MARKET AND LEGISLATION IMPACTS ON PLANNING OCTOBER 6, 2020
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TODAY’S SPEAKERS
MARC PENZINER
PETER DUNN
TARA POPERNIK
Principal and Financial Advisor at Bernstein Private Wealth Management
President and CEO, Central New York Community Foundation
CFA and CFP, Director of Research, Wealth Strategies Group at Bernstein Private Wealth Management
Investment Market Trends
Crossroads Key Conclusions ■
The Bridge to 2021: The market rally assumes a more normal 2021. Unprecedented monetary and
fiscal policy support are providing a critical bridge over the lost year of 2020 while progress on the public health crisis is permitting a gradual, albeit uneven, reopening of the economy.
■
Risks Are Still Present: And yet, despite the rally, we’re sensitive to risks that could lead to a more protracted and bumpy recovery than the market now believes. In particular, we’re focused on the path
toward successful reopening, Congress’ appetite for further policy support, and employers’ willingness to re hire workers. ■
A Reiteration of the Challenges to Market Timing: Shifting sentiment relative to the virus, and therefore the ability to fully reopen the economy, is likely to lead to periodic bouts of volatility. This makes
prudent asset allocation and a willingness to stay the course more important than ever.
As of June 30, 2020. Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. Source: AB
Macro and Markets
|
1
Stocks Snapped Back from First Quarter Sell-off
The Rally
Risk Assets Bounced Following Historic Sell-Off
MSCI World Cumulative Drawdown
1.1
1.0
0.9
0.8
0.7
2020
0.6
All other 5%+ declines since 1965
0.5 1
11 21 31 41 51 61 71 81 91 101 111 121 131 141 151 161 171 181 191 201 211 221 231 241 251 261 271 281 291 301 Days From Start of Drawdown
As of June 30, 2020. Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. Lines represent all global equity drawdowns greater than 5% since 1965. Global Equities as represented by the MSCI World Index (USD). Source: Bloomberg and AB
Macro and Markets
|
2
The Rally
2Q 2020 Returns Recap: S&P Posts Biggest Quarterly Gain Since 1998 Returns in US Dollars 2Q:2020 Returns (Percent) Equities
Credit
Government Bonds
Alternatives†
US Large-Cap US Small-Cap
20.5 25.4 14.9 18.1
EAFE* Emerging Markets US High Yield Emerging-Market Debt Global Corporate Municipals US Japan Euro Area
Long/Short Equity Nontraditional Bond Multialternative
10.1 12.3 7.9
Jan–Jun 2020 Returns (Percent) –3.1
–13.0 –11.3 –9.8 –3.8 –2.8 3.5 2.1
2.7 0.5
8.7 –0.2
–0.3
2.8
2.0 7.9 5.5 4.8
–5.8 –2.6 –5.4
Past performance does not guarantee future results. Global corporates and Japan and euro-area government bonds in hedged USD terms. All other non-US returns in unhedged USD terms. An investor cannot invest directly in an index, and its performance does not reflect the performance of any AB portfolio. The unmanaged index does not reflect the fees and expenses associated with the active management of a portfolio. *Europe, Australasia and the Far East †Returns reflect Morningstar US open-end fund category averages. As of June 30, 2020 Source: Bloomberg Barclays, Morningstar Direct, S&P and AB
Macro and Markets
|
3
Sentiment Measures Underscore Anxiety, but also, May Reverse Global Cumulative Weekly Fund Flows**
Bullish Versus Bearish Sentiment* 80
40 20 0 -20 Jun. ‘20 -40
Cumulative Flows Indexed to 100
Bullish Minus Bearish Investors (Percent)
280
Bullish Sentiment
60
Bonds Stocks
230
Money Markets
180
130
Bearish Sentiment 7/29/20
7/15/20
7/1/20
6/17/20
6/3/20
5/20/20
5/6/20
4/22/20
4/8/20
3/25/20
3/11/20
2/26/20
12/31/19
2/12/20
12/31/14
1/29/20
12/31/09
1/1/20
80 12/31/04
1/15/20
-60 12/31/99
Left Chart as of June 25, 2020. Right chart as of August 5, 2020. Past performance does not guarantee future results. There is no guarantee that any estimates or forecasts will be realized. *Bullish versus bearish sentiment defined as the difference between percent bullish investors and percent bearish investors, as derived from the American Association of Individual Investors Sentiment Survey. **Cumulative weekly flows into all equity mutual funds and ETFs, all bond funds and ETFs, and all money-market funds, globally, tracked by Emerging Portfolio Fund Research. Source: AAII, EPFR, Bloomberg, and AB
10
Sticking to One’s Long-Term Allocation Proved Beneficial
The Rally
COVID-19 Event Timeline (YTD 2020) Moderate Allocation Growth of $1* $1.05
Value of $1 Invested December 31, 2019
Hubei locks down
Oxford scientists announce first proven treatment (Dexamethasone)
Italian cases surge
$1.00
$0.98 SXSW cancelled
60/40
$0.95 US stimulus bill signed POTUS Oval Office address US blocks Europeanvisitors
$0.90
Vaccine trial planning announced US declares national emergency
$0.88
$0.85
60/40, then Cash
NY cases peak Federal Reserve cuts rates to zero NYC and California schools close
$0.80
$0.75 12/31/19
In the two weeks between the US declaring a national emergency and Congress signing the CARES Act, $330B moved into money markets. (Note: During the first two weeks of February, that figure was $13B.) 1/20/20
2/9/20
2/29/20
3/20/20
4/9/20
4/29/20
5/19/20
6/8/20
6/28/20
As of June 30, 2020. Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. *Moderate allocation is 60% global equities and 40% municipal bonds. Global equities represented by the MSCI ACWI and municipal bonds by the Bloomberg Barclays 1-10 Year Index. Allocation interrupted represents an allocation change to 100% cash, represented by ICE BofA 3-Month Treasury Bill Index, on the date that the US declared a national emergency—March 13, 2020. Source: Bloomberg-Barclays, EPFR, Bloomberg, MSCI, and AB Macro and Markets
|
4
Four Key Catalysts Sparked the Market Rally Fiscal Stimulus Amount (USD Billions)
The Reasons
Fed Funds Target Rate (Percent) 6
3,000
Coronavirus
5
Global Financial Crisis
2,000
4 3
Global Financial Crisis 2
1,000
Coronavirus 1 0
0 0
50 100 150 200 250 300 350 400 450 500 550 600
0
50
100 150 200 250 300 350 400 450 500 550 600 Days Since Start of Crisis
Days Since Start of Crisis
COVID-19 Cases >100 (All US States)
Vaccine Timel ine
1000000
Number of Confirmed Cases
Company AZN / Vaccitech / Oxford
100000
CanSino JNJ / Emergent
10000
Moderna Pfizer / BioNTech
1000
