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High-Yield and Emerging Market Debt Still Income Leaders
Favorite Sector/ Asset Class Ideas / Category Type High-Yieldbonds(taxableandtax-free) EmergingMarketDebt Investment-GradeCorporateBonds(intermediateandlong-term) PreferredStocks BuildAmericaBonds FloatingRateBankLoans
Implementation ModelWealthPortfolios[MWP]—IncomeFocused MutualFundsandETFIncomeProducingIdeas
The Search for Income
LPL F INANCIAL RESEARCH
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II
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April2010
LPL Financial Member FINRA/SIPC page 2 of 15
THE SEARCH FOR INCOME
HIGH-YIELD AND EMERGING MARKET DEBT STILL INCOME LEADERSBondyieldswereunchangedtoloweroverthefirstquarterof2010—howeverwestillbelievefixedincomemarketscontinuetoprovidethebestopportunitiesforincome-seekinginvestors.Economicallysensitivesectors,suchasHigh-YieldBonds,EmergingMarketDebt(EMD),andInvestment-GradeCorporateBonds,continuedtoleadbondmarketperformanceoverthefirstquarterof2010afteranimpressive2009.WecontinuetofindEMD,High-Yield,Investment-GradeCorporate,andHigh-YieldBondsinparticular,attractivelyvalued.Amajordrawbackofthesteadyimprovement,however,istheloweroveralllevelofyields.Wehavecitedthisdrawbackinthepastandyieldshavedeclinedevenfurthercomplicatingtheobjectivesofincomeseekinginvestors.LoweryieldsaremoreevidentamongInvestment-GradeCorporateBonds,whileHigh-YieldBondsandEmergingMarketDebtstillpossessrelativelyhighabsoluteyieldsthatmayhelpincome-seekinginvestors.Still,whenassessingthebroaderinvestmentlandscape,equitiesprovidelittlechallengetobondsfromanincomeperspective.Widespreaddividendcutsovermuchof2009havenotbeenreversedanddividendincreasesareexpectedtoremainfewandfarbetweenoverthenear-term.Sincedividendsarethekeycomponentofincomeforcommonequityanddespitetheloweroveralllevelofyields,westillbelievethebestincomeopportunitieslieinthefixedincomemarket.Ourbestideasforincomegenerationarethefollowing:
� High-YieldBonds(taxableandtax-free)
� EmergingMarketDebt
� Investment-GradeCorporateBonds(intermediate-andlong-term)
� PreferredStocks
� BuildAmericaBonds
� FloatingRateBankLoans
OurbiaswithinfixedincomeremainsHigh-YieldBondsandEMD.Thesteadyimprovementineconomically-sensitivebondsectorsover2009andthroughthefirstthreemonthsof2010hasledtoloweryieldstherebycomplicatingthejobofincome-seekinginvestors.Inourview,High-YieldBondsandEMDstillprovideincomeinvestorsthebestcombinationofyieldandpricestability.Yieldsforeachsectorhavefallenbutstillimprovingfundamentalsshouldhelpsupportprices.ThewideryieldspreadsofHigh-YieldBondsandEMDprovideagreaterbufferagainstrisinginterestrates.WefindHigh-YieldBondsandEmergingMarketDebtmostattractiveforallbondinvestors,notjustincomeseekinginvestors,aswebelieveincomewillbetheprimarydriverofbondmarketperformanceovertheremainderof2010.
EmergingMarketDebtbeganthefirstquarterof2010slowly.Asthequarterprogressed,growingconcernovertherisingdebtofselectdevelopedEuropeannations,mostnotablyGreece,focusedinvestorsevenmoreonEMD.Notonlywereyieldshigher,butmostemergingnationsenjoyarelativelysmall(anddeclining)debtburdenrelativetothesizeoftheireconomies(asmeasuredbyGrossDomesticProduct-GDP)andthatfactbecameincreasinglyappreciatedbybondinvestors.Theaverageyield
SummaryTheSearchforIncomepublicationisaquarterlyguidetoourbestideasforincome-producingsecuritiesandstrategies.Thispublicationoffersactiveandpassiveincomesuggestionsfromourcurrentmutualfundrecommendedlist,alongwithsuggestedexchange-tradedfunds(ETFs).Manyoftheassetclasses/sectorscanbeusedindividuallyorinadiversifiedportfolioandseveralarecurrentlyemployedinourmodelportfolios.
Bank Loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.
International and emerging markets investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
Preferred Stock investing involves risk which may include loss of principal.
High-Yield/Junk Bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.
The market value of Corporate Bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.
Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of funds shares is not guaranteed and will fluctuate.
Mortgage-Backed Securities are subject to credit risk, default risk, and prepayment risk that acts much like call risk, where you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment risk, and interest rate risk.
Municipal bonds are subject to availability, price and to market and interest rate risk is sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxed may apply.
Increase in interest rates will cause the prices of bonds and bond mutual funds to decline.
LPL Financial Member FINRA/SIPC page 3 of 15
THE SEARCH FOR INCOME
advantage,orspread,tocomparablematurityTreasuriescontractedoverthequarterbutwestillfindvaluationsattractive.
Investment-GradeCorporateBondsremainrelativelyattractiveanddespiteloweryieldsremainoneofthebetterincome-producingoptionsinfixedincomemarkets,especiallyconsideringthenearhistoricallylowyieldsonotherhigh-gradebondsectorssuchasTreasuriesandMortgage-BackedSecurities(MBS).Steadyimprovementineconomicdata,better-than-expectedearnings,andattractivevaluationscontinuetosupportcorporatebonds.
PreferredStocksbegan2010onastrongnoteastheFinancialssector,whichcomprisesthebulkofpreferredissuers,continuedtoshowmeaningfulrecoveryfromtherecession.WefindvaluationsmodestlyattractiveandyieldsremainhighercomparedtosimilarlyratedInvestment-GradeCorporateBonds.PreferredStocksmayremainagoodincomevehicle.Risksofsomepreferredissuers,beingforcedtoconvertpreferredissuestocommonorpostponetheirdividends,havedeclinedsubstantially.Thethreatofhigherinterestratesdoesposeariskduetothelongdurationnatureofpreferredstocks.
WeintroduceBuildAmericaBonds(BAB)inthisquarter’sSearchforIncomepublication.April2010markstheone-yearanniversaryofthefirstBABbondissue.BABsoriginatedfromtheAmericanRecoveryandReinvestmentAct(ARRA)toallowmunicipalitiestoissuetaxablebondsforqualifyinginfrastructureprojects.Byexpandingtheinvestorbasetotaxableinvestors,BABissuancewasintendedtofacilitatemunicipalities’abilitytoobtainfundingforimportantinfrastructureprojectsgivenstilluncertainmarketsinthewakeofthefinancialcrisis.BABshavebeenasuccessandthemarkethasgrownto$90billionaccordingtotheBondBuyerasofMarch15,2010.
