INCOME INVESTING

Fixed income investing: the active advantage

knows Highlights Active managers: 4Q18 • Have produced stronger returns with less risk than passive strategies over the last five years

• Can expand the universe to include higher yielding sectors with potentially less rate sensitivity

• May reduce risk through fundamental and quantitative research; sector and selection; and tactical trading

• Manage sensitivity through active duration and curve positioning Active fixed income strategies may offer investors numerous advantages over passive index strategies, providing enhanced risk-adjusted performance potential.

As the U.S. (Fed) continues to raise interest rates and unwind its balance sheet, investors are re-evaluating their fixed income investment allocations. They still seek returns in this relatively lower yield, low-inflation environment, yet many have made a move to passive investing. Billions of dollars have flowed into income index strategies in recent years.

We believe active management for fixed income can better help investors realize their goals. The advantages become all the more significant as we consider the flawed nature of issuance-based fixed income indexes and the long-standing segmentation of indexed markets.

William (Bill) Martin Tony A. Rodriguez Taxable Fixed Income CIO Taxable Fixed Income CIO TIAA Nuveen Asset Management nuveen knows income investing / 4Q18 1

Active management can be used these products have exhibited nearly 50% larger than the global in any environment lower returns and higher volatility .1 The most common as shown in Exhibit 1. On the index, the S&P 500® We believe actively managed other hand, actively managed Index, contains approximately strategies can help manage portfolio mutual funds have historically 500 liquid . In contrast, the risk while enhancing returns. outperformed their benchmarks most widely quoted bond index, the This is especially true in today’s while maintaining a similar risk Bloomberg Barclays U.S. Aggregate environment of rising interest rates. profile, on average. Index (Aggregate Index), contains a Active sector rotation, bottom- staggering 10,000+ securities.2 up security selection and interest The return profile of active versus rate (duration) management passive is even more pronounced It is impossible to buy all of those can all create opportunities for when considering only those mutual bonds, so an index manager must investors to add value that are funds with fees in the bottom half use statistical analysis and sampling simply not available in passively of the universe—which are the in an attempt to replicate the managed strategies. lower-cost share classes many characteristics and performance investors own today. of the benchmark using fewer Investors may think they can securities. And the gross return achieve these objectives with Why is it difficult for index must outperform the benchmark to passive investing, but they may funds to keep up? cover the management fees. be missing the mark. It might be logical to assume that index mutual Fixed income index strategies may funds or index exchange-traded often have difficulty matching their funds (ETFs) would match the benchmarks’ performance due to risk and return characteristics of the complexities of bond indexes. their benchmarks, but on average The global fixed income market is

Exhibit 1: Actively managed bond funds have offered better risk-adjusted returns 5 years ending 30 Jun 2018

2.95

2.75 Lower fee active 2.55 Active mutual fund 2.35

Return (%) Return Aggregate Index 2.15 Index Index ETFs 1.95 mutual funds

1.75 2.68 2.70 2.72 2.74 2.76 2.78 2.80 2.82

Risk

Chart does not represent the past performance of any Nuveen Fund. For fund performance visit nuveen.com.

Data source: Morningstar Direct, 30 June 2018. Past performance is no guarantee of future results. Risk is measured by 5-year standard deviation and return by 5-year total return. The Aggregate Index is represented by the Bloomberg Barclays U.S. Aggregate Index. Active mutual funds include all share classes of non-index open-end funds in the Morningstar Intermediate Term category with a primary prospectus benchmark of the Bloomberg Barclays U.S. Aggregate Index. Lower Fee Active Mutual Funds include the funds in the Active Mutual Fund category with fees lower than the average fund. Index mutual funds are open-end funds benchmarked to the Bloomberg Barclays U.S. Aggregate Index. Index ETFs are index ETFs benchmarked to the Bloomberg Barclays U.S. Aggregate Index. 2 nuveen knows income investing / 4Q18

