1 hancock institutional advisors, llc sec registered investment advisor hancock securities group,...

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Hancock Institutional Advisors, LLC SEC Registered Investment Advisor

Hancock Securities Group, LLC

Member FINRA, SIPC, MSRB

Hancock Institutional Advisors, LLC

SEC Registered Investment Advisor

Hancock Management Services, LLC

383 Marshall Avenue St. Louis, MO 63119

(314) 997-3191 (tel)(314) 997-3358 (fax)

www.hsg-hia.com

Finding Opportunities in Difficult MarketsNovember 21, 2014

Nick Trentmann, Portfolio ManagerJeff Holley, Portfolio Manager

Confidential and Proprietary

Employment Outlook

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• Change in Nonfarm hiring was 214,000 in October and August was revised up from 180,000 to 203,000

• The last 9 months above 200k

• Service sector again made up the majority of hiring

Employment Outlook

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• October Unemployment Rate fell to 5.8% from 5.9%

• Labor Participation Rate was up slightly to 62.8%

• Despite jobs dashboard, Fed still focuses most heavily on Unemployment Rate

Lack of Inflationary Pressure

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• Fed is willing to accept 2.5% inflation (measured by Core PCE)

• October Core PCE was 1.5%

• Without wage gains inflation will struggle to take hold

Gross Domestic Product

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• Annualized GDP growth was 3.5% in the third quarter

• Biggest surprise: 1.7% drop in imports and 7.8% rise in exports

• Net exports added 1.32% to GDP

Dollar Strengthening

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• Dollar continues to strengthen versus major currencies

• Why a stronger dollar?

Oil Prices

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• If the Fed tightens sooner than expected, growth will be muted, leading to weaker oil demand

• Saudi Arabia is resisting OPEC output cuts for fear higher prices will encourage more U.S. production

• Lower oil prices may aid consumer spending

Treasury Rates

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• 10-year Treasury rate started the year at 3.0%, currently at 2.33%

• Fed ended QE program, and the markets’ focus has shifted towards tightening

• Rates will remain depressed as economy struggles to reach “Escape Velocity”

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• Rates are extremely low.

• Very active Fed.

• Market expects funds locked at 0.25% until 2015.

• Yield curve will steepen before Fed Funds rise.

• Cash flow over the next two years not helpful.

• Avoid tail risk.

• Some increase in optionality is acceptable.

• Avoid decisions today that limit options in the future.

• The longer we stay at low rates, the greater the risks become to

rising rates.

• Look at the portfolio as a whole, not just individual bonds.

Themes from 2014

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What didn’t work?– Long-Dated Step-Ups– Multi-call Options with Long Maturities– Mortgage Backed Securities

What worked?– Floating Rate Structures– Credit (Corporate)– One-Time Call Options with Mid-Maturities

Themes from 2014

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Floating Rate Securities– Federal Family Education Loan Program (FFELP)– Corporate Floaters– Home Equity Conversion Mortgage (HECM)– Collateralized Loan Obligation (CLO)

5- to 10-Year Part of the Curve– Picks up income versus floaters– Rolls the curve– Risk: underperforms if an aggressive rise in rates

Defensive Bonds

Four Ways to Increase Income

1. Credit

2. Liquidity

3. Optionality (Cash Flow Volatility)

4. Maturity

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GO Unlimited / Limited

Essential Service Revenue

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Fixed Rate Investment Options

Corporates

Credit

Liquidity

Optionality

Typically Investment Grade

(BBB- or better)

Highly Liquid

Bid /Ask: 3 – 5 bps

None

Maturity 5 – 10 years

Municipals

Depends on Issue

Can be callable

7 – 15 years

Structured Notes

US SovereignCredit Rating

Highly Liquid

Bid / Ask: 2 – 3 bps

Callable

Varies

Please note that the characteristics provided above are typical of what our team sees in the market.

AAA

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Floating Rate Investment Options

FFELP

Credit

Liquidity

Optionality

U.S. Sovereign Credit Rating

Depends on Issue

Cash Flow

Maturity

Final Maturity: 20 – 30 years

Average Life: 8+ Years

CLOs

Depends on Issue

Cash Flow

HECM

US Sovereign

Credit Rating

Depends on Issue

Cash Flow

Final Maturity: 15 years

Average Life: 6 Years

Final Maturity: 50 years

Average Life: 7 – 8 Years


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Whole Loans

Single Family Owner Occupied

5 / 1 Hybrid ARM

7 / 1 Hybrid ARM

HELOC

Credit Established Industry Credit Criteria

Historical Loss Experience

Servicing

LiquidityUnlimited / Limited

Time to Sale

Costs to Sell

SpreadPriced to:

Prepayment Penalty

ARM portion:

Index

Margin

Caps

Floors

Yes

< 25 bps

Released

Limited

120 – 180 days

50 bps

No

Various

225

2/2/5

Sometimes

Yes

< 25 bps

Released

Limited

120 – 180 days

50 bps

No

Various

225

2/2/5

Sometimes

Limited

120 – 180 days

50 bps

No

N/A

N/A

N/A

N/A

Yes

Yes, but very originator dependent

Retained

Limited

120 – 180 days

50 bps

Prime

No

Prime

Various

Various

Various

15 Year

Yes

< 25 bps

Released


125-150 bps over like duration

Treasury

125-150 bps over like duration

Treasury

150 -170 bps over like duration

Treasury

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Whole Loans

Commercial

Multi-Family CRE Other

CreditEstablished Industry Credit Criteria

Historical Loss Experience

LiquidityUnlimited / Limited

Time to Sale

Costs to Sell

SpreadFixed Period Initial Spread to

Treasury

Prepayment Penalty

ARM portion:

Index

Margin

Caps

Yes

Yes

Limited

180 days

50 bps

200 bps

Yes

LIBOR

275

1% annual

6% life

Yes

Yes

Limited

180 days

50 bps

250

Yes

LIBOR

275

1% annual

6% life


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1. Greatest spread remain in corporate issues

2. Reduce amount of cash flows in less than 2 years

3. Yield curve is attractive in the 5- to 10-year sector

4. Rates in the 5- to 10-year part of the curve have room to

fall

5. Fed purchases/reduced volume = MBS spreads to remain

tight

6. Roll of curve is attractive

Takeaways

Current State of Equity Markets

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• U.S. equities rose for the 7th straight quarter as the S&P 500 closed up 1.13%.