FloatingRateBankLoansofferhighyieldsrelativetoshort-termsecurities,andgiventheir“floatingrate”structure,wheninterestratesrise,payahigherrate.Givenouroutlookforanimprovingeconomicenvironmentandlonger-termexpectationofhigherinterestrates,wefindbankloansanattractivesourceforincome.Apotential“headwind”forinvestors,asoutlinedinour2010Outlookpublication,isthepossibilityofFederalReserve(Fed)interestrateincreases.However,BankLoanscouldbenefitfromFedratehikes—eachratehikewouldtranslatedirectlyintohigherinterestpaymentsfromtheunderlyingbonds.
Individually,ourbestideasforincomecurrentlyresideinfixedincome.Foramoreextensiveportfoliosolution,theincomefocusedthemeinModelWealthPortfolios(MWP)combinesmultipleassetclassesandsectors.Thegoalsofthisportfolioaretoseekexcessreturnand,secondarily,togeneratesignificantlyhigheroverallyieldsthantheLPLFinancialResearchblendedbenchmarks.v
FAVORITE SECTOR/ ASSET CLASS IDEAS High-Yield Bonds (taxable and tax-free)High-yieldisanobviousassetclassforincomeseekinginvestors.Taxablehigh-yieldbondswereoneofthehardesthitsectorsduringthecreditcrunch,buthavereboundedimpressivelysince.Despitethestellarperformanceofthesebonds,yieldlevelsremainhighandwebelievethereisadditionalroomforimprovementovertheremainderof2010.Defaultratesbegantodeclineoverthefirstquarterof2010forthefirsttimesincelate2007.Moreimportantly,since2010,Moody’shastwicerevisedtheiryear-end2010
1 A Declining Default Rate Bodes Well For Narrower Yield Spreads and Thus Higher Valuations.
2 Yields Have Declined But Remain High Relative To Near Record Low High-Grade Bond Yields.
Source: Barclays, Bloomberg, LPL Financial, March 31, 2010
Source: Barclays, Bloomberg, LPL Financial, March 31, 2010
The Barclays High Yield Bond Index is an unmanaged index of corporate bonds rated below investment-grade by Moody’s, S&P or Fitch Investor Service which cannot be invested into directly. The index also includes bonds not rated by the ratings agencies. Past performance is no guarantee of future results.
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
222018161412108642
(%)
Barclays Corporate Bond Spread to Tressuries Long Term Average
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
23211917151311975
Barclays High Yield Bond Index YieldLong-Term Average
(%)
LPL Financial Member FINRA/SIPC page 4 of 15
THE SEARCH FOR INCOME
defaultrateforecastlowerandtheforecastcurrentlycallsfora2.8%defaultratebytheendofDecember2010.Aprojecteddeclineinthedefaultrate,whichweagreewith,providesfavorablebackdropforhighyieldbonds.
Sincedefaultratesandhigh-yieldbondspreadsarehighlycorrelated,theaverageHigh-YieldBondspreadtoTreasuries,5.8%asofApril14,2010,isattractive.Itishighrelativetotheexpecteddeclineindefaultsandisslightlyabovethelong-termhistoricalaverageof5.5%[Chart1].AdeclineinthedefaultratebodeswellforfurtheryieldspreadcontractionandhighervaluationsrelativetoTreasuries.Thisshouldprovideimportantpricesupportagainsthigherinterestrates.
TheaverageyieldofHigh-YieldBondsof8.2%(asofApril14)isbelowthe20-yearaverageof11.0%[Chart2].Inafixedincomeworldwheremanybondsofferhistoricallylowyields,High-YieldBondsstillstandout.LikeInvestment-GradeCorporateBonds,High-YieldBondissuershavepostedbetter-than-expectedearningsandbenefitedfromeconomicimprovement.Weexpectthistrendtocontinuetoprovideafavorablefundamentalbackdropforhigh-yieldinvestorsoverthebalanceof2010.
Fordiversificationpurposesandtoreduceindividualsecurityrisk,LPLFinancialResearchstronglyrecommendsinvestorsuseamutualfundorETFsforexposuretothisassetclass.Ingeneral,highyieldfundsprovideyieldsbetween6.0%and9.0%currently,butofcourseentailthegreatercreditriskrelativetoinvestmentgradebonds.
Highertax-bracketinvestorsmaywishtoconsidertax-freehigh-yieldbonds.YieldspreadsremainwideonahistoricalbasisandtheCensusBureaurecentlyreportedthattotalstateandlocalgovernmentrevenuesincreased0.08%duringthefourthquarterof2009versusthesamequarterin2008.Althoughamodestincrease,itisthefirstsincetheonsetoftherecessionandasignthatmunicipalrevenuesmayhavebottomed.MunicipalHigh-YieldBondsaretradingcheaperrelativetotaxablehigh-yieldgivenhistoricaldefaultsandaftertakingintoaccounttaxeffects.Pleasebeawarethatthevastmajorityoftax-freehighyieldfundsgenerateincomethatissubjecttoAMT(AlternativeMinimumTax).Again,werecommendinvestorsuseamutualfundtogainexposure.PleasecontactfundcompaniesdirectlyforthepercentageofincomesubjecttoAMT.
Emerging Market DebtEmergingmarketcountryeconomiesweatheredthefinancialcrisisbetterthanmostdevelopedcountries.Intermsofcreditquality,withtheexceptionofFiji,noAsianemergingcountry(ourfavoriteregionwithinEMD)experiencedadowngradein2009.InvestorinterestinEMDhasincreasedastheGreeksituationhashighlightedtherisingdebtburdensfacingmanydevelopedEuropeancountriesaswellastheUnitedStates.MostEMDissuershaveverymanageabledebtburdensandhavecontinuedtobenefitfromstrongerdomesticeconomicgrowth.
Evenwiththeimprovementoverthefirstquarterof2010,yieldspreadstoTreasuriesremainattractiveandwebelievehaveroomformodestimprovement.TheaverageEMDyieldspreadtocomparableTreasurieswas2.5%,asofApril14,2010,accordingtoBarclaysdata.Unlikehigh-yieldorinvestment-gradecorporatebonds,EMDspreadsarebelowtheirlonger-term
3 Although EMD Yields Have Declined Near the Lows of the Past Decade…
Source: Barclays, Bloomberg, LPL Financial, December 31, 2009
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Barclays Global EM Bond Index Yield
Yiel
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2002 2003 2004 2005 2006 2007 2008 2009 2010
4 ...Room for Valuation Improvement, Via Narrower Yield Spreads, Should Support EMD Prices.
Source: Barclays, Bloomberg, LPL Financial, March 31, 2010
The Barclays Global Emerging Markets Bond Index is an unmanaged index of external debt instruments of the emerging market nations. This includes U.S. dollar-denominated Brady Bonds, loans, and Eurobonds. Past performance is no guarantee of future results.
12
10
8
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Barclays Global EM Bond Index Spread
2002 2003 2004 2005 2006 2007 2008 2009 2010
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.
Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of funds shares is not guaranteed and will fluctuate.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.
High-Yield/Junk Bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.
Credit quality ratings are from multiple companies provided by Morningstar and pertain to the underlying portfolio holdings rather than the fund itself.
LPL Financial Member FINRA/SIPC page 5 of 15
THE SEARCH FOR INCOME
average.Thenarroweryieldspreadreflectscreditqualityimprovements,suchaslowerleverageandhigherforeigncurrencyreservesthathaveseentheEMDmarketmigrateuptoanaverageBBB-ratingupfromaBB-ratingasmeasurebytheS&P500.Webelieveyieldspreadcontractionwillslowbutfindthe1.3%yieldadvantageofEMDrelativetoInvestment-GradeCorporateBonds,whichholdanaverageA-rating,tobeattractive.
Inaddition,thecurrentyieldoftheBarclaysGlobalEmergingMarketsBondIndex,5.9%asofApril14,2010,couldbeattractiveforincomegenerationparticularlygivenstillimprovingfundamentals.EMDissuersmaybenefitfromfastereconomicgrowththantheirdevelopednationcounterparts.EMDissuersalsopossessbettercreditcharacteristics:debt-to-GDPratiosarelowerthandevelopednationsandmostEMDissuerspossesslargecurrencyreserves.ApotentialriskisthatstrongereconomicgrowthmayresultinEMcentralbanksincreasinginterestrates.However,activefundmanagershavesomelatitudetooffsetthisriskbytakingselectEMcurrencyexposurewhichmaybenefitasselectEmergingMarketcountriesrevaluetheircurrencymodestlyhigher.
Investment-Grade Corporate BondsInvestment-GradeCorporateBondsremainattractive—despiteloweryields[Chart4]—asanincome-producingoptioninfixedincomemarkets.ThisisespeciallytrueconsideringhistoricallylowTreasuryandMBSyields.AsofApril14,2010,theaverageInvestment-GradeCorporateBondyieldspreadtoTreasurieswas1.5%,stillabovethe1.3%historicalaverageandaconsiderableadvantagetoTreasuries[Chart5].GiventheprospectofmassiveTreasuryissuancein2010,corporatebondyieldspreadscouldcontractbelowthehistoricalaverage.Evenifspreadsmerelyheldstabletheaddedyieldadvantageissignificant.
Datareportedoverthefirstquarterof2010demonstratedtheimprovementinkeycreditqualitymetricsamongcorporateissuers.OverallcorporateleverageamongcorporatebondissuersintheS&P500declinedduringthefourthquarterof2009[Chart6].Bycomparingtotaldebttoacompany’searningsbeforeinterest,taxes,depreciation,andamortization(EBITDA),weseetheimpressivedeclineinleverageamongcorporatebondissuers.TheFed’sFlowofFundsdataalsorevealedthedebtgrowthduring4Q09wastheslowestsince2002,thelasttimecorporationsembarkedonthepathofcleaninguptheirbalancesheetsandimprovingtheircreditmetrics.Thefundamentalimprovementsinthecorporatesectorareinstarkcontrasttorisingdebtloadoccurringamonggovernmentissuers.Bettercreditmetricsandhigheryieldshavemadecorporatebondsabetterincomeoptioncomparedtogovernmentbonds.
Preferred StocksPreferredStocksprovidehighercurrentyieldsthancomparablyratedcorporatebonds.Althoughcalled“stocks”preferredstockshavebondcharacteristicsandincome-seekinginvestorsshouldconsidertheassetclass.Likeothercreditsensitivesectors,Preferredstocksfollowedupastrong2009reboundwithanimpressivestartto2010.Nonetheless,bothyieldsandvaluationsremainattractive.AsofApril14,2010,thepreferredmarket,asmeasuredbytheMerrillLynchHybridPreferredSecuritiesIndex,hadanaverageyieldof6.4%withanaverageS&PratingofBBB+.
5 Corporate Bond Yields Continued to Decline Over Q110 But Remain a High Quality Income Option.
6 Corporate Bond Yield Spreads are Fair in Our View and in Line With the Historical Average.
Source: Barclays, Bloomberg, LPL Financial, March 31, 2010
Source: Barclays, Bloomberg, LPL Financial, March 31, 2010
The Barclays Corporate Bond Index is an unmanaged index of investment grade rated bonds issued by corporations and quasi-government agencies. Corporate bonds issued by foreign entities but denominated in US dollars are also included in the index. Past performance is no guarantee of future results.
10
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Yiel
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read
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Barclays Corporate Bond Index Yield
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
6.56.05.55.04.54.03.53.02.52.01.51.00.5
Average Investment-Grade Corporate Bond Yield Advantage To TreasuriesHistorical Average
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Spre
ad (%
)
International and emerging markets investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
The market value of Corporate Bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.
LPL Financial Member FINRA/SIPC page 6 of 15
THE SEARCH FOR INCOME
ThegreatestrisktoPreferredStocks,dividenddeferralandcommonconversion,hasdiminishedsubstantiallyoverthepast15months.SinceFinancialscompriseroughly80%ofthepreferredmarket,thisrepresentsasignificantriskinadditiontothesectorconcentration.Interestordividenddeferral,theriskoftheissuer’srighttodelaypayments,remainsarisk.However,itisnowmorecompany-specificratherthanabroadmarketrisk.Better-than-expectedcorporateearningsoverthepastseveralquartershavetranslatedintohighercapitalratiosforvastmajorityofbanks.Therefore,theriskofregulatorsforcingfinancialcompaniestoconvertpreferredstockintocommonstocktoboostcapitaladequacyratioshasbeenreduced.
Overtheremainderof2010,interestrateriskcouldsupplantdividenddeferral/forcedconversionastheprimaryrisktopreferredstocks.Sincepreferredstocksareperpetualorhaveextremelylong30to50-yearmaturities,theypossesssomeinterestratesensitivity.TheyieldadvantagetoTreasurieswillhelpoffsethigherinterestrateriskbutinvestorsneedtobeawareofthisrisk,whichwillbecomemoreprominentwhentheFedbeginstosignalhigherinterestrates.
Build America BondsBornfromthe$787billionARRA,BuildAmericaBonds(BABs)appeartobealong-termfixtureinthebondmarket.TheObamaAdministrationhasagreedtoextendtheBABprogrambeyonditscurrentyear-end2010expirationandcoupledwiththegrowthoftheBABissuance,theBABmarketappearsheartostay.BABbondsarenowincludedinthewidelyfollowedBarclaysCapitalbondindexesandthereforesubjecttoregularpurchasesfrompassiveinvestorswhocloselymimicbenchmarkpositions.TaxablebondinvestorshaveembracedBABstodiversifyexistingholdingsofcorporate,Treasury,andMortgage-Backedbondsintheirportfolios.
