Our Winter edition of MOR Investing focuses on fixed income investing in today’s volatile markets. Whether you are looking for cash flow or total returns in your fixed income portfolio, see how the professionals at Morgan Keegan can help you position your portfolio. Also, learn how annuities can be used to plan for retirement. All this and more is in this edition of MOR Investing.
Investing in Bonds in Today’s Low Rate Environment
With historically low rates, tight credit spreads, extraordinary government actions, fear of inflation and endless headline noise from the never-ending media stream, investing in fixed income can be a daunting endeavor. New policies geared toward stimulating global economies are having a dampening effect on fixed income investment strategies. However, the professionals in Morgan Keegan’s Fixed Income Capital Markets division believe that, with a solid customized strategy, everyone can position themselves appropriately in the current environment.
Not since the end of the Second World War have we seen Treasury rates this low. Many in the investment industry believe that we are at the end of a thirty-year bull run in the bond market that started with the high rates of the late Seventies and early Eighties. Furthermore, tight credit spreads (the amount of additional yield compensation above the corresponding treasury rate) are limiting your excess returns for taking more risk to the point where you may not be compensated enough for owning lower credit quality bonds. Growing national debt and enormous government stimulus programs have many convinced that inflation and rising rates are just around the corner. And it seems that the consensus among broadcast media pundits is that a bond bubble is about to burst. However, we at Morgan Keegan believe that the concern should not necessarily be about whether you are invested in bonds (every portfolio should have them), but rather how you are doing it.
While there are investors who look for more speculative investment opportunities within fixed income, for most fixed income investors their objectives rank as follows: 1) safety and stability, 2) income, and 3) growth. With the potential for future rising rates and expanding credit spreads, bond portfolios may have the potential for significant downside price movement. While we know that in the absence of a default you get all your money back at maturity, seeing a significant drop in value on a statement can be unsettling. But if the portfolio is positioned correctly, much of the effects of rising rates or expanding spreads can be addressed. How do we determine the appropriate strategy for an individual? It starts with a conversation with your Morgan Keegan financial advisor to determine if you are a “total return” or “cash flow” investor relative to your fixed income portfolio.
Total return investors are people who do not have a current need for cash flow and are more interested in stability or growth. They want to see the value of their bond portfolio at the same or higher in total value and would give up the cash flow to accomplish that goal. For these investors, now is a time to shorten maturities, lower duration and stay higher in credit quality. The resulting three- to five-year ladder may not earn much, but it should not lose much in the event of rising rates. This type of portfolio will also provide regular opportunities for reinvestment of principal as the short bonds mature. In the process of repositioning longer maturing bonds to a short ladder, many investors are able to harvest significant capital gains.
Cash flow investors are individuals who need a certain amount of income from the portfolio in order to meet their annual expenses. For a cash flow investor, the need for stable income may outweigh the desire for statement stability. Absent a default or call, cash flow will not change and investors will get all of their principal back at maturity. For this investor, the strategy may be a barbell-shaped approach that invests in both ends of the maturity spectrum, adding longer maturity, higher yielding bonds to a short ladder strategy. Investors should invest just enough on the longer end of the curve to achieve their income needs, then invest the rest in the short ladder for stability and near term reinvestment opportunities.
Morgan Keegan clients have access to technology that enables our financial advisors to break down and analyze bond portfolios. Our financial advisors and analysts work together to determine the best strategies for clients based on their individual needs and objectives. If an investor is unsure of how much volatility they can handle in their fixed income portfolio, we have the ability to test their securities against a hypothetical rate move. This is also known as “shocking” the portfolio. This will give you a very clear idea of what a movement in rates can do to market value, and whether you are a total return or cash flow investor when it comes to bonds.
Although we are in a challenging time to find attractive yield in bonds, today’s volatile markets offer very logical choices. Whether you are looking for stability in your portfolio or steady income, action can be taken to mitigate risk as you work toward your financial goals. Start the New Year knowing your portfolio is still working for you. Talk to your Morgan Keegan financial advisor today.
Introducing ID Reclaim® — Identity Recovery Service
We are pleased to announce a new complimentary service to help Morgan Keegan clients in the event you should suffer identity theft. ID Reclaim®, available at no cost to all MOR Accounts that have checks and/or the MOR Platinum Visa CheckCard, is a support program that provides assistance and resolution to identity theft victims, even if that theft does not directly involve your MOR Account.
With ID Reclaim® you have a fully-managed resolution service at no cost that provides:
- A personal recovery advocate assigned to manage the identity recovery
- A customized recovery plan will be established to address specific issues
- Research, phone calls, letters, follow-up, and case documentation by your advocate on your behalf through a limited power of attorney authorization
- Contacting of creditors, bill collectors, banks, mortgage companies, and agencies such as the department of motor vehicles, Social Security administration, and the U.S. Postal Service by your advocate
- Restoration of your identity, as closely as possible, to its pre-theft status
It is important to take proactive measures, like shredding your unwanted documents, to safeguard your personal information. To help provide peace of mind if identity theft strikes, we’re providing ID Reclaim® automatically and at no cost to the primary and secondary account holders of all MOR accounts with banking privileges. Please contact your Morgan Keegan financial advisor for more information or visit www.morgankeegan.com/MORaccount.
Are Annuities a Retirement Option for You?
Are you ready for retirement?
