Infographics

Taking Advantage of the Infrastructure Boom: The Case for Taxable Municipal Bonds

Published

12 months ago

July 29, 2019

Jenna Ross

Taxable municipal bonds infographic

The Case for Taxable Municipal Bonds for Investors

If you’re a homeowner, there are probably a few things you’ve been neglecting to do. Perhaps the kitchen needs upgrading, or the roof needs replacing. We tend to procrastinate on these improvements due to large renovation costs, until it hits a point where we can’t ignore them anymore. This is the state that U.S. infrastructure has reached—on a national scale.

Today’s infographic from New York Life Investments highlights the level of disrepair in U.S. infrastructure. It also explores why taxable municipal bonds, which will finance the required infrastructure upgrades, provide such an interesting investment opportunity.

Falling Apart at the Seams

The American Society of Civil Engineers (ACSE) regularly assesses the nation’s infrastructure—things like bridges, airports, and drinking water—and scores it in a ‘report card’. After decades of neglect, the U.S. only scored a D+ in 2017.

The ASCE estimates that $4 trillion is needed to bring infrastructure up to a B grade, $1.3 trillion of which will be provided by state and local governments.

The urgent needs for increased investment in America’s infrastructure continue to grow and our nation’s economic vitality and quality of life are at stake.

— Ed Mortimer, U.S. Chamber Vice President of Transportation and Infrastructure

U.S. municipal bonds will be the primary funding source for this massive financing need. These bonds are quite popular with individual U.S. investors, as the interest income from most municipal bonds is not subject to federal income tax.

However, the U.S. tax code limits the volume of non-taxable bonds issued, and the purposes for issuing them. As a result, many local and state governments have been turning to taxable municipal bonds to finance their infrastructure projects.

The Muni Opportunity

Taxable municipal bonds are a potentially attractive investment for many reasons.

1. Competitive Historical Yield and Strong Returns
In the last decade, a lagging global economy led to historically low interest rates—many sovereign (national) bonds fell into negative territory. Taxable municipal bonds provided an alternative source of yield potential, outpacing the yields of comparable treasury bonds in some cases.

Not only that, but in the post-crisis era, taxable municipal bonds have averaged a return of 6.9% per year, beating the 4.6% performance on U.S. corporate investment-grade bonds, a staple in most institutional portfolios.

2. High-Quality, Stable Credit Ratings
Most municipal bonds are high quality with low default rates, making them attractive to risk-conscious investors.

	U.S. Municipals	Global Corporates
Rating Spread	Over 76% rated A+ or better	Only about 10% are AA rated
	Tiny portion below investment grade	Nearly half are below investment grade
Default Rate	0.81% for those rated BAA by S&P	0.84% for those rated AAA by S&P

Historically, municipal bond ratings have also been far more stable than that of global corporates.

3. Inefficient pricing
The municipal bond market is highly fragmented, and most issues are too small to be included in a market index.

This market fragmentation, combined with limited sell-side research and many buy-and-hold investors, often leads to inefficient pricing. Active investors have the potential to generate higher returns by applying their credit research and trading skills.

4. Low Correlations
Correlation measures the degree to which two securities move in relation to each other. In general, taxable municipal bonds have a low correlation to other fixed-income sectors. This means they help provide portfolio diversification and reduce volatility.

5. Longer durations
Since taxable municipal bonds fund long-term capital projects, they are usually financed with longer maturing bonds. Institutional investors welcome this source of long-duration assets, as they can match them up with their long-dated obligations.

A Compelling Portfolio Addition

Taxable municipal bonds have many positive qualities that make them a strong contender for investment. When added to a diversified fixed-income portfolio, they may also improve the risk/return profile.

As the U.S. begins to revitalize its infrastructure, taxable municipal bonds present a strong—and often overlooked—opportunity for investors.

Infographics

What is Defined Outcome Investing?

Defined outcome investing is a customizable solution that investors of all mindsets can use to add a layer of predictability to their results.

Published

2 weeks ago

June 30, 2020

Marcus Lu

This infographic is available as a poster.

What is Defined Outcome Investing?

Equities can play a critical role in any investment portfolio thanks to their long-term growth potential. At the same time, this asset class can also present a number of challenges for investors.

Uncertainty around the short to mid-term performance of equities can be a major deterrent for some, while others may find it difficult to select the best stocks based on their unique needs. Fortunately, there is a solution that can help investors overcome these challenges. In today’s infographic from New York Life Investments, we introduce defined outcome investing, and examine how it can help individuals take more control over their equity investments.