SinceBABsareissuedtofundqualifyinginfrastructureprojects,whichareinherentlylong-terminnature,thevastmajorityofissuanceislong-termwith90%ofBABsmaturingbeyond10yearsaccordingtoBondBuyerdata.Thehigheryieldsassociatedwithlonger-termbondsmeansthatBABscanplayaroleinmeetinginvestorincomeneeds.Ofcourse,thelongermaturitiesalsoimplythatrisinginterestratesareapossiblerisk.
OnekeyfacetofextendingtheBABprogrambeyond2010isapossiblelowersubsidyfromthegovernment.Currently,amunicipalissuerpaysahigherinterestratewithaBABversusatraditionaltax-exemptbondbutreceivesa35%subsidybackfromthegovernmentsothatBABissuanceisjustaseconomicallyfeasibletothemunicipality.However,currentproposedlegislationcallsforaslightreductioninthesubsidyandtherebymaymakeitlessappealingformunicipalitiestoissueBABsin2011andbeyond.ShouldBABissuancedropsharplyinresponse,existingBABsmaybenefitfromascarcitypremiumandhelppricesberesilienttorisinginterestrates.
Floating Rate Bank LoansCompaniesratedbelowinvestmentgradeissueloansviabanks(hencethename“BankLoans”)fortheirshort-termfundingneeds.Mostbankloansareseniorsecureddebt,asthecompaniesgenerallypledgespecifictangibleassetsfortheloan,rankingthemabovetraditionalbondsandequitiesinacorporation’scapitalstructure.Thesesecuritiestypicallypayahigheryieldthanshort-termsecurities(generally2.5to3.0%aboveLIBOR,London
7 Corporate Bond Issuer Leverage Declined Sharply on a Year-Over-Year Basis During the Fourth Quarter of 2010.
8 Build America Bonds Can Offer Diversification and Yield to Income-Seeking Investors.
Source: FactSet, LPL Financial, December 31, 2009
Debt: Overall corporate leverage among corporate bond issuers in the S&P 500.
EBITDA: Earnings before interest, taxes, depreciation, and amortization.
Source: Wells Fargo, Bloomberg, LPL Financial ,April 16, 2010
The Wells Fargo Build America Bond Index is a comprehensive, rules-based index measuring the performance of certain types of municipal bonds issued under the American Recovery and Reinvestment Act of 2009.
7.00
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Wells Fargo Build America Bond Index Yield
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Preferred Stock investing involves risk which may include loss of principal.
Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of funds shares is not guaranteed and will fluctuate.
Mortgage-Backed Securities are subject to credit risk, default risk, and prepayment risk that acts much like call risk, where you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment risk, and interest rate risk
Municipal bonds are subject to availability, price and to market and interest rate risk is sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxed may apply.
The issuance of Build America Bonds (BAB) began in April 2009, and were authorized by ARRA economic stimulus of 2009. They can be issued for qualifying infrastructure projects.
LPL Financial Member FINRA/SIPC page 7 of 15
THE SEARCH FOR INCOME
Inter-bankOfferedRate)andprovideprotectionagainstrisinginterestratessincetheinterestrateonbankloansadjustsatregularintervalstoreflectchangesinashort-termrate,usually3-monthLIBOR.Unliketraditionalfixed-ratebondswhererisinginterestrateshurttheirprices,whenratesrise,bankloanspayahigherrateandtheirpricesdonotnecessarilyfall.
Yieldsonbankloanscontinuedtodeclineoverthefirstquarterof2010.Althoughtheinterestratespaidwererelativelyunchanged,acontinuedriseinbankloanpricesledtolowercurrentyields.Amongtheoptionsdiscussedinthispublication,bankloanspossessthelowestcurrentyields.However,sincetheaveragebankloantradesat92.5centsonthedollar,accordingtoBarclaysdata,asofApril15,2010,thecurrentyieldremainsmodestlyattractivegivenitsshortduration.Similartohigh-yieldbonds,improvingeconomicdatacoupledwithourexpectationofagoodfirstquarterearningsseasonshouldsupportprices.
BankLoansalsomakeaninterestingcontrarianplayinadiversifiedincomeproducingportfolio.Atsomepointinthesecondhalfof2010,webelievetheFedwillhikeinterestratesandbankloanswillstandtobenefitmorethanotherfixedincomesectors.Webelievecurrentvaluationsandyieldsareattractiveenoughforinvestmentnow.Givenourbeliefofanimprovingeconomicenvironmentandsubsequenthigherinterestrates,wefindBankLoansbothasanattractiveinvestmentopportunityandgoodsourceforincome.
Bank Loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.
LPL Financial Member FINRA/SIPC page 8 of 15
THE SEARCH FOR INCOME
IMPLEMENTATION
Model Wealth Portfolios — Income FocusedWhilewehighlightedourfavoriteindividualsectorandassetclassideasforincomethisquarter,withinModelWealthPortfolios(MWP),LPLFinancialResearchcombinesmultipleassetclassesandsectorstocreateaportfoliothatseeksexcessreturnand,secondarily,generatessignificantlyhigheroverallyieldsthantheLPLFinancialblendedbenchmarks.
WithintheseIncomeFocusedmodels,wemodifyourassetallocationmodelstoincreasetheirincome-generatingability.Fundselectionisfocusedonidentifyingthosemutualfundsthathavehistoricallyperformedverywellwithagoodportionoftheirperformancecomingfromincome.ThetablebelowhighlightsrelevantstatisticsofMWPIncomeFocusedmodels.
INCOME FOCUSED MODEL WEALTH PORTFOLIO PERFORMANCE
Model Portfolios 3-Months YTD 1-Yr 2-YrAnnualized Since 3/1/08
AGGRESSIVE GROWTHMWP Income Focused 4.08% 4.08% 49.84% -5.67% -6.18%
AG Benchmark " 5.66% 5.66% 49.38% -2.62% -2.77%
+ / - Benchmark -1.57% -1.57% 0.47% -3.05% -3.41%
GROWTHMWP Income Focused 4.23% 4.23% 47.99% -5.30% -5.82%
G Benchmark " 5.07% 5.07% 42.01% -1.10% -1.25%
+ / - Benchmark -0.84% -0.84% 5.97% -4.20% -4.57%
GROWTH WITH INCOMEMWP Income Focused 4.20% 4.20% 45.53% -2.65% -3.30%
G&I Benchmark " 4.26% 4.26% 32.63% 0.76% 0.62%
+ / - Benchmark -0.06% -0.06% 12.90% -3.42% -3.92%
INCOME WITH MODERATE GROWTHMWP Income Focused 4.24% 4.24% 42.92% 0.79% -0.07%
IMG Benchmark " 3.39% 3.39% 23.55% 2.34% 2.22%
+ / - Benchmark 0.84% 0.84% 19.37% -1.55% -2.29%
INCOME WITH CAPITAL PRESERVATIONMWP Income Focused 4.22% 4.22% 39.52% 3.27% 2.34%
ICP Benchmark " 2.48% 2.48% 14.88% 3.66% 3.58%
+ / - Benchmark 1.74% 1.74% 24.64% -0.39% -1.24%
Source: FactSet, LPL Financial 3/31/10
Benchmark IndicesAggressiveGrowth Growth
Growth withIncome
Income with Moderate Growth
Income with Capital Preservation
Russell 3000 Index 95% 80% 60% 40% 20%
Barclays Aggregate Bond Index 0% 15% 35% 53% 70%
Cash 5% 5% 5% 7% 10%
For further information about the model portfolios, please contact your LPL Financial advisor.