Sanofi / Translate Bio CureVac
100 1
11
21
31 41 51 61 71 81 91 101 111 Days Since Cases Exceeded 100
Phase 1
Interm Data
Phase 2/3
Approval
April
June
Late Summer
TBA
March
May 22
TBA
TBA
September
2H20
N/A
Early 2021
March
May 18
July
4Q20
May
June/July
TBA
TBA
4Q20
Early 2021
TBA
TBA
3Q20
TBA
TBA
Early Summe r
Inovio
April
Late June
July/August
YE2020
Sanofi / GSK
2H20
Early 2021
TBA
TBA
Top left and top right charts as of April 30, 2020. Bottom left chart as of June 30, 2020. Bottom right chart as of June 25, 2020. Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. Source: Bloomberg, Congressional Budget Office, Peter G. Peterson Foundation, Wall Street Journal, JHU, company disclosures, and Bernstein Analysis
Macro and Markets
|
8
The Reasons
EPS Estimates Have Declined, but 2021 Figures are Off Worst Levels‌ S&P 500 Earnings Per Share
Est. on 12/31
~$195 Est. on 12/31 $159
$162
$131
2017
~$177
$162
Bearish estimates in March (~$140)
$125
2018
2019
2020*
2021*
As of June 30, 2020. Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. *Consensus estimates Source: FactSet
13
The Reasons
…Which Supported the Case for the Rally 2021 S&P EPS and Growth (vs. 2019’s $162) $130
$136
$143
$149
$156
$162
$169
$175
$182
(20)%
(16)%
(12)%
(8)%
(4)%
0%
4%
8%
12%
21.0x
(16)%
(11)%
(7)%
(3)%
1%
5%
10%
14%
18%
20.0x
(20)%
(16)%
(12)%
(8)%
(4)%
0%
4%
8%
12%
19.0x
(24)%
(20)%
(16)%
(12)%
(8)%
(5)%
(1)%
3%
7%
18.0x
(28)%
(24)%
(20)%
(17)%
(13)%
(10)%
(6)%
(2)%
1%
(32)%
(28)%
(25)%
(21)%
(18)%
(15)%
(11)%
(8)%
(4)%
(36)%
(33)%
(29)%
(26)%
(23)%
(20)%
(16)%
(13)%
(10)%
(40)%
(37)%
(34)%
(31)%
(28)%
(25)%
(22)%
(19)%
(16)%
(44)%
(41)%
(38)%
(35)%
(33)%
(30)%
(27)%
(24)%
(21)%
(48)%
(45)%
(43)%
(40)%
(37)%
(35)%
(32)%
(30)%
(27)%
17.0x 16.0x
15.0x 14.0x 13.0x
At the trough, the S&P was down ~30% YTD and investors were baking in a worst-case scenario for 2021 EPS, i.e., declines of ~10%–20% (vs. 2019) As of June 30, 2020.
Yet, investors now assume earnings won’t be down as much as feared (current assumptions bake in flat EPS vs. 2019) The market has rallied to reflect these better expectations, taking the S&P to only down 0%–5% YTD.
Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. Source: Bloomberg, and AB
14
The Risks
And Yet, Period Ahead is Not Without Risk 2020 Election
Fed Behind The Curve?
New COVID Case Spikes
The economic recovery is likely to be more bumpy than normal given these risks. We expect bouts of economic optimism followed by periods of pessimism.
US/China Relations
For that reason, the equity recovery, too, is likely to be volatile. A diversified portfolio approach is the most prudent to manage through these uncertain times.
Future Fiscal Support?
Pace of Rehiring
As of June 30, 2020. Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. Source: AB
Macro and Markets
| 12
The Risks
Economy Opening Up, but Progress Will Be Bumpy and Uneven Credit Card Spending YoY Change (Weekly Average) Grocers
Total TSA Travel Numbers
Restaurants 2,500,000
90 %
Total Traveler Throughput
2,000,000 60 % 1,500,000 30 %
1,000,000
0%
500,000
0 3/20
(30) % 6/19
11/19
4/20
5/20
6/20
Las Vegas Casino Traffic
50
6000
40
5000
Number of Players
Weekly Entries (Millions)
NYC Subway Use
4/20
30 20 10 0 6/19 7/19 8/19 9/19 10/1911/19 12/19 1/20 2/20 3/20 4/20 5/20
MTA Turnstile Entries Total
4000 3000 2000 1000 0 6/19 7/19 8/19 9/19 10/19 11/19 12/19 1/20 2/20 3/20 4/20 5/20 CZR
GDEN
LVS
MGM
PENN
Private
WYNN
Top left chart as of June 27, 2020. Top right chart as of June 30, 2020. Bottom left chart as of June 26, 2020. Bottom right chart as of June 28, 2020. Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. Casino traffic represents casino players, which is distinct from foot traffic and includes table and slots machine users. Source: MScience, US Transportation Security Administration, Metropolitan Transportation Authority, Bloomberg, and AB
16
The Risks
Continued Policymaker Stimulus Will Be Needed to Buttress Economy Monetary Policy: Central Bank Action
Fiscal Policy: Government Action
Policy Rates
Change in Primary Balance*: US, Eurozone, UK, Japan, China Real Global Policy Rate (Left)
3.0%
-100%
Central Banks Hiking (Right)
Policy Rate
1.5%
-50%
0.0%
0%
-1.5%
50% Central Banks Cutting (Right)
-3.0%
4.5
100%
91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 Year
1.4
1.7
Purchases (12m Rolling, $bn)
Security Purchases 6,000
SNB BOE Fed All
5,000 4,000
ECB BOJ EM
0.1 -0.1
3,000
-0.6
2,000 1,000
0.5
0.2
0.2
15
16
0.1 0.1
-0.3
-1.2 -1.3
0 -1,000 09
10
11
12
13
14
15 Year
16
17
18
19
20
21
07
08
09
10
11
12
13
14 Year
17
18
19
20
Top left chart as of April 1, 2020. Bottom left chart is as of April 30, 2020 and forecast is through July 2021. Right chart as of December 31, 2019 and forecast is through December 2020. Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. *Simple average of respective governments’ net borrowing/lending as a percentage of potential GDP. As of June 11, 2020. Source: Haver Analytics, and AB
17
The Risks
Not Quite a V-Shaped Recovery AB Forecast for US GDP ($ Bil.) 20,000
19,500
19,000
New Forecast
18,500
Old Forecast
18,000
17,500
17,000 1q17 2q17 3q17 4q17 1q18 2q18 3q18 4q18 1q19 2q19 3q19 4q19 1q20 2q20 3q20 4q20 1q21 2q21 3q21 4q21 1q22 2q22 3q22 4q22
As of June, 2020. Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. Source: AB
18
FAANG Stocks Outperformed the Broader US Market by a Wide Margin Total Return YTD S&P 500, FAANG Stocks, and S&P 500 Ex-FAANG Stocks 160
Total Return Indexed to January 1, 2020
150
45%
140 FAANG Stocks
130 120 110 S&P 500
1%
100
(5)% 90
80
S&P 500 without FAANG Stocks
70 60 12/31
1/31
2/29
3/31
4/30
5/31
6/30
7/31
As of July 31, 2020. Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. FAANG stocks include Facebook, Amazon, Apple, Microsoft and Google. All three representative indices are market cap weighted using Factset’s weighting methodology. The S&P 500 index constituent list used is static and as of August 25, 2020. Total returns include returns from price change and dividends. Source: FactSet, Standard and Poor’s, and AB
Mock
| 25
Concentration Risks Rise as US Growth Giants Surge Russell 1000 Growth Index Weight of Index (Percent)
US Stocks Weight in MSCI World (Percent) Microsoft
10.4%
Apple
10.2%
Amazon
8.0%
Alphabet Inc.