How can active managers The index also has minimal add value? exposure to select securitized The most commonly used The Aggregate Index sectors, such as asset-backed benchmark, the Aggregate Index, has drawbacks and commercial mortgage- suffers from many drawbacks that backed securities and non-agency provide active managers with more that allow active residential mortgages. opportunities to generate excess managers to Thus, the Aggregate Index returns and manage risk. These overlooks trillions of dollars’ worth shortfalls include limited sector potentially generate of bond issues. exposure, increasing excess returns and due to market value weighting In contrast, active managers and duration that fluctuates manage risk. have the ability to strategically with issuance. Active managers allocate away from potentially may add value to fixed income lower yielding government bonds. They can often supplement index- portfolios by taking advantage opportunity set. For example, the eligible bonds with off-benchmark of these limitations. Let’s look Aggregate Index contains thousands investments that may offer higher at each in turn: of holdings with a market value yield, greater diversification and of more than $20 trillion.1 But, as Expanding the less sensitivity to rate increases, as shown in Exhibit 2, it essentially investment universe shown in Exhibit 3. excludes non-dollar denominated By their very nature, bond indexes bonds (non-USD), emerging Active managers may also have are exclusionary, meaning they markets , global high yield flexibility to add non-USD bonds limit themselves in terms of the corporate bonds and senior . to improve return potential and

Exhibit 2: The Aggregate Index misses out on many sectors

Sectors not included in Aggregate Index

$30

$20

$10 Index market value ($trillions) Index market

$0 Aggregate Non-USD Emerging markets Global high yield Senior Index bonds debt corporates loans

Data sources: Bloomberg, L.P., JPMorgan, , 30 Jun 2018. Past performance is no guarantee of future results. Chart shows market value of various market indexes only and does not include the entire universe of outstanding securities. Certain securities may be represented in more than one index. Representative indexes: Aggregate Index: Bloomberg Barclays U.S. Aggregate Index; Non-USD bonds: Bloomberg Barclays Global Aggregate ex USD Index; Emerging markets debt: JPMorgan Emerging Markets Bond Index Global, JPMorgan Corporate Emerging Markets Bond Index and JPMorgan Index Emerging Markets; Global high yield corporates: Bloomberg Barclays Global High Yield Index; Senior loans: Credit Suisse Leveraged Index. Indexes are unmanaged and unavailable for direct investment. nuveen knows income investing / 4Q18 3

Exhibit 3: Off-benchmark sectors have offered potential for higher yield, greater diversification and less interest rate sensitivity

Yield-to-worst Diversification potential Interest rate sensitivity (correlation to Aggregate Index) (correlation to 10-year U.S. Treasury)

1.00 0.

. 0. 0. . . 0.

0.

. 0.

1.0 0.0 0.01

-0.

Aggregate on-US erging loal ig yield Senior Index onds arets det cororates loans

Data sources: Bloomberg, L.P., JPMorgan, Credit Suisse, 30 Sep 2018. Past performance is no guarantee of future results. Representative indexes: Aggregate Index: Bloomberg Barclays U.S. Aggregate Index; Non-USD bonds: Bloomberg Barclays Global Aggregate ex USD Index; Emerging markets debt: Bloomberg Barclays Emerging Markets USD Aggregate Index; Global high yield corporates: Bloomberg Barclays Global High Yield Index; Senior loans: Credit Suisse Leveraged Loan Index. Indexes are unmanaged and unavailable for direct investment. increase diversification, as global of the index. That means passive opportunities, rather than those interest rates follow different paths. investors are, by the nature of the companies or governments that These securities are subject to index, investing in that issue the most debt. additional risks, including political have the most debt. To be sure, risk and volatility. some of the world’s most successful Managing downside risk is critical. Active managers carefully consider institutions (including the U.S. Portfolio returns can be hurt more these risks when choosing how and if government) carry large debt by a bond not repaying its principal to make non-USD allocations. loads. But passive investing may than they are helped by a bond increase exposure to issuers with repaying principal plus interest. Enhancing risk- higher leverage, declining credit Using in-depth research, active adjusted returns quality or, in the case of the U.S. managers can screen issuers who In fixed income indexes, securities government, substantial interest they believe may not repay their are weighted by the market value of rate risk. Active managers, using debt, or may experience financial the outstanding debt, so the most rigorous credit research processes, hardship that causes their bonds to indebted issuers make up more can focus on the most compelling decline in price before . 4 nuveen knows income investing / 4Q18

Actively managing entities make up more than half of interest rate risk the participants in the .