Indices are unmanaged and cannot be invested into directly.
*Please refer to page 14 for model descriptions.
LPL Financial Member FINRA/SIPC page 9 of 15
THE SEARCH FOR INCOME
INCOME FOCUSED MODEL WEALTH PORTFOLIO MUTUAL FUNDS
Name Ticker 1-Year 5-Year 10-YearSince Inception
Inception Date
Gross Expense Ratio
30-Day SEC Yield Web Address
Columbia Marsico 21st Century Z NMYAX 60.73 4.35 2.90 4/10/00 1.04 www.columbiafunds.com
MainStay Large Cap Growth I MLAIX 44.97 6.06 -0.29 6.25 4/1/05 0.99 0.00 www.mainstayfunds.com
Parnassus Equity Income - Inv PRBLX 50.15 7.03 6.09 10.07 9/1/92 0.99 1.47 www.parnassus.com
Eaton Vance Tax-Managed Dividend Inc I EIDIX 41.25 2.09 -7.46 8/27/07 0.94 3.18 www.eatonvance.com
Allianz NFJ Dividend Value Instl NFJEX 46.55 1.53 6.63 5/8/00 0.67 www.allianzinvestors.com
Eagle Mid Cap Stock I HMCJX 49.72 4.47 5.92 1.73 6/6/06 0.87 www.eagleasset.com
Alpine Dynamic Dividend ADVDX 41.91 -1.55 4.64 9/22/03 1.20 www.alpinefunds.com
Royce Dividend Value Invmt RDVIX 64.82 6.18 0.54 9/14/07 1.69 www.roycefunds.com
Cohen & Steers Realty Income A CSEIX 119.61 2.77 10.85 7.98 9/2/97 1.39 6.56 www.cohenandsteers.com
Oppenheimer Developing Markets Y ODVYX 88.19 18.06 13.93 15.79 9/7/05 1.08 www.oppenheimerfunds.com
T. Rowe Price Emerging Markets Bond PREMX 36.63 9.69 11.44 12.59 12/30/94 0.97 6.04 www.troweprice.com
Loomis Sayles Bond Instl LSBDX 44.16 7.45 9.04 10.41 5/16/91 0.65 5.14 www.loomissayles.com
Principal Preferred Securities Inst PPSIX 80.88 4.24 5.03 5/1/02 0.74 6.31 www.principal.com
RidgeWorth Seix Floating RT High Inc I SAMBX 26.68 3.63 3/1/06 0.49 www.ridgeworthfunds.com
Artio Global High Income I JHYIX 53.20 8.78 10.96 1/30/03 0.76 7.44 www.artiofunds.com
Oakmark Equity & Income I OAKBX 33.52 7.36 9.84 11.55 11/1/95 0.85 4.70 www.oakmark.com
American Funds Capital Inc Bldr F-2 CAIFX 33.61 4.33 7.53 -2.85 8/1/08 0.42 3.80 www.americanfunds.com
Source for data: Morningstar Direct, LPL Financial, 3/31/10
30 day yield: The fund’s 30 day yield is based on yield to maturity of a fund’s investments over a 30-day period and not on the dividends paid by the fund, which may differ.
Gross Expense Ratio: The gross expense ratio is the fund’s total annual operating expense ratio. It is gross of any fee waivers or expense reimbursements.
The performance data quoted represents past performance. Past performance is not an indicator of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information quoted. To obtain current month-end performance information, please refer to manager’s website displayed in the table above.
The performance data quoted reflects the reinvestment of dividends and capital gains, is net of expenses and but does not reflect the maximum advisory fee of 3.0%. Such fee, if taken into consideration, will reduce the performance quoted above.
LPL Financial Member FINRA/SIPC page 10 of 15
THE SEARCH FOR INCOME
Mutual Fund and ETF Income Producing IdeasThefollowinglistcomprisesoursuggestionsformutualfundsandETFsthatprovideexposuretotheincomeproducingsectorswehaveoutlinedinthisreport.
TAXABLE HIGH-YIELD FIXED INCOME EXPOSURE - MUTUAL FUNDS
Fund/Model Name Ticker 1-Year 5-Year 10-YearSince Inception
Inception Date
Gross Exp. Ratio
30-Day SEC Yield
Intermediate/Long High Yield BondArtio Global High Income I JHYIX 53.20 8.78 10.96 1/30/03 0.76 7.44
MainStay High Yield Corporate Bond I MHYIX 40.65 6.10 6.60 6.74 1/2/04 0.83 6.41
Pioneer Global High Yield Y GHYYX 73.96 6.47 6.23 12/27/05 0.78 9.35
PIMCO High Yield Instl PHIYX 50.75 6.75 7.00 8.19 12/16/92 0.53 6.88
Delaware High-Yield Opportunities A DHOAX 50.00 6.64 6.84 6.88 12/30/96 1.37 8.87
Pax World High Yield PAXHX 32.07 6.47 6.34 5.70 10/8/99 1.04 7.83
Barclays Capital US High Yield Bond 56.18 7.78 7.45
Source: Morningstar Direct, LPL Financial, 3/31/10TAXABLE HIGH-YIELD FIXED INCOME EXPOSURE - ETFS
Exchange-Traded Fund Ticker1- Year
5- Year
10- Year
Since Inception
Inception Date
Gross Exp. Ratio
30-Day SEC Yield
Mkt Ret Annlzd 1-Year
Mkt Ret Annlzd 5-Year
Mkt Ret Annlzd 10-Year
Mkt Ret Annlzd Since Incep
Taxable High Yield BondsiShares iBoxx $ High Yield Corporate Bd HYG 42.73 3.56 4/4/07 0.50 8.26 44.27 3.42
SPDR Barclays Capital High Yield Bond JNK 53.72 3.89 11/28/07 0.40 53.75 3.88
Barclays Capital US High Yield Bond 56.18 7.78 7.45
Source: Morningstar Direct, LPL Financial, 3/31/10
For the most recent month end performance please visit the respective fund’s website: JHYIX: www.artioglobal.com; MHYIX: www.nylim.com/portal/site/MainStay; GHYYX: www.pioneerinvestments.com; PHIYX: www.pimcofunds.com; DHOAX:www.delawarefunds.com; PAXHX: www.paxfund.com, HYG: www.ishares.com; JNK: www.spdrs.com
The performance data quoted represents past performance. Past performance is not an indicator of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information quoted. To obtain current month-end performance information, please refer to manager’s website displayed above.