4.5%
3.7%
70
60
50 Top Five 36.9 40 Rest of Index 63.1
30
20 Jan 75
Feb 84
Mar 93
Apr 02
May 11
Jun 20
Past performance and current analysis do not guarantee future results. As of June 30, 2020 Source: FactSet, MSCI, Russell Investments and AB
| 30
Narrow Markets Amplify the Risk of Imbalance S&P 500 Returns over the past 5 Years Have Been Driven Just by the Technology Sector 60
5-Year Cumulative Returns Relative to S&P500
5-YR Cumulative Returns
40 20 0 (20) (40)
(60) Technology
Utilities
Healthcare
Industrials
Financial
Energy
Market Concentration Is at Its Highest in Decades as Top 5 Stocks Comprise More than 20% of S&P500 Concentration of Highest Market Cap Weightings in S&P 500 (Percent) 25
Top 5
20 15 10 5 0
6/906/916/926/936/946/956/966/976/986/996/006/016/026/036/046/056/066/076/086/096/106/116/126/136/146/156/166/176/186/196/20 Past performance does not guarantee future results As of June 18, 2020. Source: BAML, FactSet and AB analysis
21
The Sector Dispersion in 2020 Has Continued to Be Extreme YTD 2020 S&P 500 Returns by GICS Sector (Total Returns)
50%
30% 15%
7%
10%
(0)%
(10)%
(1)%
(3)%
(6)%
(7)%
(9)%
Discretionary sector driven by Amazon
(30)%
(11)%
(15)% (24)%
(35)%
Energ y
Financials
Industrials
Utilitie s
REIT S
Material s
Staple s
US Market
Health Care
Comm Svcs
Discretionary
Technolog y
(50)%
Past performance does not guarantee future results. As of June 30, 2020 Source: S&P
22
Research & Advice
Market Rebound Proves, Once Again, The Benefit of Staying Invested Projected* and Actual Returns (Annualized) 10-Year Forecasted Returns (as of June 2015)
Great Markets 9.2% Actual Annualized Net-of-Fee Return**: 4.5% Typical Markets 5.2%
Hostile Markets 1.5%
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
As of June 30, 2020. Past performance does not guarantee future results. There is no guarantee that any estimates or forecasts will be realized. *Great markets represents 10th percentile, typical markets represents 50th percentile, and hostile markets represents 90th percentile. Based on Bernstein’s estimates of the range of returns for the applicable capital markets as of June 30, 2015, for a 60/40 stock/bond allocation. Stocks modeled as 21% US diversified, 21% US value, 21% US growth, 7% US Small/Mid-Cap, 22.5% developed international, and 7.5% emerging markets. Bonds modeled as intermediate-term diversified municipals. Data do not represent past performance and are not a promise of actual future results or a range of future results. See Assumptions and Notes on Bernstein Wealth Forecasting System in the Appendix for further details. **The hypothetical performance of the Moderate Portfolio Simulation (MPS) is a simulated portfolio intended to illustrate the investment experience of a Bernstein taxable client who was invested in a moderate growth allocation of Bernstein investment services. Represents monthly returns. Assumes no portfolio additions or withdrawals over the period. Results based on pretax returns and do not reflect the impact of taxes. It is presented for illustrative purposes only, and no representation is made that an investor will, or is likely to, achieve profits or experience losses similar to those shown. See Performance Disclosures at the end of this presentation for additional information regarding the simulation’s composition and calculation methodology. Source: AB
23
Navigating Through a Clouded Landscape Our Strategy to Navigate a Challenging Period
Research & Advice
ReturnSeeking
RiskMitigating
■ Quantifying Core and Surplus Capital What level of wealth do you need to maintain your lifestyle with a high degree of confidence? Diversifying
■ Investing Intentionally
What investment strategies should be considered for your core capital? How does your investment strategy change with your surplus capital?
■ Rationalize Cash Allocation For clients with cash to invest and a long time horizon, today may present an opportunity.
■ Cash Management: cash or money-market vehicles for near-term spending ■ Risk-Mitigating: conservative, high-quality, diversified municipal or taxable bonds ■ Return-Seeking: invested across global equity markets, diversified by geography, style and market capitalization
■ Diversifying Assets: creates opportunities to take advantage of current market dislocations and provide growth
As of June 30, 2020. Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. Source: AB
24
Election Impact
I Know “It’s Different This Time,” but… …There’s Little Relationship Between Political Power and the Stock Market Democratic President
Republican President
9.2%
9.1%
Divided Government
Unified Government
10.0%
8.2%
Past performance does not guarantee future results. Returns reflect annualized returns for each Presidential Term dating back to 1937, based off the Dow Jones Industrial Average. As of December 31, 2019 Source: Bloomberg and AB
26
How Can We Think About the Potential Market Impact? What We Know
What We Don’t Know
o The balance of power in the White House, Senate, and House will affect the economy and markets
o How closely the election results will match the polls
o What current polls are saying o We shouldn’t let personal political views cloud our investment judgment
o How actual policy proposals will compare to campaign platforms and how much they’ll change as they’re debated and voted on o How much different election results or policies are already being factored in by the market or when they will be
On balance, we do not recommend tactical asset allocation shifts driven by election handicapping Our investment teams are working every day to make sure we’re taking advantage of market mispricings while minimizing the downside risk to the portfolio from any individual event
27
Markets Tend to Ignore Politics Until a Month Before the Election Correlation Between Polling Spread and Stock Price Changes
In recent elections, the correlation between stocks and poll results is minimal until October; then they become more closely linked. 2016
Average 1996–2016
2012
2008
2004
2000
Really about Global Financial Crisis
1996
Really about end of dot-com bubble
61 52
31
8
Jan–Sep Oct. to Election
25 7
Jan–Sep Oct. to Election
24
24
4
3 Jan–Sep Oct. to Election
19
Jan–Sep Oct. to Election
Jan–Sep Oct. to Election
8 2 Jan–Sep Oct. to Election
1 Jan–Sep Oct. to Election
Historical analysis does not guarantee future results. Polling spread is the absolute difference in polling percentage between the two major presidential candidates. Source: Bernstein US Economics Research
28
The Market Currently Expects Unusually High Volatility in November… …which may be a function of anticipated uncertainty around when the election result will be known
– Counting and validating votes may take longer – Primary election results have been delayed by weeks in SOME races
o Political polarization may amplify the uncertainty
5 Implied Daily Price Changes
o A large portion of votes are likely to be submitted by mail
6
4
3
2
1
0 Implied November November 2012 & 2016 Average 2020 Move Move
Past 30 Day Realized
Historical analysis does not guarantee future results. Price moves based on implied and realized volatilities of the S&P 500. Source: Bernstein US Options Trading Desk
29
How Might the Election Affect Fiscal and Monetary Policy? Investors are currently expecting: o Multi-year fiscal stimulus oEasy monetary policy
Trump Reelection Probability: 37%
Biden Election Probability: 61%
Republican White House Republican Senate
Democratic White House Republican Senate
Fiscal: Expansionary
Fiscal: Rediscovered austerity Fed: Easy policy
Fed: Potential shift in Chair
These four election scenarios will have varying implications for investors’ confidence in this continued policy support
Republican White House Democratic Senate
Democratic White House Democratic Senate
Fiscal: Stagnation
Fiscal: Expansionary, but with corporate tax hikes
Fed: Easy policy
Fed: Easy policy
As of August 4, 2020 Past performance is not necessarily indicative of future results. There is no guarantee that any estimates or forecasts will be realized. Assumes Democrats retain control of the House of Representatives. Figures may not tally to 100% due to rounding and transaction costs. Source: Election probabilities are RealClearPolitics’ average of the odds of 7 betting markets, AB
30
Competing Visions for the Future Campaign platforms are informative, but actual policies are what matter.