Understanding How DOI Works

Defined outcome investing (DOI) is a family of strategies that add a layer of predictability to an investor’s results. This is achieved through two unique aspects.

The first is a customizable risk-return profile, which gives investors the option of receiving either upside enhancement or downside protection features.

Risk-Return Feature	How it Works
Upside enhancement	Enhances the returns of the specified index, up to a cap. The investor is not sheltered from negative returns.
Downside protection	Protects investors from negative returns, up to a certain amount. The investor still participates in market upside, up to a cap.

The second aspect is a predetermined time period—defined outcome strategies carry a maturity date, similar to a fixed income security. Upon reaching its maturity date, a defined outcome strategy expires and the proceeds are paid out to the investor. This feature makes it easier for an investor to time their equity exposures around personal liquidity needs.

To understand the potential of DOI, consider a woman who wishes to make a down payment on a property one year from now. She would like to invest and grow her money in the meantime, but is worried about market volatility. Rather than purchase individual securities or ETFs, she could opt for a defined outcome strategy with downside protection over a one year term.

These features would reduce the likelihood of negative returns over the year, while still giving her exposure to the growth potential of equities.

Types of Defined Outcome Strategies

Investors have three distinct types of defined outcome strategies to choose from, depending on their personal objectives.

Growth Strategies

Growth strategies are designed for investors who:

Have a positive outlook on markets
Seek high levels of capital appreciation
Accept the possibility of negative returns

As implied by their name, these strategies produce enhanced market returns. They do not, however, offer any downside protection. The table below demonstrates how a growth strategy with 50% upside enhancement would perform across a number of scenarios. Assume a maximum return cap of 36%.

Market Scenario	S&P 500 Return (via ETF)	Growth Strategy Return	Defined Outcome Result
Strongly Positive	50%	36%	Investors reach their maximum return cap of 36%.
Positive	20%	30%	Investors gain 10 percentage points over the index.
Modestly Positive	8%	12%	Investors gain 4 percentage points over the index.
Negative	-10%	-10%	Investors match the index's negative return.

Buffered Strategies

Buffered strategies are a more neutral solution designed for investors who:

Have a moderate outlook on markets
Seek capital appreciation
Require a safety buffer to mitigate losses

Buffered strategies allow investors to participate in equity markets while receiving a specified level of insulation from negative returns. The table below demonstrates how a buffered strategy with 20% loss insulation would perform across a number of scenarios. Assume a maximum return cap of 24%.

Market Scenario	S&P 500 Return (via ETF)	Buffered Strategy Return	Defined Outcome Result
Strongly Positive	30%	24%	Investors reach their maximum return cap of 24%.
Positive	8%	8%	Investors match the positive return of the index.
Negative	-20%	0%	Investors are sheltered from losses within their buffer.
Strongly Negative	-30%	-10%	Any losses beyond the buffer are realized by the investor.

Preservation Strategies

Preservation strategies are best suited for risk-averse investors who:

Have a negative outlook on markets
Want to manage downside risk
Have significant financial obligations in the near future

Preservation strategies provide a different type of downside protection where, instead of a buffer, investors define their maximum loss. The table below demonstrates how a preservation strategy with 95% capital preservation (5% maximum loss) would perform across a number of scenarios. Assume a maximum return cap of 20%.

Market Scenario	S&P 500 Return (via ETF)	Preservation Strategy	Defined Outcome Result
Strongly Positive	30%	20%	Investors reach their maximum return cap of 20%.
Positive	8%	8%	Investors match the positive return of the index.
Negative	-3%	-3%	Investors match negative returns within their maximum loss.
Strongly Negative	-30%	-5%	Investors maintain 95% of their capital.

Accessing Defined Outcome Strategies

Defined outcome strategies are accessed through a vehicle known as a unit investment trust (UIT). UIT’s offer similar levels of transparency and accessibility when compared to ETFs or mutual funds, including daily liquidity and transparency of holdings. So how are they able to offer such compelling risk-return features?

The answer lies in their use of equity options, a type of derivative contract. Equity options give the holder, in this case the UIT, the option of buying (or selling) a stock at a predetermined price on a specific date in the future. These contracts are used to engineer the risk-return features previously described, and are the reason why defined outcome strategies carry a maturity date.

Thus, in order to realize the specified upside enhancement or downside protection features, an investor must hold the UIT for its entire term. While there is no penalty for redeeming a UIT early, the investor will not reach their defined outcome objective.

A More Predictable Approach to Investing

Equities are a powerful tool for long-term growth, but it can be difficult to build a properly-aligned portfolio according to one’s risk tolerance. This becomes especially relevant in today’s uncertain economic environment.