Not only is the typical bond index Investors should The index’s duration has also limited in its sector composition, know what they increased over time, as shown in but the sector weights may also Exhibit 5. This increase is due to change over time. This makes it own, as the risk the higher weighting of Treasuries, important for investors to know factors are not along with the increased issuance of what they own, as the risk factors long-term corporate debt. Longer (sector, duration, and constant, even for duration means the bonds tend to prepayment) are not constant, even an . be more sensitive to rising interest for an index strategy. rates. And investors in passive fixed income strategies are, in essence, The U.S. Treasury issued more debt forced to accept these risks. This in part to finance growing deficits Major bond market participants provides another opportunity following the financial crisis, and can often have primary for active managers to add value as a result, Treasury exposure in outside of maximizing income and since they can reduce portfolio the Aggregate Index increased return. Central focus on sensitivity to changing interest massively from 25% to 38% from controlling growth and inflation, rates in two ways: 31 Dec 2008 to 30 Jun 2018.3 while financial institutions often Exhibit 4 shows the current manage against book yield or Aggregate Index breakdown. regulatory constraints. These

Exhibit 4: The Aggregate Index has a high concentration of lower-yielding bonds Sector composition of the Aggregate Index 1% 2% Asset-backed securities Commercial mortgage- backed securities yield 3.2% yield 3.6%

28% 38% Mortgage-backed securities U.S. Treasuries yield 3.6% yield 2.9%

30% 1% Investment grade corporates U.S. Agencies yield 4.1% yield 3.4%

Data source: Bloomberg, L.P., 30 Sep 2018. Yield represents yield-to-worst. nuveen knows income investing / 4Q18 5

Exhibit 5: The Aggregate Index presents increasing downside risk Aggregate Index duration

6.01 years

increase 62% ective duration (years)

3.1 years

00 00 00 011 01 01 01

Data source: Barclays Live, Bloomberg, L.P., 29 Jun 2018. Duration is expressed in years and measures the sensitivity of the price (value of the principal) of a fixed income investment to a change in interest rates.