Taxes
Biden Platform
Trump Platform
o Partial reversal of corporate tax cuts, raising rates from 21% to 28%, and implementing minimum federaltax
o Pre-COVID proposal to extend individual tax cuts beyond 2025
o Increase marginal tax rate on highest earners from 37% to 39.6%
o COVID stimulus proposal to cut payroll tax that funds Social Security and Medicare from 15.3% to zero
o Tax capital gains as ordinary income for $1M+ earners
Trade
Healthcare
o Reduction in tariffs
o Use tariffs aggressively
o Multilateral trade agreements
o Bilateral trade agreements
o Push China on IP infringement and steel dumping
o Potential unspecified Phase Two agreement with China
o Onshore more pharma and electric vehicle manufacturing
o Onshore supply chains
o Expand the ACA for low-income population
o Repeal ACA in full or in pieces
o Create a public option
o Work requirements and caps or block grants on Medicaid
o Lower Medicare age to 60 from 65
o Drug pricing inside Medicare to be based on global prices
o Allow Medicare to negotiate lower prices and use caps, indexing, and legalization of foreign purchasing to limit prices
Infrastructure
o $2 trillion infrastructure plan with emphasis on public transportation, electric vehicles, and clean energy technologies
o Loosely specified plans with emphasis on rural areas
Source: Campaign websites, press reports, and AB
31
What Might the Election Mean for Asset Class Fundamentals? Stock and bond returns depend not only on fundamentals but also current expectations
US Stocks
US Bonds
Blue Wave
Biden + GOP Senate
Trump + Dem Senate
Red Wave
Neutral
Negative
Neutral
Positive
Higher corporate taxes potentially offset by reduced trade tensions and stimulus spending, including infrastructure plan
Gridlock could make stimulus spending and infrastructure plan difficult, also harder to pass tax hikes
Likely to find some agreement on stimulus, other policies may face gridlock, would expect trade tensions to remain elevated
Potentially higher volatility from trade tensions. Corporate tax hikes off the table, stimulus likely and eventual infrastructure plan possible
Rates: Neutral Inflation: Slightly higher Credit: Headwind Munis: Tailwind
Rates: Lower Inflation: Lower Credit: Headwind Munis: Headwind
Rates: Neutral Inflation: Slightly higher Credit: Neutral Munis: Neutral
Rates: Slightly lower Inflation: Higher Credit: Tailwind Munis: Headwind
Analysis provided for illustrative purposes only and is subject to revision. Source: AB analysis
32
Asset Allocation Based on a Plan, Beats Asset Allocation Based on Polls Market Timing Based on Politics Hurts Returns Growth of US$10,000: Dow Jones Industrial Average 1,600,000
Fully Invested at All Times
1,400,000
US Dollar
1,200,000
Invested Only During a Democratic Presidency
1,000,000 800,000 Invested Only During a RepublicanPresidency
600,000 400,000 200,000 0 37
46
55
64
73
82
91
00
09
18
Past performance does not guarantee future results. Through September 30, 2019 Monthly performance of Dow Jones Industrial Average, dating back to 1937 Source: Bloomberg and AB
33
The Election May Drive Future Sector Fundamentals Whose Profits May Rise or Fall? Blue Wave
Biden + GOP Senate
Trump + Dem Senate
Red Wave
Construction and Engineering Transportation
Renewables
US Oil & Gas
Health Insurers
Pharma
Big Tech
Historical analysis does not guarantee future results. Source: AB analysis
34
The Election May Have Meaningful Implications for Wealth Planning Planning for Potentially Higher Tax Rates Is More Likely to Add Value than Tactical Trading o Tax Management
– Loss harvesting could defer taxes into a higher rate environment – Gain harvesting could reduce future taxes, but only helps if ratesincrease
o Asset Allocation – Tax-efficient assets and strategies benefit Retirement accounts and cash balance plans Municipal bonds Insurance and annuities (including Private Placement Life Insurance and Private Placement Variable Annuities)
Private equity and alternative strategies with long holding periods Passive management
o Charitable Giving – Use appreciated positions
o Estate Taxes – Another area of potential policy changes, but specifics unknown Bernstein does not provide tax, legal, or accounting advice. Source: AB analysis
35
Investment Outlook
Projected Returns and Volatility— Over 10 Years (Taxable) Range of Returns
Range of Annual Pretax Returns* (%)
32.2 26.0
19.9 14.0
9.1 2.1 (4.2)
6.6 0.8 (4.5)
0/100
20/80
3.0
3.9
(6.1)
(8.9)
40/60
5.8
4.8 (12.0)
60/40
80/20
(15.2)
10% (Superior Markets) 50% (Median Markets) 90% (Poor Markets)
100/0
Probability of Peak-to-Trough Losses** (%) 10% Loss
20% Loss
30% Loss
93
88 77
74 57
54
47 34
29
27
24 <2
0/100
<2
<2
20/80
<2
10
40/60
9
<2
60/40
80/20
100/0
Allocation (Stocks/Bonds) Data do not represent past performance and are not a promise of actual or range of future results. See Assumptions and Notes on Bernstein Wealth Forecasting System in Appendix for further details. Globally diversified stocks are represented by the following allocation for a 100% return-seeking allocation: 16.2% US value, 16.2% US growth, 12.0% US diversified, 6.0% US small-/mid-cap, 21.2% developed foreign markets, 8.1% emerging markets, 9.6% US Low Vol Equity, 10.7% high-risk international. Equity geography weights may shift in proportion to total return-seeking allocation. Bonds are represented by diversified intermediateterm municipal bonds in the proportions noted. Additional details regardingallocation available upon request. *Based on Bernstein's estimates of the range of returns for the applicable capital markets over the next 10 years as of June 30, 2020. First-year volatility of the portfolios: 0/100 = 3.8%, 20/80 = 6.0%, 40/60 = 10.2%, 60/40 = 14.5%, 80/20 = 18.9%, 100/0 = 23.3%. The annual equivalent volatility of the portfolios over the entire 10-year analysis: 0/100 = 2.8%, 20/80 = 4.0%, 40/60 = 6.8%, 60/40 = 9.8%, 80/20 = 12.8%, 100/0 = 15.9%.Annual equivalent volatilitydiffers from the first-year volatilitybecause the expectation and distribution of asset-classreturns change over time. **Data indicate the probability of a peak-to-trough decline in pretax, pre-cash-flow cumulative returns of 10%, 20%, or 30% over the next 10 years. Because the Wealth Forecasting System uses annual capitalmarket returns, the probability of peak-to-trough losses measured on a more frequent basis (such as daily or monthly) may be understated. The probabilities depicted above include an upward adjustment intended to account for the incidence of peak-to-trough losses that do not last an exact number of years.
