in either direction the other security will move in the opposite direction. Correlation of 0 means the movements of the securities are completely random. Less Sensitivity to Rising Interest Rates With interest rates at historically low levels, many investors are concerned about the potential impact of rising rates. Indeed, when interest rates go up, bond prices go down, but different types of bonds have varying sensitivities to changes in interest rates. Preferred securities are often more sensitive to changes in credit spreads than other types of bonds. So on a relative basis they may perform well during periods of gradually increasing interest rates. This advantage is partially offset by their longer-dated nature (many are perpetual), making preferreds more sensitive to rate changes. As shown in Exhibit 8, preferred securities actually outperformed many traditional fixed income categories during the last period of gradually increasing Fed funds rates. Exhibit 8: Preferreds Delivered Positive Returns During the Last Rate Increase Cycle 10% 8% 6% 4% 2% 0% Broad Bond Market Treasuries Investment Grade Corporates 3.91 Preferred Securities 7.90 High Yield Corporates 3.81 Global Bonds 4.50 Municipal Bonds Sources: Barclays; BofA Merrill Lynch and Nuveen Asset Management. Data from 6/1/04 6/30/06. During this period the Fed funds rate increased 17 times from 1.00% to 5.25%. Broad Bond Market represented by the Barclays U.S. Aggregate Bond Index; Treasuries by the Barclays U.S. Treasury Index; Investment Grade Corporates by the Barclays U.S. Corporate Investment Grade Index; Preferred Securities by the BofA Merrill Lynch U.S. Preferred Stock Fixed Rate Index; High Yield Corporates by the Barclays U.S. High Yield Bond Index; Global Bonds by the Barclays Global Aggregate Bond Unhedged Index; Municipal Bonds by the Barclays Municipal Bond Index. Investors cannot invest in an index. Past performance does not guarantee future results. Manage Interest Rate Risk Finally, as we begin to approach the point where market interest rates may rise, managing interest rate sensitivity becomes increasingly important. This is especially true in the preferred market, where securities tend to be longer duration and therefore, have more sensitivity to rising rates. One way active managers can make a portfolio less sensitive to rising rates is to add securities with fixed-to-float coupon structures to the portfolio. These security structures contain the following features: Pay a fixed coupon for a preset number of years (5, 7, 10 or more), then convert to a floating rate coupon for the remaining life of the security or until it is called. The floating coupon is based on a benchmark rate, such as 3-month LIBOR, plus a predetermined spread that is set when the security is issued. 4

5 This structure has less interest rate sensitivity versus fixed-forlife structures, but these structures can introduce reinvestment risk if redeemed by issuer, or if the floating rate index is low when the coupon resets. Compared to fixed-for-life capital structures, fixed-to-floating rate structures generally experience better relative price performance in a rising rate environment. Typically, they also tend to experience less extension of duration as rates rise and fewer bonds are called. Exhibit 9: Comparison of Structures Structure Fixed-to-float Fixed-for-life Par $1,000 $25 Coupon 8.40% 8.125% Maturity Perpetual Perpetual As-Of Date 9/30/2015 9/30/2015 Fixed-to-Float Yield Curve Scenario Assumption Current Curve +100 bps +200 bps +300 bps Price ($) Total Return 0.00% -2.25% -4.43% -6.54% YTW 3.44% 4.44% 5.45% 6.46% Eff. Duration (yr) Fixed-for-Life Yield Curve Scenario Assumption Current Curve +100 bps +200 bps +300 bps Price ($) Total Return 0.00% -3.06% -7.04% % YTW 2.26% 3.70% 5.68% 8.14% Eff. Duration (yr) Sources: Bloomberg and The Yield Book. Data as of 9/30/15. Assumes immediate parallel shift of the September 30, 2015, yield curve with OAS and volatility held constant. This hypothetical scenario is for informational purposes only. Scenario data is provided by a third-party source believed to be reliable. Securities mentioned are used as examples for educational/ informational purposes only; inclusion does not constitute a recommendation to buy or sell nor imply inclusion in any Nuveen investment vehicle. Past performance is no guarantee of future results. Active Management Can Offer Advantages Active management of preferred securities may better capitalize on heavy retail investor market participation and changing bank regulations. Leveraging Opportunity Across Two Distinct Markets In addition to the various structures detailed in Exhibit 3, the over $850 billion U.S. preferred securities market 4 is primarily composed of two types of issues: 5 $25 par value securities 6 that trade on the New York Stock Exchange and target retail investors. $1000 par value securities that trade over-the-counter and target institutional investors. Mispricing between issues. Using their expertise, a professional asset manager can identify differences in the market that may not be readily apparent to retail investors. For example, a company may issue both $25 and $1000 par value securities with the same credit and structural risk. A professional manager can compare the difference in economics for essentially the same security, selling what they believe to be the overpriced security and buying the underpriced security. In some cases, the difference in valuations between the two markets can be substantial. How can such mispricing occur? Exhibit 10 shows two securities that were identical except for the par denomination and a 2 basis point difference in coupon. Retail investors often focus on absolute yield when valuing securities, and in this case they drove the $25 par securities to relatively rich levels in the search for income. Institutional investors tend to value securities based on yield spreads to U.S. Treasuries or senior debt. The result was an extreme difference in valuations between the two securities. An investor could have paid 4% less for the institutional $1000 par securities and gained 213 basis points in yield versus the same structure in a $25 par. 4 Source: Stifel. As of 10/5/15. 5 There are also $50 and $75 par structures, but these are much less common. 6 The par value of the security defines the dollar value of the bond or stock. 5