Whether you are approaching the start of your retirement years or have already reached them, annuities can be an attractive investment vehicle for saving and insuring income. Single premium immediate annuities and variable annuities with living benefits can help take the volatility out of your income.
Here’s how:
The single premium immediate annuity is a contract between you and the insurance company in which you pay a single sum of money to the insurance company in exchange for income payments for a fixed period of time or the rest of your life.
Variable annuities are long-term investment contracts that may help you grow your retirement assets and provide a lifetime income stream. The value of the money in your contract is dependent upon the performance of the wide range of investment subaccount options available from professional money managers. But optional living benefits can help you maintain a rising income base or a steady income that cannot go down even if the investment performance is negative. Some living benefits also offer the ability to capture gains to create an opportunity to raise your income. Keep in mind these living benefits do come at an additional cost and are subject to tax and paid against the cash value of the annuity.
One of the most popular living benefits is the Guaranteed Lifetime Withdrawal Benefit (GLWB). While this optional rider also comes at an additional cost, it provides assurance of guaranteed withdrawals for life. A GLWB can be a good idea if you want a fixed income but don't like the idea of giving up access to your money that annuitization requires. However, like all deferred annuities, they are intended as long-term investments, suitable for retirement funding. The annuity's cash value may be subject to market fluctuations and investment risk. The annual cost of a GLWB can equal 3% or more, and withdrawals are subtracted from the annuity's cash value and could even reduce it to zero.
Retirement should be a time for enjoying life and not worrying about your portfolio’s income potential. Your Morgan Keegan financial advisor can provide more information and help you determine whether annuities and living benefits might be a suitable option for you.
Variable annuities are sold by prospectus. Variable annuities contain fees and charges including, but not limited to mortality and expense risk charges, sales and surrender (early withdrawal) charges, administrative fees and charges for optional benefits and riders. You should consider the investment objectives, risk, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the annuity, can be obtained from the insurance company issuing the annuity or from your financial professional. You should read the prospectus carefully before you invest. Early withdrawals are subject to surrender charges, withdrawals of taxable amounts are subject to ordinary income tax, and if made before age 59.5, may be subject to an additional 10 % federal income tax penalty. Withdrawals have the effect of reducing the death benefit, income benefit, and cash surrender value. Variable annuity contract values will fluctuate and are subject to market risk, including the possibility of loss of principal. Guarantees are subject to the claims paying ability of the insurance company.
New Cost Basis Reporting Taking Effect
As of January 1, 2011, there are changes to the way Morgan Keegan reports sale transactions to you and to the IRS. The Emergency Economic Stabilization Act of 2008 requires brokerage firms, in addition to reporting the sale proceeds of transactions made in your account during the tax year, to calculate and report the holding period and resulting gain or loss from each sale transaction on your 1099 forms and directly to the IRS. The cost and date information of opening transactions is retained in what are commonly referred to as “tax lots”. Updates to Morgan Keegan’s systems will allow you and your financial advisor to identify specific tax lots at the time of a sale or to set a tax lot closing preference for your account.
The new rules will be implemented over a three-year period, first affecting stock purchased after December 31, 2010. More details, including answers to commonly asked questions about how the new requirements will affect your tax reporting landscape, are available here.
Important Messages for Account Holders
Order Flow Information
In compliance with industry regulations, the following disclosure regarding order flow is provided for your information: Client securities orders may be executed with Morgan Keegan itself, with other broker dealer market makers or through the exchanges on which the securities are listed. Several of these markets facilities offer automated execution services. Morgan Keegan’s order routing among the execution facilities depends upon various factors such as the identity of the security and the size of the order. Participants to whom Morgan Keegan directs orders execute such orders at the displayed national best bid or offer (NBBO) subject to order size and liquidity of the markets and also provide the opportunity for execution of limit orders at prices superior to the NBBO. Morgan Keegan may receive additional cash remuneration, known as order flow payment, in these transactions.
Routing Practices of Non-Directed Orders
U.S. Securities and Exchange Commission Rule 606 requires all brokerage firms, including Morgan Keegan, to make publicly available quarterly reports on the routing practices of non-directed orders. A non-directed order is an order the customer has not specifically directed Morgan Keegan to route to a particular venue for execution. Morgan Keegan is pleased to provide these reports to its clients in an electronic format accessible at www.morgankeegan.com, www.tagaudit.com or www.tta.thomson.com. Should you be unable to access this report electronically, a hard copy may be obtained by contacting your Morgan Keegan financial advisor. Rule 606 also requires all brokerage firms, including Morgan Keegan, upon customer request, to disclose the identity of the execution venue and the execution time for any order during the six months prior to the request. This information may be obtained by contacting your financial advisor.
Option Contracts Assignments/Exercises
Assignments/exercises for option contracts are being allocated using Random Computer Selection. This is the accepted industry standard. The Random Computer Selection will be derived from a computerized formula that will generate option assignments to customers’ accounts with short option positions. After the position is randomly selected, then the corresponding stock or cash settlement is transacted and the position is automatically delivered from the assigned customer account.
Investors in Auction Rate Securities
For anyone with an investment in auction rate securities or for anyone interested in investing in auction rate securities, we would direct your attention here for a description of Morgan Keegan's material practices and procedures regarding these auctions. A written description of these material practices and procedures is available upon request. If you have any questions regarding these securities or these procedures, please feel free to contact your financial advisor.