Legislative Impact on Planning
Three Years, Three New Pieces of Legislation ■ 2018 (effective): TCJA
■ 2019: SECURE Act ■ 2020: CARES Act
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Charitable Organizations Worried TCJA Would Slow Giving* Pre-TCJA Law
Current Law
37.06 million
15.99 million
*Source: Tax Policy Center http://www.taxpolicycenter.org/model-estimates/impact-itemized-deductions-tax-cuts-and-jobs-act-jan-2018/t18-0009-impact-tax
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40
Actually, Giving Increased Post-TCJA â&#x2013; Total gifts increased by 0.7% in 2018 to $427.7 billion 2018 Charitable Gifts by Cohort (in Billions) $20.1 $39.7 $75.9
$292.1
Total Gifts Individuals
Foundations
Bequests
Corporations
*Source: Giving USA 2019
|
41
Who is Giving? Who are They Giving To? 2018 Contributions: $428 Billion (0.7% increase from 2017, $ billions)
Bequests $39.71
Education $58.72
Corporations $20.05
Human Services $51.54
5%
14% 12%
9%
Foundations $75.86
Religion $124.52 Grantmaking Foundations $50.29
18%
68%
Health $40.78
29%
12%
10% 7%
Individuals $292.09
Public-Society Benefit $31.21
5%
5%
2% Unallocated $6.53 2% Individuals 3% $9.06
International Arts, Environment/ Affairs Culture, Animals and Humanities $22.88 $12.70 $19.49
Source: Giving USA 2019 Annual Report on Philanthropy for the Year 2018
42
Charitable Giving under TCJA Strategies to Consider: â&#x20AC;&#x153;Bunchingâ&#x20AC;?Annual Gifts with a Donor-Advised Fund
Giving Appreciated Stock
Charitable IRA Rollovers
Source: AB
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43
“Bunching” Annual Gifts Continue with $10,000 Annual Giving 2018 Mortgage Interest
2019
2020
Bunch Giving in Alternate Years
2021
$6k
$6k
$6k
$6k
State & Local Taxes
$10k
$10k
$10k
$10k
Charitable Gifts
$10k
$10k
$10k
Total Deductions
$26k
$26k
$2k
$2k
Amount above Standard Deduction
For $10,000 Donation: • Annual tax savings: $740 • $2,960 over 4 years
2018 Mortgage Interest
2019
2020
2021
$6k
$6k
$6k
$6k
State & Local Taxes
$10k
$10k
$10k
$10k
$10k
Charitable Gifts
$20k
-
$20k
-
$26k
$26k
Total Deductions
$36k
$16k
$36k
$16k
$2k
$2k
Amount above Standard Deduction
$12k
$0
$12k
$0
For “Bunched” $20,000 Donation: • Tax Savings of $4,440 in years 1 and 3* • $8,880 savings over 4 years
Source: AB *Under the Tax Cuts and Jobs Act, the standard deduction was increased to $24,000 for taxpayers married filing jointly (from $12,700 in 2017). This is set to expire after December 31, 2025. Assumes donor contributes a cash gift and is subject to the 37% federal tax bracket. Bernstein is not a legal, tax or estate advisor. Investors should consult these professionals as appropriate before making any decisions.
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44
Find the Most Efficient Way to Make Gift $20,000 Gift Donor in Top Income-Tax Bracket, Assumes Fully Deductible
$3,570 $7,400
$7,400 $7,400
$12,600
$12,600
$9,030
Charitable IRA Rollover
Cash
25% Basis Stock
Applicable rate for IRA distribution is assumed to be 37% (no after-tax IRA contributions, and Medicare surtax does not apply). Applicable rate for stock gain is assumed to be 23.8%. Deduction limited to 60% of AGI in year of gift for cash or 30% of AGI in year of gift of appreciated publicly traded stock. Benefit of deduction assumes full use of deduction against income otherwise taxed at 37% tax rate. Gift is to a public charity. Source: AB
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Where to from Here â&#x20AC;&#x201C; Q1 2020
45
SECURE Act: Modifications to PostDeath RMD Rules ■ All DC retirement plans, traditional and Roth, must be distributed entirely within 10 years of participant’s death unless an exception applies ■ Three categories of beneficiaries under the SECURE Act:
—Non-designated beneficiary (old 5-year rule applies) —Designated beneficiary (new 10-year rule applies)
—Eligible designated beneficiary (lifetime stretch still applies) Surviving spouse Minor child of the participant (10-year rule begins at the age of majority) Disabled beneficiary
Chronically ill individual Less than 10 years younger beneficiary |
46
RMDs During Life Reduce Growth of Qualified Retirement Plans $1 Million IRA, 70-Year-Old Participant Median IRA Accumulation Value (Pre-Tax) 60% Stocks, 40% Bonds Nominal ($ Millions)
$1.5 $1.3
$1.0 $0.8
$0.5 $0.3
$0.0 70
74
78
82
86
90
94
98
102
106
110
Age Required minimum distributions begin at age 72. Projections based on ABâ&#x20AC;&#x2122;s estimates of the range of returns for the applicable capital markets over the periods analyzed. Data do not represent past performance and are not a promise of actual future results or a range of future results. See Notes on Wealth Forecasting System in Appendix for further details.
|
47
The New 10-Year Rule Appears Very Costly for Beneficiaries… $1 Million Beneficiary IRA Median Pretax Accumulation, 25-Year-Old Beneficiary 60% Stocks, 40% Bonds Nominal (USD Millions) 5.0
4.0 3.0
Stretch IRA 2.0
10-Year Rule 1.0 0.0
0
2
4
6
8
10
12
14
16 Year
18
20
22
24
26
28
30
Beneficiary IRA values are displayed pretax. All distributions from beneficiary IRA are taxed at top marginal federal tax rates with after-tax proceeds reinvested 60% stocks and 40% bonds. “Stretch IRA” illustrates pretax beneficiary wealth assuming a lifetime stretch under pre-SECURE Act rules (e.g., designated beneficiary is age 25, divisor is 58.2 and reduced by one each subsequent year). “10-Year Rule” illustrates pretax beneficiary wealth assuming a lump sum distribution from the beneficiary IRA at the end of the 10th year. Projections based on AB’s estimates of the range of returns for the applicable capital markets over the periods analyzed. Data do not represent past performance and are not a promise of actual future results or a range of future results. See Notes on Wealth Forecasting System in Appendix for further details.
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48
…Costs Moderate Considerably after Adjusting for Deferred Tax Liability Spendable Dollars from $1 Million Beneficiary IRA Median After-Tax Accumulation, 25-Year-Old Beneficiary 60% Stocks, 40% Bonds Nominal (USD Millions) 4.0
3.0
Stretch IRA 2.0
10-Year Rule 1.0
0.0 0
2
4
6
8
10
12
14
16 Year
18
20
22
24
26
28
30
Beneficiary IRA values are displayed after-tax. All distributions from beneficiary IRA are taxed at top marginal federal tax rates with after-tax proceeds reinvested 60% stocks and 40% bonds. “Stretch IRA” illustrates after-tax beneficiary wealth assuming a lifetime stretch under pre-SECURE Act rules (e.g., designated beneficiary is age 25, divisor is 58.2 and reduced by one each subsequent year). “10-Year Rule” illustrates after-tax beneficiary wealth assuming a lump sum distribution from the beneficiary IRA at the end of the 10th year. Projections based on AB’s estimates of the range of returns for the applicable capital markets over the periods analyzed. Data do not represent past performance and are not a promise of actual future results or a range of future results. See Notes on Wealth Forecasting System in Appendix for further details.