6 Exhibit 10: Retail and Institutional Investors Value Preferred Securities from the Same Company Differently Issue Type Retail Institutional Par $25 $1000 Coupon 8.00% 7.98% Price (% of Par) 109.5% 105.6% YTW 3.33% 5.46% Call Date 12/2017 3/2018 Payments Non-Cumulative Non-Cumulative Maturity Perpetual Perpetual Rating Baa2/BBB Baa2/BBB Source: Bloomberg. Data as of 9/30/15. Securities mentioned are used as examples for educational/information purposes only; inclusion here does not constitute a recommendation to buy or sell nor imply inclusion in any Nuveen investment vehicle. Past performance is no guarantee of future results. Larger block sizes and greater liquidity. Professional managers buy in larger block sizes for their clients, while the average retail investor typically does not have a large enough position to access this market. Access to the international market. Securities issued by non-u.s. entities in U.S. dollars, also known as Yankees, constitute approximately 40% of the U.S. dollar denominated market. 7 They also tend to be dominated by institutional $1000 par value securities. Retail investors typically ignore this market and research departments provide less coverage. Adding these non-retail oriented securities to a portfolio can increase issuer diversification and reduce correlation with U.S. asset classes. 8 Active Management of Scheduled Call Risk Most of the preferred security universe has explicitly stated call provisions. Most preferred issuers will call securities when they can be refinanced at cheaper levels. This is usually in response to lower interest rates and/or tighter credit spreads, or when the issuer already has excess capital on its balance sheet. Scheduled calls of preferred securities trading at premiums may lead to investor loss, especially when investors are not actively managing yields-to-call. In April 2013, J.P. Morgan called 8 different preferreds totaling over $5 billion par. All eight securities were trading at premiums, with all but one structure causing substantial investor losses. Managing call risk should be a high priority for preferred investors. Exhibit 11: Sample Scheduled Call Losses Ticker Price (as of 4/8 close) Price (as of 4/9 open) Yield-to-Call (using 4/8 close price) JPM O % JPM J % JPM X % JPM Y % JPM P % JPM S % JPM W % JPM K % Source: Bloomberg. Securities mentioned are used as examples for educational/informational purposes only; inclusion here does not constitute a recommendation to buy or sell nor imply inclusion in any Nuveen investment vehicle. Past performance is no guarantee of future results. 7 Source: Stifel. Data as of 10/5/15. 8 Note that Yankees though denominated in U.S. dollars and sold on U.S. markets carry many of the same risks associated with any international investment, including political and economic change, social unrest, changes in governmental regulations, differences in accounting and the lesser degree of accurate public information available. Regulatory Changes Create Opportunity Bank regulatory issues may also create opportunity. Because of regulation changes, banks in the U.S. and abroad have increased capital levels and common equity cushion through retained earnings and capital raises. Common equity ratios of U.S. banks are at the highest levels since the 1940s, as shown in Exhibit 12. This has created a larger common equity cushion for preferred securities and improved overall credit qualities. When this happens, the risk premium (or yield spread) required by the market declines and prices may improve. Exhibit 12: Common Equity Ratios Have Improved U.S. Banks Historical Tangible Common Equity Ratio 15.0% 12.0% 9.0% 1941=>8.9% 6.0% 3.0% 0.0% Source: Federal Deposit Insurance Corporation, New York Federal Reserve Bank and Barclays Research. Data from 1/1/1934 to 12/31/ =>8.9% 2010

7 CoCos Offer Risk Adjusted Opportunities The changes in bank regulation have created a new security, the contingent capital security (CoCo). CoCos are preferred securities with explicit loss-absorption features activated when the capital of the issuing company falls below a predetermined level (trigger). Upon a trigger event, and depending on the structure, CoCos will either (1) convert to equity, or (2) experience a write-down of principal either permanent or temporary. Banks issue CoCos to meet new capital requirements set forth by recent regulatory reform (Basel III/CRD IV). Most CoCos are issued by non-u.s. banks and to a lesser degree by non- U.S. insurance companies. The CoCo market has grown substantially in recent years, standing at roughly $370B. 9 We expect the asset class to grow further as banks continue to increase capital to meet minimum regulatory-mandated thresholds. For investors with adequate research resources, we feel the CoCo market offers compelling risk adjusted opportunities. Adding Preferred Securities to a Portfolio Exhibit 15 shows sample portfolios designed for a rising rate environment using preferred securities. Of course, individual