1) Manage overall portfolio 2) Position portfolios along Active fixed income duration. As rates rise, a the . Interest rates do management portfolio with a shorter duration not typically rise uniformly along offers opportunity will generally experience a the yield curve. For example, if smaller price decline than one long-term rates rise more, the yield While indexing and ETF with a longer duration. Portfolio curve steepens. In this environment, investing has increased in managers can actively lengthen an active manager has the flexibility popularity over the past few or shorten duration as rates rise to emphasize intermediate-term years, we believe actively and fall throughout the cycle. By securities. This flexible approach managed fixed income strategies their nature, passive strategies avoids or de-emphasizes the long will continue to add value. can’t do this, and it would be end of the curve where interest Actively managed portfolios extremely difficult for an individual rates can have a greater impact have provided better returns investor to attempt this by on bond prices. with less risk than passive purchasing single bonds. portfolios. Active managers can adjust their sector allocation, benefit from bottom- up security selection and position We believe actively managed portfolios to minimize the impact from rising rates. fixed income strategies will Together, these levers make continue to add value. active fixed income an attractive management strategy. JPMorgan CorporateEmergingMarkets BondIndex a bond’spricewillchangeapproximately1%intheoppositedirectionforeveryyearofduration. Duration tenor mustbeatleastoneyear. ratingsareBa1/BBB+,onlyfundedtermloansincluded,andthe to theindexiftheyqualifyaccordingfollowingcriteria:ThehighestMoody’s/S&P Credit SuisseLeveragedLoanIndex issued byGinnieMae(GNMA),Fannie Mae(FNMA),andFreddie Mac(FHLMC). Bloomberg Barclays U.S. Securities Mortgage-Backed Index corporate bonds. Bloomberg BarclaysU.S. CorporateInvestmentGradeIndex maturity fixed-incomesecurities.Theindexassumesreinvestmentofalldistributionsandinterestpayments. Bloomberg BarclaysU.S. Treasury Bellwether 10-Year Index are excluded.STRIPSexcludedfromtheindexbecausetheirinclusionwouldresultindouble-counting. 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, Bloomberg Barclays U.S. Treasury Index 2% oftheindex. Bloomberg Barclays U.S. High Yield 2% Capped Index securities, whichareclassesofsecuritiesthatrepresentinterestsinpoolscommercialmortgages. Bloomberg Barclays U.S. Securities Index CommercialMortgage-Backed asset- and backed securities securities. pass-through mortgage securities, corporate and government for components index with market, bond rate fixed grade investment Bloomberg BarclaysU.S. AggregateIndex corporate sectors. Bloomberg Barclays Global Aggregate ex U.S. Index Bloomberg BarclaysEmergingMarkets USDAggregateIndex Glossary 3 BarclaysLive,Bloomberg, 29Jun2018. of30Jun2018. 2 Datasource:Bloomberg, L.P. TheBloombergBarclaysU.S. AggregateIndexcontained9,959securitieswithamarket capitalizationof$20.135trillionas 1 BankofInternationalSettlement. nuveen.com. visit please For more information, ,LLC.NuveenAssetLLCisaregisteredinvestmentadviserandaffiliateofNuveen, The investment advisory services, strategies and expertise of TIAA Investments, a division of Nuveen, are provided by Teachers Advisors, LLC and TIAA-CREF investment objectives,risktoleranceandliquidityneedsbeforechoosinganstyleormanager. including risk, of degree certain a possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. It is important to review your carry investments All products. investment or securities specific sell or buy to recommendations no contains report This from thirdpartysourceswhichwebelievetobereliablebutarenotguaranteedastheiraccuracy orcompleteness. guarantee economic of any future adverse result. It and is not intended risk to provide specificdefault advice and shouldrisk, not be consideredliquidity investment advice ofrisk, any kind. Informationprepayment was obtained as developments. ThisinformationrepresentstheopinionofNuveenAssetManagement,LLCand isnotintendedtobeaforecastoffutureeventsandthisno such risks additional to subject are securities mortgage-backed and Asset-backed fluctuation,politicalandeconomicinstability, lackofliquidityanddifferinglegalaccountingstandards. including risks, additional involve investments Foreign risk. credit greater to subject are therefore and structure capital company’s a in instruments debt other payment of principal andinterest and does not removethemarket risks ofinvestinginthe fund shares.Preferred securities are subordinated to bondsand to subject are securities debt yield high or grade and investment heightened credit Below risk. The fall. guarantee prices provided by bond the U.S.rise, rates government to interest treasury inflationAs protectedrisk. securities (TIPS)income relates onlyand torisk the prompt transaction roll dollar risk, derivatives risk, call risk, rate interest risk, credit risk, market to subject are securities income fixed or Debt possible. is loss principal risk; involves Investing risk on A word in and circumstances and objectives investor’s an on based made be consultation withhisorheradvisors. should decisions Investment action. of course specific any suggest or investor, strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of particular This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment S&P 500Index JPMorgan GovernmentBondIndex EmergingMarkets JPMorgan EmergingMarkets BondIndex Global measures how long it takes, in years, for an investor to be repaid a bond’s price by total cash flows. Generally, for every 1% change in interest rates,

is acapitalization-weightedindexof500stocksdesignedtomeasuretheperformancebroaddomesticeconomy. is designedtomirrortheinvestableuniverseofU.S. leveragedloanmarket. dollar-denominated Loansareadded includes public obligations of the U.S. Treasury. Treasury bills are excluded by the maturity constraint but are part representssecuritiesthatareSECregistered,taxableanddollardenominated.TheindexcoverstheU.S. trackstotalreturnsfortradedexternaldebtinstrumentsintheemergingmarkets measurestheperformanceofglobalbondsexcludingU.S. Itincludesgovernment,securitized and measures theperformanceofcorporatebondsissuedinemergingmarkets. measures theperformanceofgovernmentbondsissuedinemergingmarkets. is auniverseofTreasury bonds,andusedasabenchmarkagainstthemarket forlong-term includes USD-denominated debtfromemergingmarkets aroundtheworld. includesUSD-denominated covers agency mortgage-backed pass-through securities (both fixed-rate and hybrid ARM) ARM) hybrid and fixed-rate (both securities pass-through mortgage-backed agency covers trackstheperformanceofU.S. bondsandlimitseach issueto noninvestment-grade measures the market of USD-denominated, fixed-rate, investment grade taxable taxable grade investment fixed-rate, USD-denominated, of market the measures measures the performance of investment-grade commercial mortgage-backed commercialmortgage-backed measurestheperformanceofinvestment-grade

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