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Distribute Inherited IRA as Lump Sum in Year 10 or Distribute over Time? Initial Inherited IRA$1.31 Value of $1.0 Million (USD Millions, Nominal)â&#x20AC;&#x201D;60/40* $1.23 $1.17
$1.03
Increase %**
$1.02
$1.00
$0.99
$0 Income
$100k Income
$250k Income
$600k Income
26.6%
20.9%
Lump Sum Year 10
16.5%
$0.99
0.0%
Over 10 Years
*Values assumed the beneficiary of the inherited IRA receives earned income, separate from any portfolio-related income, of $0, $100,000, $250,000, or $600,000. We assumed the beneficiary inherits a $1.0 million IRA and either satisfies the required distribution as a full lump sum in year 10 or takes even distributions over a 10-year period. All values illustrated above are net of federal income taxes, do not account for any state income taxes, and assume the IRA is invested with an asset allocation of 60% global stocks and 40% bonds. **Increase % calculates the increase in total wealth from taking distributions over 10 years has compared to as a lump sum in year 10. Values may not add due to rounding. Projections based on ABâ&#x20AC;&#x2122;s estimates of the range of returns for the applicable capital markets over the periods analyzed. Data do not represent past performance and are not a promise of actual future results or a range of future results. See Notes on Wealth Forecasting System in Appendix for further details.
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Could a Testamentary Charitable Remainder Trust (CRT) Be a Solution? CRT designated beneficiary of IRA
IRA Participantâ&#x20AC;&#x2122;s Death
Remainder when trust expires
Charitable Remainder Trust
Charity
Estate tax deduction at participantâ&#x20AC;&#x2122;s death* IRA liquidated and reinvest tax deferred
Annual cash payouts: Percentage of trust value (CRUT) or fixed-dollar amount (CRAT)
Non-Charitable Beneficiary
*The estate tax charitable deduction is not the total amount contributed, but rather the present value of what is expected to pass to charity. The calculation of the present value takes into account the value of the contributed assets, the discount rate (based on the Section 7520 rate) and the term of the trust (for lifetime trusts, a life expectancy table is used). See Sections 7520 and 664 of the Internal Revenue Code of 1986, as amended, and the Treasury regulations thereunder. Source: AB | 12
Total Wealth Beneficiary IRA vs. CRUT $5 Million Inherited IRA vs. 20-Year Term CRUT Personal Wealth Over Time—Median Case* 60% Stocks, 40% Bonds (Nominal, USD Millions) Total Wealth Charity’s Interest
$9.6
$1.6 ($0.8)
Personal Wealth
CRT Benefit CRT Cost
$8.8
No CRUT
11.114%
CRUT Payout Percentage
*Values displayed are based on the median outcome. Based on Bernstein’s estimates of the range of long-term returns for the applicable capital markets. Data do not represent past performance and are not a promise of actual future results or a range of future results. See Notes on Wealth Forecasting System in Appendix for further details. Source: AB
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Roth Conversions Post SECURE Act Can Create a Benefit Assuming the Tax Rates Don’t Change… Subject to Top Marginal Tax Brackets* After-Tax Range of Assets—Year 10* Nominal (USD Millions)
Probability 5% 10% 50%
4.0
90% 95%
3.5
3.0
2.90
2.69
2.5 2.0
1.5
1.69
1.0
1.06
1.79 1.12
0.5
0.0 No Conversion
100% Conversion
For illustrative purposes only. Data do not represent past performance. Actual returns may be higher or lower than projected. *Values assume non-eligible beneficiary inherits the Traditional IRA and Roth IRA assets and satisfies the required distribution as a lump sum in year 10. The beneficiary is assumed to be subject to top marginal tax rates and the portfolio is assumed to be allocated as 80% global stocks and 20% bonds. Based on Bernstein's estimates of median returns for applicable capital markets over next 10 years. AB is not a legal, tax, estate, or insurance advisor. Investors should consult these professionals as appropriate before making any decisions. Source: AB | 14
…but, if Beneficiary’s Tax Rate is Lower, then Conversion Becomes Costly Beneficiary with No Other Income Annual Distributions of Inherited Traditional IRA (10 Bracket Runs) After-Tax Range of Assets—Year 10* Nominal (USD Millions)
Probability 5% 10% 50%
4.0
90% 95%
3.5 3.19
3.0
2.90
2.5 2.03
2.0
1.79
1.5 1.29
1.0
1.12
0.5 0.0 No Conversion
100% Conversion
For illustrative purposes only. Data do not represent past performance. Actual returns may be higher or lower than projected. *Values assume non-eligible beneficiary inherits the Traditional IRA and Roth IRA assets and satisfies the Roth IRA required distribution as a lump sum in year 10 and the required distribution for the Traditional IRA as an even distribution over 10 years. The beneficiary is assumed to be single and have no other income other than the income that is generated by the portfolio and required distributions. The portfolio is assumed to be allocated as 80% global stocks and 20% bonds. Based on Bernstein's estimates of median returns for applicable capital markets over next 10 years. AB is not a legal, tax, estate, or insurance advisor. Investors should consult these professionals as appropriate before making any decisions. Source: AB
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SECURE Act Key Messages ■ Losing the stretch IRA and Roth IRA has a cost, but it’s much less than initially feared ■ The optimal distribution strategy for inherited IRAs and Roth IRAs depends on beneficiaries tax rates
■ In most situations, CRTs will be unattractive, unless charitable objectives or other non-tax objective are prevalent ■ Roth conversions may be more attractive as a result of the SECURE Act; however, caution should be exercised since tax rules can change
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CARES Act: Considerations for Retirement Accounts RMDs Waived for 2020
Coronavirus-related Withdrawals
Roth?
• Any RMDs due in 2020 may be recontributed — includes beneficiary and traditional • Withheld taxes must be contributed to avoid recognizing income • • • •
Up to $100,000 without penalty No mandatory withholding Repayable over 3 years Can spread income over 3 years (2020, 2021, 2022)
• Low valuations • Low taxes?
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CARES Act: Charitable Giving Three Ways to Give in 2020 Cash 100% Deductible Appreciated Stock QCD from IRA Our Advice?
| 18
Personal Philanthropy
There Are Many Reasons People Give In deciding what and how much to give, it is useful to plot the elements of your philanthropic vision along various dimensions.
Passions
Catalysts
Target Communities
Source: Bernstein
59
Plotting Your Philanthropic Mission
What do you want your philanthropic legacy to be?
What causes are important to you?
How do you think about your philanthropic investments? Is it different than how you think about your personal investments?
What organizations are you active in, and serve with your time?
Do you proactively donate to philanthropic organizations?
Have you ever made a gift to charity other than cash?
60
Additional Considerations: Timing and Family Timing: ➢ Do you want to see the benefits of your charitable giving while you’re alive?
➢ Do you give to charities each year, or do you give large gifts spaced over time? ➢ How much time do you want to commit?
Family: ➢ How and when do we want to involve our heirs?
➢ Do our children share our philanthropic passions? ➢ Do we want our family to continue to manage the Private Foundation or advise regarding distributions from the Donor Advised Fund once we’re gone?
61
Components of a Philanthropic Plan: Determine Your Capacity to Give Hierarchy of Goals
➢ It is important to analyze the impact on your financial plan and the associated trade-offs . ❖
What is the best timing for making an irrevocable gift?
❖
Should we make a large onetime gift or small gifts over time?
❖
Which causes shouldwe support?
➢ Before you make a gift, you should feel confident in your ability and capacity to give.