The performance data quoted reflects the reinvestment of dividends and capital gains, is net of expenses and but does not reflect the maximum advisory fee of 3.0%. Such fee, if taken into consideration, will reduce the performance quoted above.The volatility of the benchmark used to compare performance is materially different from that of the portfolio.
30 day yield: The fund’s 30 day yield is based on yield to maturity of a fund’s investments over a 30-day period and not on the dividends paid by the fund, which may differ. Gross Expense Ratio: The gross expense ratio is the fund’s total annual operating expense ratio. It is gross of any fee waivers or expense reimbursements. All indices are unmanaged and can’t be invested in directly.
LPL Financial Member FINRA/SIPC page 11 of 15
THE SEARCH FOR INCOME
EMERGING MARKET DEBT EXPOSURE - MUTUAL FUNDS
Fund/Model Name Ticker 1-Year 5-Year 10-YearSince Inception
Inception Date
Gross Exp. Ratio
30-Day SEC Yield
Emerging Market BondsT. Rowe Price Emerging Markets Bond PREMX 36.63 9.69 11.44 12.59 12/30/94 0.97 6.04
MFS Emerging Markets Debt A MEDAX 33.14 10.12 13.25 12.45 3/17/98 1.40 4.71
JPM EMBI Global 29.15 9.27 10.27
Source: Morningstar Direct, LPL Financial, 3/31/10
EMERGING MARKET DEBT EXPOSURE - ETFS
Exchange-Traded Fund Ticker1- Year
5- Year
10- Year
Since Inception
Inception Date
Gross Exp. Ratio
30-Day SEC Yield
Mkt Ret Annlzd 1-Year
Mkt Ret Annlzd 5-Year
Mkt Ret Annlzd 10-Year
Mkt Ret Annlzd Since Incep
Emerging Market BondsPowerShares Emerging Mkts Sovereign Debt PCY 33.72 7.83 10/11/07 0.50 6.31 31.32 8.53
iShares JPMorgan USD Emerg Markets Bond EMB 29.33 7.28 12/17/07 0.60 5.08 29.27 7.27
JPM EMBI Global 29.15 9.27 10.27
Source: Morningstar Direct, LPL Financial, 3/31/10
TAX FREE HIGH-YIELD FIXED INCOME EXPOSURE - MUTUAL FUNDS
Fund/Model Name Ticker 1-Year 5-Year 10-YearSince Inception
Inception Date
Gross Exp. Ratio
30-Day SEC Yield
Tax Free High YieldNuveen High Yield Municipal Bond I NHMRX 36.20 -0.64 4.37 3.83 6/7/99 0.77 7.10
Franklin High Yield Tax-Free Inc Adv FHYVX 21.55 4.06 5.09 3.72 1/3/06 0.53 4.86
Oppenheimer Rochester National Muni A ORNAX 49.37 -3.51 2.96 3.51 10/1/93 2.97 7.92
Barclays High Yield Municipal 28.32 3.06
Source: Morningstar Direct, LPL Financial, 3/31/10
For the most recent month end performance please visit the respective fund’s website: NHMRX, ORNAX: www.oppenheimerfunds.com, FHYVX: www.franklin-templeton.com, PREMX: www.troweprice.com, MEDAX: www.mfs.com; HYD: www.ishares.com; PCY: www.powershares.com; EMB: www.ishares.com
The performance data quoted represents past performance. Past performance is not an indicator of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information quoted. To obtain current month-end performance information, please refer to manager’s website displayed above.
The performance data quoted reflects the reinvestment of dividends and capital gains, is net of expenses and but does not reflect the maximum advisory fee of 3.0%. Such fee, if taken into consideration, will reduce the performance quoted above. The volatility of the benchmark used to compare performance is materially different from that of the portfolio.
30 day yield: The fund’s 30 day yield is based on yield to maturity of a fund’s investments over a 30-day period and not on the dividends paid by the fund, which may differ. Gross Expense Ratio: The gross expense ratio is the fund’s total annual operating expense ratio. It is gross of any fee waivers or expense reimbursements. All indices are unmanaged and can’t be invested in directly.
TAX FREE HIGH-YIELD FIXED INCOME EXPOSURE - ETFS
Exchange-Traded Fund Ticker1- Year
5- Year
10- Year
Since Inception
Inception Date
Gross Exp. Ratio
30-Day SEC Yield
Mkt Ret Annlzd 1-Year
Mkt Ret Annlzd 5-Year
Mkt Ret Annlzd 10-Year
Mkt Ret Annlzd Since Incep
High Yield Tax Free BondsMarket Vectors High-Yield Muni ETF HYD 26.81 24.30 2/4/09 0.71 24.81 22.91
Barclays High Yield Municipal 28.32 3.06
Source: Morningstar Direct, LPL Financial, 3/31/10
LPL Financial Member FINRA/SIPC page 12 of 15
THE SEARCH FOR INCOME
INVESTMENT GRADE CORPORATE BOND EXPOSURE - MUTUAL FUNDS
Fund/Model Name Ticker 1-Year 5-Year 10-YearSince Inception
Inception Date
Gross Exp. Ratio
30-Day SEC Yield
Intermediate/Long High Quality BondLoomis Sayles Investment Grade Bond Y LSIIX 31.97 7.61 8.86 8.67 12/31/96 0.54 4.33
Dodge & Cox Income DODIX 18.35 5.97 6.82 7.76 1/3/89 0.43 7.45
Federated Total Return Bond Instl FTRBX 12.97 5.95 6.54 6.64 10/1/96 0.45 4.19
Metropolitan West Total Return Bond I MWTIX 21.41 7.22 7.18 7.18 3/31/00 0.44 4.41
Columbia Intermediate Bond Z SRBFX 22.62 5.42 6.42 8.07 12/5/78 0.64 4.71
Loomis Sayles Bond Instl LSBDX 44.16 7.45 9.04 10.41 5/16/91 0.65 5.14
Barclays Capital Aggregate 7.69 5.44 6.29
Long High Qualtiy BondVanguard Long-Term Investment-Grade VWESX 20.43 4.71 7.08 8.49 7/9/73 0.26 5.84
Barclays Capital Govt Credit Long 10.29 5.29 7.26
Eclectic Fixed IncomeDelaware Diversified Income A DPDFX 28.64 7.57 9.19 8.47 12/29/97 1.02 5.03
Franklin Strategic Income Adv FKSAX 27.51 6.75 7.75 7.61 8/12/99 0.64 5.53
Barclays Capital Aggregate 7.69 5.44 6.29
Source: Morningstar Direct, LPL Financial, 3/31/10INVESTMENT GRADE CORPORATE BOND EXPOSURE - ETFS
Exchange-Traded Fund Ticker1- Year
5- Year
10- Year
Since Inception
Inception Date
Gross Exp. Ratio
30-Day SEC Yield
Mkt Ret Annlzd 1-Year
Mkt Ret Annlzd 5-Year
Mkt Ret Annlzd 10-Year
Mkt Ret Annlzd Since Incep
Intermediate/Long High Quality BondiShares Barclays Intermediate Credit Bd CIU 17.63 5.92 1/5/07 0.20 3.36 15.95 6.12
iShares iBoxx $ Invest Grade Corp Bond LQD 20.69 4.70 5.52 7/22/02 0.15 4.69 18.85 4.72 5.61
SPDR Barclays Capital Interm Credit Bond ITR 15.90 10.84 2/10/09 0.15 14.88 9.35
Vanguard Intermediate-Term Bond ETF BIV 10.01 6.77 4/3/07 0.12 3.89 9.52 6.84
Barclays Capital Aggregate 7.69 5.44 6.29
Long High Quality BondSPDR Barclays Capital Long Credit Bond LWC 24.80 23.52 3/10/09 0.15 25.19 21.93
Vanguard Long-Term Bond ETF BLV 10.29 5.97 4/3/07 0.12 5.34 9.25 6.15
Barclays Capital Govt Credit Long 10.29 5.29 7.26
Source: Morningstar Direct, LPL Financial, 3/31/10
For the most recent month end performance please visit the respective fund’s website: LSIIX, LSBDX: www.loomissayles.com; DODIX:www.dodgeandcox.com; FTRBX: www.federatedinvestors.com; MWTIX: www.mwamllc.com; SRBFX: www.columbiafunds.com; VWESX: www.vanguard.com; DPDFX; FKSAX: www.franklin-templeton.com, CIU & LQD: www.ishares.com; ITR & LWC: www.spdrs.com; BIV & BLV: www.vanguard.com
The performance data quoted represents past performance. Past performance is not an indicator of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information quoted. To obtain current month-end performance information, please refer to manager’s website displayed above.