• International and emerging market equities fell 4% as Japan, China and Europe deal with slower economic growth and deflation fears.


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•Geopolitical tension and Ebola fears caused volatility to creep back into the markets.

•As has been the case for the last 2 years, investors quickly bought the dip, and order was quickly restored.


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• Equity performance has been highly correlated to Central Bank intervention

• This includes actions by the European Central Bank, Bank of Japan, Bank of England and others.

Equity Outlook

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•Equities currently look fairly valued. Earnings growth has been fueled primarily by financial engineering (stock buybacks, margin expansion and M&A activity) and not sales growth.

•Equity prices will move in tandem with earnings growth and not multiple expansion.

•Strong economic growth is needed for continued 10%+ returns. We would view a 10%+ correction as healthy and would look to add.

Source: Standard & Poor’s, Robert Shiller Data, FRB, FactSet, J.P. Morgan Asset Management.

Equity Outlook

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• Relative to bonds, equities look attractive.

• Current S&P 500 yield is roughly 1.791% compared to the 10-year at roughly 2.35%.

• Historically around 5%, current S&P 500 dividend growth rate per year is currently at 11.89% (YTD).

Source: Standard & Poor’s, FactSet, Robert Shiller Data, J.P. Morgan Asset Management.


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•Small-cap equities continued to underperform. They were down 7.36% for the quarter and have underperformed large-cap stocks by 15% in the last 12 months. Despite this underperformance, they still remain about 30% over fair value relative to large-cap stocks.

•We expect small cap stocks to stay under pressure as investors remain cautious about this rally and sell riskier assets in favor of perceived safe havens like large cap stocks, bonds and cash.

Normalized P/E Russell 2,000

Source: Russell Investment Group

Equity Outlook

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• Favor growth over value and opportunistic value names.

Source: Standard & Poor’s, Russell Investment Group, FactSet, J.P. Morgan Asset Management.

Equity Outlook

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•We currently favor the health care, information technology and energy names.

•Falling oil prices have made consumer staples and discretionary names more attractive.

•Financials will benefit from rising rates. Regulatory pressures and other added costs will continue to hinder earnings growth potential.

Source: Standard & Poor’s, Russell Investment Group, FactSet, J.P. Morgan Asset Management.

Equity Outlook

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•Consider an allocation to international equities (5 – 15%, based on the portfolio)

•Valuations gap will close in the coming years if Europe can turn the corner and China can stay on stable ground and convert to a consumption-driven economy.

•As of December 31, 2013, there were 631 companies outside of the U.S. with a dividend yield of at least 3%. Only 99 such companies exist in the U.S.

Portfolio Positioning

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•Stick with U.S. large cap dividend paying equities, specifically companies with strong balance sheets.

•Increase allocation to alternative money managers – long/short equity, buy-write strategies and event driven funds.

•For international stocks, look for experienced active managers with long term, multi cycle experience. Value focus with ability to add to positions in volatile markets.

Biographies and Disclaimer

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The material contained herein has been prepared from sources we believe to be reliable, but is provided without any representation as to accuracy or completeness. This material does not purport to be a complete analysis of the securities, companies or industries involved. This material is published solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product. All opinions and estimates included with this material are our own unless otherwise stated and are subject to change without notice. All investments can fluctuate in price, value and/or income. Past performance is not necessarily a guide to future performance. This material has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient.

Nick J. Trentmann, Portfolio Manager

At Hancock Institutional Advisors, LLC, Nick is responsible for portfolio and securities management and analytics for fixed income portfolios. He also assists in the firm’s sales and marketing efforts to institutional clients. Prior to joining Hancock in 2007, Nick was a financial advisor with Renaissance Financial and a credit analyst at Citi. Nick brings ten years experience in the financial services industry. Nick earned a bachelor’s degree from the University of Missouri. He holds Series 7 and 66 licenses from FINRA.

Jeffrey R. Holley, Financial Advisor & Portfolio Manager

At Hancock, Jeff Holley works alongside clients to help identify and achieve their financial goals. He conducts and distributes investment research throughout the firm, is a co-manager of the Conservative Equity Strategy, and serves on Hancock’s Investment Committee. In addition to his advisory-based roles, Jeff executes trades, maintains option orders, monitors the overall client allocation process, and writes investment commentary on behalf of the firm. Prior to joining Hancock in 2013, Jeff worked at Edward Jones where he most recently served as an Equities Investment Specialist, primarily involved in conducting research and providing solutions to Financial Advisors. Jeff earned a Bachelor of Science degree in Business Administration from the University of Missouri - Columbia. He holds Series 7 and 66 licenses from FINRA and is currently a Level II candidate in the CFA program. Jeff is an active member of Marian Middle School’s Young Friends Committee and Finance Committee.

For copies of this presentation, please contact Nick at (314) 997-3191 x315 or [email protected].

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