Gift to Alma Mater
Liquid Assets
Surplus Capital
Children and Grandchildren
Charity
Core Capital* Lifestyle Spending
*Core capital is defined as the amount needed today to support annual spending needs for life after taxes and inflation with a 90% level of confidence. Source: Bernstein
62
Components of a Philanthropic Plan: Which Assets Help Optimize My Giving? Some Assets Are More Difficult to Give and Harder for Charities to Receive
Cash
Appreciated Publicly Traded Securities
Private Securities
Real Estate
Art and Tangible Property
Simplest
Simplest for donor to give and for nonprofits to receive
Qualified Retirement Plans Most Complex
Simple; can avoid embedded capital gain by giving to nonprofits
A littlemore complex; require qualified appraisals; may not be suitable for some strategies*
Can be very complex; requires qualified appraisals; may not be suitable for some strategies; debt can be problematic
Complex; subject to a higher top marginal capitalgains rate (28%); typically limited to cost basis for income tax deduction unless related use†
Complex; typically a bequest, as giving options are limited while IRA owner is alive
*Contributing S corporation stock to a charitable remainder trust (CRT) will cause a corporation to lose its S corporation tax status. †Considered related use if an organization will use the property in a manner that is related to the philanthropic mission of the organization—for instance, contemporary art donated to a contemporary art museum for public viewing. Source: AB 63
Components of a Philanthropic Plan: What Philanthropic Strategy Should You Use? Both purely and partly philanthropic strategies give you the flexibility to make immediate, staged, or deferred gifts. Purely Philanthropic Strategies
Charitable IRA Rollover
Partly Philanthropic Strategies Charitable Gift Annuities
Charitable Remainder Trusts
Immediate Gifts Deferred Gifts
Staged Gifts
Charitable Lead Annuity Trusts
Deferred Gifts Staged Gifts
Purely Philanthropic Strategies
Partly Philanthropic Strategies
Allow you to make a gift and the assets will solely benefit charity
Allow you to split a giftâ&#x20AC;&#x2122;s benefit between you or your loved ones, and charity
Investments
Your Capacity to Give Source: Bernstein 64
Components of a Philanthropic Plan: Measuring Your Impact Total Philanthropic Value (TPV) = Total Gifts + Remainder ➢ TPV assesses the projected financial impact of various giving strategies or spending policies. $22.6
$8.6 $14.2
Remaining Assets Total Philanthropic Value (TPV)
$9.4 $14.0 $10.0
Cumulative Distributions
$4.8 Beginning Assets
Assets: Year 10
Assets: Year 30
➢ TPV is the sum of distributions over time and any remaining assets that will support future giving, in current dollar terms. ➢ The following all play a role in determining TPV: ❖
Size of annual gifts
❖
Time horizon for making the gifts
❖
Asset allocation of the giving strategy
❖
Expected capital market returns
TPV is the sum of cumulative distributions and the portfolio remainder value after inflation. Allocation is 80% stocks and 20% bonds. Global stocks are modeled as 12% US diversified, 16.2% US value, 16.2% US growth, 6% US small- and mid-cap, 9.6% US low vol equity, 23.7% developed international, 9.0% high-risk international, and 7.3% emerging market. Bonds are modeled as 50% intermediate-term taxable bonds and 50% global intermediate-term taxable bonds, hedged. Based on Bernstein’s estimates of the range of returns for the applicable capital markets as of January 31, 2019. Data do not represent past performance and are not a promise of actual future results or a range of future results. See Notes on Wealth Forecasting System at the end of this presentation. Source: Bernstein 65
Charitable Income Tax Deduction A donor is entitled to a charitable income tax deduction for gifts to charity.* The value of the deduction and the income limitations for charitable gifts depends on the type of charitable entity to which a gift is made. Type of Charity Receiving Contribution
PUBLIC CHARITY Type of Property Contributed
PRIVATE FOUNDATION
Deductible Amount of Contribution
% of AGI Limit
Deductible Amount of Contribution
% of AGI Limit
Actual dollar amount
100%
Actual dollar amount
30%
Qualified
Fair market value
30%
Fair market value
20%
Unqualified
Fair market value
30%
Cost basis
20%
Real estate
Fair market value
30%
Cost basis
20%
Closely held business interests
Fair market value
30%
Cost basis
20%
Cash Publicly traded securities
*Charitable income tax deductions are available if you are able to and choose to itemize your deductions. 100% deduction limit on cash gifts to directly to charities in 2020, gifts to donor advised funds not included Personal Philanthropy
| 12
How Much Can I Deduct This Year? It Depends on What I Give and the Nature of the Recipient Charity…. Let’s assume I want to make a charitable gift of $400,000 this year and my AGI is $1,000,000. How much is deductible* this year? Year 1
Year 2
Cash Gift (to DAF)
$400,000
-
Cash Gift (to Private Foundation)
$300,000
$100,000
Stock Gift (to DAF)
$300,000
$100,000
Publicly Traded Stock Gift (to Private Foundation)
$200,000
$200,000
Closely Held Stock (to Private Foundation)
Limited to Cost Basis
REMINDER: Charitable tax deductions reduce taxes but do not eliminate them.
Tax Deduction: A reduction of the income that is eligible for taxation. vs. Tax Credit: A dollar-for-dollar reduction in taxes owed.
*Charitable income tax deductions are available if you are able to and choose to itemize your deductions. Figures above assume AGI of $1 million in year 1 and year 2. Personal Philanthropy
| 13
Best Practices for Asset Allocation
Evolving Landscape Necessitates a New Allocation Paradigm Next-Gen Model Multi-Dimensional
Conventional Model One Dimensional Stocks
Higher Risk Higher Return
Alternatives
Bonds
Lower Risk Lower Return
1st Dimension Asset Class
Traditional
2nd Dimension Liquidity and Purpose
Return Seeking
Alternatives
Growth
3rd Dimension Spending
As of December 31, 2019. Past performance is not indicative of future results. There is no guarantee that any estimates or forecasts will be realized. Risk as measured by standard deviation of returns and correlation Source: AB
Risk Mitigating
Diversifying
Liquidity Shortfall Risk
Income
Allocation Drift Risk Lower Risk Lower Return
Higher Risk Higher Return
Illiquidity, Cash Flow Investor Preferences ALTERNATIVES & FOCUSED EQUITIES
1 4
|
Addressing Today’s Challenges
LOWER EXPECTED RETURNS
LOW INTEREST RATES
RISING INTEREST RATES
As of June 30, 2019. For illustrative purposes only. Please see A Word About Risk: Alternative Investments in General and Important Information and Disclosures in the Appendix. Source: AB
HIGH MARKET LEVELS
VOLATILITY
|
Where to from Here – Q1 2020
70
Addressing Today’s Challenges
LOWER EXPECTED RETURNS
LOW INTEREST RATES
▪ Deep research-based investing ▪ Concentrated, execution-focused
Seeking Superior Income, Better Growth, and Portfolio Diversification ▪ Income Alternatives ▪ GrowthAlternatives
▪ Exploiting market dislocations and RISING INTEREST RATES
anomalies whether opportunistic or persistent
▪ Often illiquid, and/or leveraged
HIGH MARKET LEVELS
▪ Focused Equities
As of June 30, 2019. For illustrative purposes only. Please see A Word About Risk: Alternative Investments in General and Important Information and Disclosures in the Appendix. Source: AB
VOLATILITY
ALTERNATIVES & FOCUSED EQUITIES
1 9
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© 2020 CENTRAL NEW YORK COM MUNITY FOUNDATION
ESG Investing
Learning Objectives ➢ Define responsible investing and ESG factors ➢ Understand where demand for responsible investing is coming from ➢ Review the spectrum of ways to invest responsibly ➢ Outline various ESG incorporation strategies ➢ Discuss examples of how to practice responsible investing
➢ Review trade-offs of responsible investing
|
74
What is Responsible Investing? There is no single approach to Responsible Investing and no single word to define it
Active Ownership
Community Investing
Values-based Investing Mission-related Investments
Socially Responsible
Corporate Engagement
Standards-based
Best-in-class
Transparency
Activist
Green
Responsible Investing
ShareholderAdvocacy