The performance data quoted reflects the reinvestment of dividends and capital gains, is net of expenses and but does not reflect the maximum advisory fee of 3.0%. Such fee, if taken into consideration, will reduce the performance quoted above.The volatility of the benchmark used to compare performance is materially different from that of the portfolio.The volatility of the benchmark used to compare performance is materially different from that of the portfolio.
30 day yield: The fund’s 30 day yield is based on yield to maturity of a fund’s investments over a 30-day period and not on the dividends paid by the fund, which may differ. Gross Expense Ratio: The gross expense ratio is the fund’s total annual operating expense ratio. It is gross of any fee waivers or expense reimbursements. All indices are unmanaged and can’t be invested in directly
LPL Financial Member FINRA/SIPC page 13 of 15
THE SEARCH FOR INCOME
PREFERRED STOCK EXPOSURE - MUTUAL FUNDS
Fund/Model Name Ticker 1-Year 5-Year 10-YearSince Inception
Inception Date
Gross Exp. Ratio
30-Day SEC Yield
Preferred SecuritiesPrincipal Preferred Securities Inst PPSIX 80.88 4.24 5.03 5/1/02 0.74 6.31
Nuveen Preferred Securities I NPSRX 99.17 1.41 12/18/06 1.26 6.99
Merrill Lynch Preferred Stock Hybrid 57.62 1.23 4.68
Source: Morningstar Direct, LPL Financial, 3/31/10
BANK LOAN EXPOSURE - MUTUAL FUNDS
Fund/Model Name Ticker 1-Year 5-Year 10-YearSince Inception
Inception Date
Gross Exp. Ratio
30-Day SEC Yield
Bank LoanRidgeWorth Seix Floating RT High Inc I SAMBX 26.68 3.63 3/1/06 0.49
Eaton Vance Floating Rate I EIBLX 40.16 3.72 3.91 1/30/01 0.87 3.96
Barclays Capital US High Yield Loans 45.97
Source: Morningstar Direct, LPL Financial, 3/31/10
For the most recent month end performance please visit the respective fund’s website: PPSIX: www.principalfunds.com; NPSRX: www.nuveen.com; SAMBX: www.ridgeworthfunds.com; PFF: www.ishares.com; PGF & PGX: www.powershares.com; EIBLX: www.eatonvance.com
The performance data quoted represents past performance. Past performance is not an indicator of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information quoted. To obtain current month-end performance information, please refer to manager’s website displayed above.
The performance data quoted reflects the reinvestment of dividends and capital gains, is net of expenses and but does not reflect the maximum advisory fee of 3.0%. Such fee, if taken into consideration, will reduce the performance quoted above.The volatility of the benchmark used to compare performance is materially different from that of the portfolio.
30 day yield: The fund’s 30 day yield is based on yield to maturity of a fund’s investments over a 30-day period and not on the dividends paid by the fund, which may differ. Gross Expense Ratio: The gross expense ratio is the fund’s total annual operating expense ratio. It is gross of any fee waivers or expense reimbursements. All indices are unmanaged and can’t be invested in directly
PREFERRED STOCK EXPOSURE - ETFS
Exchange-Traded Fund Ticker1- Year
5- Year
10- Year
Since Inception
Inception Date
Gross Exp. Ratio
30-Day SEC Yield
Mkt Ret Annlzd 1-Year
Mkt Ret Annlzd 5-Year
Mkt Ret Annlzd 10-Year
Mkt Ret Annlzd Since Incep
Preferred SecuritiesiShares S&P U.S. Preferred Stock Index PFF 86.30 -0.41 3/26/07 0.48 6.39 85.43 -0.42
PowerShares Financial Preferred PGF 102.68 -2.45 12/1/06 0.69 8.09 100.41 -2.68
PowerShares Preferred PGX 58.23 -8.06 1/31/08 0.50 7.09 55.58 -8.23
Merrill Lynch Preferred Stock Hybrid 57.62 1.23 4.68
Source: Morningstar Direct, LPL Financial, 3/31/10
BUILD AMERICA BOND EXPOSURE - ETFS
Exchange-Traded Fund Ticker1- Year
5- Year
10- Year
Since Inception
Inception Date
Gross Exp. Ratio
30-Day SEC Yield
Mkt Ret Annlzd 1-Year
Mkt Ret Annlzd 5-Year
Mkt Ret Annlzd 10-Year
Mkt Ret Annlzd Since Incep
Build America BondPowerShares Build America Bond BAB 1.67 11/17/09 4.83 1.52
Wells Fargo Build America Bond Index 6.37 5/1/09 6.98
Source: Morningstar Direct, LPL Financial, 3/31/10
LPL Financial Member FINRA/SIPC page 14 of 15
THE SEARCH FOR INCOME
REQUIRED DISCLOSURES:
This report has been prepared by LPL Financial from sources believed to be reliable but no guarantee can be made as to its accuracy or completeness. The opinions expressed herein are or general information only, are subject to change without notice, and are not intended to provide specific advice or recommendations for any individuals.