With customizable risk-return profiles and a defined maturity date, defined outcome investing is a powerful solution that can support a variety of financial goals through different phases of the market cycle. Whether its maximizing returns or saving for retirement, investors can now take greater control over their financial future.

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Infographics

Financial Wellness: How to Be Resilient During a Crisis

Even prior to COVID-19, only about 28% of U.S. adults were financially healthy. Here’s how you can improve your financial wellness during a crisis.

Published

1 month ago

June 3, 2020

Jenna Ross

This infographic is available as a poster.

Financial Wellness: How to Be Resilient During a Crisis

Due to the COVID-19 pandemic, 90% of Americans feel anxious about money. These stress levels are the same across all income groups.

Unfortunately, financially-stressed people are more likely to face physical and mental health challenges. For example, people with high debt stress during the 2008 financial crisis had higher levels of back tension, severe depression, and anxiety.

In today’s infographic from New York Life Investments, we take a look at the current state of financial health, and highlight ways people can improve their financial wellness during a crisis.

A Current Snapshot

Financial health is the degree to which people are able to be resilient and take advantage of opportunities over time. It rests on eight indicators:

Spend: Spend less than income and pay bills on time
Save: Have sufficient liquid savings and long-term savings
Borrow: Have manageable debt and a prime credit score
Plan: Have appropriate insurance and plan ahead financially

Based on these factors, individuals fall along a spectrum of financial health. In the U.S., only about 28% of people were considered to be financially healthy in a 2019 study.

Clearly, many Americans were already facing challenging circumstances prior to the pandemic. Here are a couple of the top issues.

More Complexity

Finances have become more complicated over time.

For many years, workers could rely on defined benefit pension plans that paid a set amount in retirement. In recent decades, pensions have primarily shifted to defined contribution plans. These require the employee to make investment decisions and build their own nest egg.

Unfortunately, financial education has not kept pace with the rising need for knowledge. Fewer than half of U.S. states require high school students to take a course in personal finance.

“Money Talk” Taboo

To build financial literacy, individuals would benefit from talking more openly about money. However, 44% of Americans surveyed would rather talk about religion, death, or politics than discuss personal finance with a loved one.

Fears of embarrassment and conflict are major emotional roadblocks that hamper financial progress. What can individuals do to improve their financial wellness, especially during a crisis?

Building Resiliency

People can follow a step-by-step strategy to optimize their financial situation.

Assess their current situation.
Uncertainty can be a major source of anxiety. To identify the source of stress—and determine if it’s warranted—investors can take stock of their income, expenses, savings, and debts.

Financial self-awareness is positively associated with greater financial satisfaction, and stronger spending and investing decisions.
Prepare for the worst-case scenario.
What can individuals do if they lose their job or see a prolonged drop in retirement savings?

Investors can consider various options, such as taking on freelance work, cutting unnecessary expenses, or increasing retirement plan contributions. Then, they can “stress test” their financial plan to account for these scenarios and begin preparing as best they can.
Break goals into small chunks.
Specific, achievable, and measurable goals are easier to manage. For example, rather than having a goal to pay down $51,000 in debt, an individual could aim to make monthly payments of $850 over five years.

By setting smaller goals, investors can take action to make progress. Research has shown that achieving quick wins makes people more likely to achieve their financial goals.
Improve financial knowledge and openness.
Investors can educate themselves as much as possible—people with high investment knowledge are proven to be more prepared and less anxious.

Has planned for retirement Feels anxious when thinking about personal finances Has emergency savings

Low Investment Knowledge 62% 48% 78%

High Investment Knowledge 73% 21% 90%

People can also take steps to break financial taboos with loved ones, by starting with simple conversations about experience and building to more concrete discussions about family finances. The ability to talk about money is one of the most important skills for building financial literacy.
Create long-term, purposeful goals.
Setting the right goals helps investors define their own parameters for success, which in turn keeps them focused and motivated. It’s also important to monitor goal progress regularly, to allow for portfolio or contribution adjustments as needed.

	Has planned for retirement	Feels anxious when thinking about personal finances	Has emergency savings
Low Investment Knowledge	62%	48%	78%
High Investment Knowledge	73%	21%	90%

Taking Charge

Financial crises can strike at any point in time, whether it’s due to personal circumstances or an economic downturn.

To improve their situation, people can focus on the controllable elements of financial health: spending, saving, borrowing, and planning. This allows investors to emerge with a stronger, more resilient plan than they had before the crisis.

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