Microfinance Investments
Investment Standards
Sustainable Capitalism
Positive Screening
Impact Investing
Socially Conscious
Ethical
Thematic
Environmental, Social, and Governance (ESG)
Negative Screening
Sustainability Divestment
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75
What Does Responsible Investing Mean? It is an investment discipline that incorporates environmental, social, and corporate governance (â&#x20AC;&#x153;ESGâ&#x20AC;?) factors alongside traditional financial metrics to better manage risk and generate longterm returns while investing capital for a better tomorrow
Potential Universe of Investments
Values/ Missions/ Objectives
Seeks to generate competitive returns
Seeks to make a positive societal impact
Responsible Investing 10
|
What are ESG Factors? There are several ESG factors and they are ever-changing. Examples may include:
Environmental ❖ Climate Change ❖ Greenhouse gas (GHG) emissions ❖ Resource depletion ❖ Waste and pollution ❖ Deforestation
Social ❖ ❖ ❖ ❖ ❖
Working conditions Local communities Conflict Health and Safety Employee relations and diversity
Governance ❖ Executive pay ❖ Bribery and corruption ❖ Political lobbying and donations ❖ Board diversity and structure ❖ Tax strategy
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77
Investors Are Increasingly Striving for More than Just Financial Returns
As of December 31, 2017 Source: AB |
78
The Demand for Responsible Investing ➢ The Responsible Investing trend is gaining momentum as more mainstream asset managers are taking steps to meet the interests of investors. ➢ One half of High Net Worth (HNW) investors and more than half of women own or are interested in owning impact investments. ➢ Millennials, who are leading the charge, are set to inherit more than $30 trillion from their baby boomer parents. ➢ Even over the span of a few years (2015-2017), demand from both individuals and organizations has increased significantly. ❖ Types of Investors: ❑ Individual investors ❑ Fund managers ❑ Private Foundations
❑ Pension funds ❑ Family offices
❑ Religious institutions
Impact investments, as defined by the Global Impact Investing Network, are those “made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. MILLENNIALS Ages 21–36 (Born 1981–1996); GENERATION X Ages 37–52 (Born 1965–1980); BABY BOOMERS Ages 53–72 (Born 1946–1964); SILENT GENERATION Ages 73+ (Born before 1946). Analysis of the quantitative data was augmented by qualitative insights. In-depth conversations were conducted with 40 survey participants who agreed to anonymously share their personal perspectives and experience. Current analysis does not guarantee future results. Source: U.S. Trust Bank of America
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79
There Is a Generational Shift Underway in Responsible Investing With growing interest across all generations - Millennials are leading the way Expressed Interest In Having Impact Investments*
80%
60% 54% 39%
34% Total Interested
21%
24% 24%
8% 2015
43% 28%
23% 17%
10% 2017
SILENT
Older
29%
37%
17%
13%
Own
34%
52%
7% 2015
10% 2017
BOOMERS
17%
11% 2015
2017
GEN X
2015
2017
MILLENNIALS
Younger
*As of June 30, 2017 Impact investments, as defined by the Global Impact Investing Network, are those “made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. MILLENNIALS Ages 21–36 (Born 1981–1996); GENERATION X Ages 37–52 (Born 1965–1980); BABY BOOMERS Ages 53–72 (Born 1946–1964); SILENT GENERATION Ages 73+ (Born before 1946). Analysis of the quantitative data was augmented by qualitative insights. In-depth conversations were conducted with 40 survey participants who agreed to anonymously share their personal perspectives and experience. Current analysis does not guarantee future results. Source: U.S. Trust Bank of America
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There is a Spectrum of Ways to Invest Through a Responsible Lens Many investors operate between or across categories Financial - only Investing
Responsible Investing
No consideration of ESG
Attempt to Reduce uncertain ESG practices
Sustainable Investing
Incorporate ESG practices
Impact Investing Focus on societal issues that produce competitive financial returns
Focus on societal issues that may produce below-market returns
Impactonly Investing Focus on societal issues that do not generate financial returns
Producing competitive financial returns
Reducing Environmental, Social, and Governance risks
In Search of Environmental, Social, and Governance options
Emphasizing quantifiable high-impact results
Source: Bridges Fund Management
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The Spectrum of Responsible Investing Options Screening
Narrowing the investment universe through negative or positive screening based on certain ESG criteria, or driven by the investorâ&#x20AC;&#x2122;s moral/ethical perspective.
Goal-Based
Investment approaches that incorporate an additional dimension of responsibility along with financial return.
Sustainable
Strategies that leverage a top-down framework to focus on issuers enabling positive societal outcomes and whose managements exhibit responsible behavior.
Impact
Investments made with the intention to generate a measurable social and/or environmental impact alongside a financial return.
For illustrative purposes only. Source: AB
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Examples of Responsible Investing* ➢ Integrating ESG information into quantitative and qualitative analysis, which could result in making adjustments to areas such as selection, weighting, or asset allocation
➢ Engaging, either individually or alongside other investors, with companies on the ESG factors identified as relevant to them ➢ Using shareholder voting rights to influence company behavior ➢ Encouraging companies to disclose information on the ESG factors that do or could affect them ➢ Monitoring overall ESG risk within the portfolio, for instance by measuring the portfolio’s carbon footprint ➢ Contributing to the shaping of investor-relevant public policy ➢ Promoting wider acceptance and use of responsible investment within the investment industry
*Source: Principles for Responsible Investment (PRI) https://www.unpri.org/signatories/become-a-signatory/what-is-responsible-investment
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Environmental and Social Considerations and How They Vary by Sector Mass Transit
Water/Wastewater
Carbon emission reduction
Conservation, water quality
Access to low-income populations
Access/outreach to lowincome populations
Energy Transition to renewables Access/outreach to lowincome populations
Economic and Community Development
Education Graduation rates, attendance, outreach
Healthcare Charity care Quality/safety of care
“Green” use of proceeds Underserved communities
Environmental
Social
Governance Stewardship of Capital Transparency Current analysis does not guarantee future results. As of June 30, 2019 Source: AB
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The Reality of Responsible Investing: It’s an Evolution Benefits
Challenges
➢ Ensures investors align investments with personal values or an organization’s objectives
➢ It is difficult to measure a company’s impact— there is no standard or yardstick to compare against
➢ Gives opportunity for investors to withhold investment dollars from businesses that do not behave well; as a result, companies are influenced to behave more responsibly
➢ Not a passive strategy—takes time to research potential investments thoroughly
➢ Rewards companies that act ethically
➢ Fees can be higher due to additionalresearch required
Source: Bernstein
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Key Takeaways ➢ For both individual investors and organizations, responsible investing offers the opportunity to make a positive societal impact through their investments. ➢ Interest and demand for responsible investing strategies continues to grow. ➢ Responsible investing provides a range of approaches for implementing strategies that can be tailored to an investor’s specific goals. ➢ Responsible investing has trade-offs, and the strategies chosen should be aligned with the investor’s objectives.
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