investors should discuss personal circumstances with a professional advisor. Exhibit 14: Sample Hypothetical Rising Rate Fixed-Income Portfolios Conservative Portfolio Moderate Portfolio Aggressive Portfolio Broad Bond Market 20% Short Term Corporates 55% Global Bonds 5% High Yield Corporates 15% Preferred Securities 5% Broad Bond Market 15% Short Term Corporates 40% Global Bonds 10% High Yield Corporates 25% Preferred Securities 10% Broad Bond Market 10% Short Term Corporates 20% Global Bonds 20% High Yield Corporates 35% Preferred Securities 15% Hypothetical Portfolio Characteristics Hypothetical Average Annual Returns During Rising Rate Periods Conservative Moderate Aggressive Conservative Moderate Aggressive Yield 2.92% 3.71% 4.51% Period 1: 2/1/94 2/28/ % 1.82% 1.65% Return 4.45% 4.82% 5.17% Period 2: 6/1/99 5/31/ % 0.64% -0.93% Risk Period 3: 6/1/04 6/30/ % 4.13% 4.89% Data as of 9/30/15. Returns measured by 10-year total return. Risk is measured by 10-year standard deviation of returns. Sample Portfolios, Risk/Return, Portfolio Characteristics and Performance charts show hypothetical strategies for illustrate purposes only and do not reflect actual products currently or previously managed. They should not be relied upon for investment advice. Hypothetical performance does not reflect the deduction of fees and expanses, which would reduce performance in any actual client account. The proposed strategy holdings and weights are subject to change without notice. There is no guarantee the strategies will meet their investment objective. Past performance is no guarantee of future results. Broad Bond Market represented by Barclays U.S. Aggregate Bond Index; Short Term Corporates represented by Barclays Credit 1-3 Year Index; High Yield represented by Barclays U.S. Corporate High Yield Index; Global Bonds represented by Barclays Global Aggregate Bond Unhedged Index; Preferred Securities represented by BofA ML Preferred Stock Fixed Rate Index. Market indices do not include fees. Investors cannot invest directly in an index. During Period 1, the Fed funds rate increased 7 times from 3.00% to 6.00%; Period 2, 6 times from 4.75% to 6.50%; Period 3, 17 times from 1.00% to 4.25%. 9 Source: Stifel. Data as of 10/5/15. 7

8 Navigating the Preferred Waters If, like us, you are always looking for new investment waters to sail, consider preferred securities. They are a hybrid asset class, with features of both bonds and stocks, that offer attractive yield, diversification potential and less sensitivity to rising rates. Moreover, they are an asset class with distinct advantages for professional investors using an active management approach. Deep expertise at the helm can help investors benefit from a large retail presence and regulatory changes. Bottom line, preferred securities may represent a true ocean of opportunity. For more information, please consult with your financial advisor and visit nuveen.com. INDEX DEFINITIONS The Barclays 7-10 Year U.S. Treasury Index contains securities in the Treasury Index with a maturity from 7 up to (but not including) 10 years. The Barclays Credit 1-3 Yr Index is a broad-based benchmark that measures the return of bonds with 1-3 year maturities. The Barclays Global Aggregate Unhedged Index measures the performance of global bonds. It includes government, securitized and corporate sectors and does not hedge currency. The Barclays Municipal Bond Index covers the USD denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The Barclays Investment Grade Corporate Index is a broad-based benchmark that measures the investment grade, fixed-rate, taxable corporate bond market. The 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 passthrough securities and asset-backed securities. RISKS AND OTHER IMPORTANT CONSIDERATIONS This information represents the opinion of Nuveen Asset Management, LLC and is not intended to be a forecast of future events and this is no guarantee of any future result. It is not intended to provide specific advice and should not be considered investment advice of any kind. Information was obtained from third party sources which 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 The Barclays U.S. Corporate High Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if they fall within the middle rating of Moody s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt. The Barclays U.S. Treasury Index includes public obligations of the U.S. Treasury. Treasury bills are excluded by the maturity constraint but are part of a separate Short Treasury Index. In addition, certain special issues, such as state and local government series bonds (SLGs), as well as U.S. Treasury TIPS, are excluded. STRIPS are excluded from the index because their inclusion would result in double-counting. The Barclays USD Capital Securities Index contains securities viewed as a hybrid fixed income securities that either receive regulatory capital treatment or a degree of equity credit from the rating agencies. This generally includes Tier 2/Lower Tier 2 bonds, perpetual step-up debt, step-up preferred securities, and term preferred securities. The BofA Merrill Lynch Preferred Stock Fixed Rate Index is designed to replicate the total return of a diversified group of investment-grade preferred securities. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. products. All investments carry a certain degree of risk, including possible loss principal and there is no assurance that an investment will provide positive performance over any period of time. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc. GPE-TFTPREF-1215P INV-AN-12/16 Nuveen Investments 333 West Wacker Drive Chicago, IL nuveen.com