Selling bonds prior to maturity may make the actual yield differ from their advertised yield and may involve a loss or gain. Bond values will decline as interest rates rise. Government bonds have a Government guarantee that applies only to timely payment of principal and interest only and not to the anticipated price or yield which may fluctuate with market conditions.
The guarantee does not apply to bonds sold prior to maturity. Government Agency bonds have an implied government backing (due to Federal Charter) but are not full, faith, and credit of the U.S. Government. Municipal bonds are federally tax-free, but may be subject to state and local taxes, and may be subject to the alternative minimum tax. Certificates of Deposit sold in the secondary market prior to maturity, are subject to market fluctuation. CD’s are FDIC Insured and offer a fixed rate of return if held to maturity.
Principal risk: An investment in Exchange Traded Funds (ETFs), structured as a mutual fund or unit investment trust, involves the risk of losing money and should considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks: not diversified, the risks of price volatility, competitive industry pressure, international political and economic developments, possible trading halts, Index tracking error.
Investing in mutual funds involve risk, including possible loss of principal. Investments in specialized industry sectors have additional risks, which are outlines in the prospectus.
Bank Loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.
International and emerging markets investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
Preferred Stock investing involves risk which may include loss of principal.
High-Yield/Junk Bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.
The market value of Corporate Bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.
Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of funds shares is not guaranteed and will fluctuate.
Mortgage-Backed Securities are subject to credit risk, default risk, and prepayment risk that acts much like call risk, where you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment risk, and interest rate risk.
Financials sector companies are involved in activities such as banking, consumer finance, investment banking and brokerage, asset management, insurance and investment, and real estate, including REITs.
LPL Financial does not engage in investment banking services nor has LPL Financial or the analyst(s) been compensated during the previous 12 months by any company mentioned in this Report for any non-investment banking securities-related services and non-securities services nor has any company mentioned been a client of LPL Financial within the past 12 months.
Correlation is a statistical measure of how two securities move in relation to each other. Correlations are used in advanced portfolio management.
BBB: An obligation rated ‘BBB’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB: An obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.
London Interbank Offered Rate (LIBOR): An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers’ Association. The LIBOR is derived from a filtered average of the world’s most creditworthy banks’ interbank deposit rates for larger loans with maturities between overnight and one full year.
The Wells Fargo Build America Bond Index is a comprehensive, rules-based index measuring the performance of certain types of municipal bonds issued under the American Recovery and Reinvestment Act of 2009.
Credit Quality: One of the principal criteria for judging the investment quality of a bond. As the term implies, credit quality informs investors of a bond or bond portfolio’s credit worthiness, or risk of default.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.
Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. They can obtain a prospectus from you. Read carefully before investing
INDEX DESCRIPTIONS
Barclays High Yield Bond Index is an unmanaged index of corporate bonds rated below investment grade by Moody’s, S&P or Fitch Investor Service. The index also includes bonds not rated by the ratings agencies.
Barclays Corporate Bond Index is an unmanaged index of investment grade rated bonds issued by corporations and quasi-government agencies. Corporate bonds issued by foreign entities but denominated in US dollars are also included in the index.
The Barclays Global Emerging Markets Bond Index is an unmanaged index of external debt instruments of the emerging market nations. This includes U.S. dollar-denominated Brady Bonds, loans, and Eurobonds.
Russell 3000® Index: measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market. As of the latest reconstitution, the average market capitalization was approximately $4.8 billion; the median market capitalization was approximately $944.7 million. The index had a total market capitalization range of approximately $386.9 billion to $182.6 million.
The Russell 3000 Growth Index is an unmanaged index comprised of those Russell 3000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 3000 Value Index measures the performance of those Russell 3000 companies with lower price-to-book ratios and lower forecasted growth values.
Barclays Aggregate Bond Index: is comprised of the Barclay’s Government/Corporate Bond Index, Mortgage-Backed Securities Index, and Asset-Backed Securities Index, including securities that are of investment-grade quality or better, have at least one year to maturity, and have an outstanding par value of at least $100 million.The Barclay Aggregate Bond Index is composed of securities from Lehman Brothers Government/Credit Bond Index, Mortgage-Backed Securities Index, and Asset- Backed Securities Index including securities that are of investment-grade quality or better, have at least one year to maturity, and have an outstanding par value of at least $100 million. The Barclay Aggregate Bond Index is composed of securities from Lehman Brothers Government/Credit Bond Index, Mortgage-Backed Securities Index, and Asset- Backed Securities Index.
LPL F INANCIAL RESEARCH
www.lpl.com
Member FINRA/SIPCPage 15 of 15
RES 2204 0410Tracking #632402 (Exp. 04/11)
Member FINRA/SIPC
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and make no representation with respect to such entity.
The Merrill Lynch Preferred Stock Hybrid Securities Index is an unmanaged index consisting of a set of investment-grade, exchange-traded preferred stocks with outstanding market values of at least $50 million that are covered by Merrill Lynch Fixed Income Research. The Index includes certain publicly issued, $25- and $100-par securities with at least one year to maturity.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
*Model Descriptions
Aggressive Growth
Aggressive Growth will essentially be fully invested in equity assets at all times (with the exception of a 5% cash position). Investors in this portfolio should have a long time horizon of 10 years or more, an understanding of the volatile history of equity investments, and a propensity to add money to the account on a systematic basis.
This portfolio is very aggressive by nature and should not be considered by anyone unwilling to take on significant risk.
Growth
Growth will be targeted to an allocation of 80% in equity assets and 20% in fixed income assets (including a 5% cash position). Investors in this portfolio should have a long time horizon, an understanding of the volatile history of equity investments, and a propensity to add money to the account on a systematic basis. This portfolio is aggressive by nature and should not be considered by anyone unwilling to take on significant risk.
Growth w/ Income
Investors in this portfolio should have a long time horizon, and an understanding of the volatile history of equity investments. The primary investment objective of this portfolio is growth of principal. Fixed income assets are included to generate income and reduce overall volatility.
Income w/ Moderate Growth
Income with Moderate Growth will be targeted to a normal allocation of 40% in equity assets and 60% in fixed income assets (including a 7% cash position). Investors in this portfolio should have a time horizon of more than five years, and be comfortable with the volatile history of equity investments The primary investment objective of this portfolio is income, with growth of principal an important consideration. Fixed income assets form the core of the portfolio, generating income and lowering the portfolio’s overall volatility. Equity assets provide the opportunity for long-term growth of principal.
Income w/ Capital Preservation
Income with Capital Preservation will be targeted to a normal allocation of 21% in equity assets and 79% in fixed income assets (including a 10% cash position). Investors in this portfolio should have a time horizon of more than five years, and be comfortable with the volatility that will occur within the modest equity portion of their investment portfolio. The primary investment objective of this portfolio is income, with growth of principal as a secondary concern. Fixed income assets form the core of the portfolio, generating a steady income stream. A small investment in equity assets provides the opportunity for modest long-term growth of principal.