Sponsored Content – American Century Investments
The “new normal” environment of subdued economic growth and low interest rates contains weighty implications for investment returns and retirement planning. Accordingly, income strategies will likely play an increasingly important role in your clients’ portfolios.
It’s been well-documented that the leading edge of the Baby Boom generation will reach full retirement age in 2011. But it appears that the retirement wave may already be washing ashore—more Americans filed for Social Security benefits in 2009 than in any year on record.
Looking at the income side of the retirement equation, the Employee Benefit Research Institute reported that Social Security payments account for 40% of the average retiree’s income, while investment income makes up just 13% of the pie. Considering that only a third of retirees have saved $50,000 or more—and 29% have saved nothing at all—the need for additional investment income is glaring.
The situation on the expense side of the retirement equation is similarly daunting. Any assessment of income needs in retirement must account for the rising cost of health care at a time when Medicare and employer-sponsored health benefits are under increasing strain. Social Security benefits are similarly threatened. This puts a greater onus on retirees to pick up the growing tab for health care and day-to-day expenses.
Investment income drives total returns
A consistent stream of income is critical in the total return equation because it enhances returns when the markets are going up and buoys returns when the markets are going down.
According to a recent Bloomberg report, nearly 50% of the S&P 500 Index’s return and 80% of the return of the Barclays Capital U.S. Aggregate Bond Index—a leading broad-market benchmark within the fixed-income universe—over the last 25 years came from interest payments.
Dividends are also an important barometer for equity-oriented investors since companies paying dividends tend to have comparatively healthy balance sheets and more stable earnings growth over time.
Addressing your clients’ needs
Every individual who walks through your door is different, possessing unique personal goals, investment objectives, and risk tolerances. Broader themes emerge, however, including tax sensitivity and a desire for growth. Income-oriented strategies can pay considerable dividends for both groups.
Income needs of tax-conscious clients
The prevailing economic and interest rate environment suggests fairly modest yields and returns going forward, which means maximizing after-tax performance will be crucial for many of your clients. Such tax-aware investors are typically:
• In a high tax bracket
• Potentially subject to the alternative minimum tax (AMT)
• Looking to meet income objectives in the most tax-efficient manner possible
Despite an assortment of economic, budgetary and supply/demand challenges, municipal bonds (munis) continue to offer a viable approach to meeting tax-free income targets. Senior vice president and senior portfolio manager Steven Permut, who leads American Century Investments’ muni investment team, believes recent volatility in the muni market—which he feels has been driven largely by investors’ emotions as they respond to how market conditions have been portrayed in the media—presents patient investors with an opportunity to buy tax-free bonds at attractive yields, relative to those offered on fully taxable investments.
Permut cautions, however, that the economic challenges mean we may see more municipal credit rating downgrades and even some defaults—normally a relatively rare occurrence in muni investing. The latest muni market turbulence, combined with the demise of many municipal bond insurers in recent years, underscores the value of careful credit analysis and security selection, which experienced muni portfolio managers, such as Permut and his team, can offer. Fortunately, even under these challenging conditions, munis are still considered to have comparatively high credit quality, second only to U.S. Treasuries in the domestic bond market. Permut and his team do not believe there will be widespread muni defaults, but there could be further yield spikes that offer relatively attractive tax-free income investment opportunities to investors working with experienced muni portfolio managers.
Solution to consider: American Century® Intermediate-Term Tax-Free Bond Fund. This actively managed, investment-grade bond portfolio holds a demonstrated track record of successfully addressing the challenges of the muni market. The portfolio can help your clients capitalize on existing investment opportunities, manage credit risk, preserve wealth and minimize taxes, while preventing exposure to the AMT.
Income for equity-oriented investors
Historically, long-term investors have viewed stocks as the growth engine within their investment portfolios. In the wake of equities’ mostly tepid returns since 2000, however, many investors are reassessing the role of stock holdings. The considerable benefits of dividend-paying equities are becoming increasingly apparent to investors who believe in the long-term growth potential of stocks, especially since many market forecasts are calling for moderate equity price appreciation over the next several years.
For investors in retirement, stock dividends compare favorably with interest paid on taxable bonds and real estate investment trusts. Dividend-paying stocks also tend to offer attractive risk-adjusted returns, since such shares historically possess higher total return and lower price volatility profiles than non-dividend-paying equities. The regular payouts can also help buoy a portfolio in market downturns.
Solution to consider: American Century® Equity Income Fund. This fund has ranked in the top 10% of total returns and the bottom 10% of volatility (standard deviation) of its Morningstar Large-Cap Value peer group over the 10-year period ended December 31, 2010.*
Led by Phil Davidson, CFA, Chief Investment Officer, U.S. Value Equity, and co-portfolio managers Michael Liss and Kevin Toney, the team focuses on investments in high-quality, income-paying companies trading below fair value— all characteristics that have proven to deliver higher returns, lower volatility, and better downside protection over time. In addition, Davidson’s team uses convertible securities to dampen the volatility of fund returns, help limit downside risk and enhance yield. Since fund inception, convertibles have historically comprised approximately 15% to 30% of portfolio assets.
Regardless of your clients’ overall goals and objectives, current conditions have reinforced the value of income-oriented investments in most portfolios. To further explore American Century Investments’ varied income-oriented offerings, visit americancentury.com/ipro or contact a wholesaler today.
This information is for educational purposes only and is not intended as investment advice.
Intermediate-Term Tax-Free Bond: Interest rate changes are among the most significant factors affecting bond return. In a declining interest rate environment, bond prices rise and the fund may generate less income. In a rising interest rate environment, bond prices fall. There is no guarantee that the investment objectives will be met. Dividends and yields represent past performance and are no guarantee that they will continue to be paid. Fund holdings are subject to change without notice. Investment income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax. Capital gains are not exempt from federal income tax.
Equity Income: Equity investments are subject to market fluctuations. The fund invests in convertible securities, which may be affected by changes in interest rates, the credit of the issuer and the value of the underlying common stock. The fund also may invest in foreign securities, which can be riskier than investing in U.S. securities.
You should consider the funds’ investment objectives, risks, and charges and expenses carefully before you invest. The funds’ prospectus or summary prospectus, which can be obtained by visiting americancentury.com contains this and other information about the fund, and should be read carefully before investing.
*Equity Income ranks: The fund ranks in the Morningstar® Large Value peer group as follows:
Total Returns: 1 yr - 640/1240; 3 yrs - 57/1120; 5 yrs - 70/956; 10 yrs - 12/502.
Standard Deviation: 3 yrs - 10/1120; 5 yrs - 8/956; 10 yrs - 3/502.
Source: Morningstar. As of 12/31/2010.
The average of the Morningstar Large Value Category is an average of all the funds in this category. It is not an investment product available for purchase.
Data reflects past performance and is no guarantee of future results.
P.O. Box 419385 | Kansas City, MO 64141-6385 | 1-800-345-6488 | americancentury.com/ipro
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