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Taxable Fixed Income
115 South LaSalle Street, 34th Floor, Chicago, Illinois 60603 P 312.993.5800 rmbcap.com
1
Portfolio Update: Fourth Quarter 2017
The RMB Taxable Fixed Income strategy produced a -0.07% total return during the fourth quarter of 2017, net of fees. This
compares to a total return of the Bloomberg Barclays Intermediate Government Credit Index of -0.20% over the same period,
bringing the total overall return for the year to +1.74% for the portfolio versus +2.10% for the benchmark.
The strongest performance came from bonds maturing in the seven- to ten-year sector with returns of +1.01%. The one- to
three-year maturity sector followed with returns of -0.11% for the quarter. Bonds maturing in the intermediate parts of the
curve performed the weakest in the Portfolio with three- to five-year maturity bonds returning -0.32%, followed by five- to
seven-year maturity bonds with a total return of -0.25%.
Corporate bonds outperformed the Treasury sector within the Portfolio as the fourth quarter maintained a steady demand for
high quality corporate credit and a supportive economic environment for company fundamentals. The RMB Taxable Fixed
Income strategy’s allocation to corporate bonds returned +0.10% versus the Treasury allocation which returned -0.39%.
During the quarter, the corporate bond allocation experienced an overall tightening in credit spreads of -0.09%, further
strengthening total returns.
During the fourth quarter, the Portfolio’s overall market yield increased by +0.27% as domestic interest rates generally
trended higher throughout the quarter. Bonds held in the one- to five-year maturity sectors experienced higher nominal yields
throughout the quarter corresponding with a Federal Funds rate hike completed in December, whereas five- to ten-year bonds
increased by a lesser degree.
Portfolio Analytics 12/30/2016 3/31/2017 6/30/2017 9/30/2017
12/31/2017
Market Yield 1.93% 2.04% 2.02% 2.02% 2.29%
Duration 3.09 3.34 3.17 3.03 3.05
Recent Events
Interest rates increased over the quarter as the market adjusted to a well-telegraphed hike in the Federal Funds (Fed Funds)
rate and inflation readings that remained firm. Nearly all parts of the curve ended up higher than their respective parts when
compared to the prior quarter where the largest increase came from the two-year U.S. Treasury. The two-year posted a
0.40% increase; ending the year at 1.89%, the highest level seen in over 10 years. There were modest gains in the 10-year
U.S. Treasury yield with a +0.07% increase from quarter-end to quarter-end and a -0.12% decline in the 30-year U.S.
Treasury.
U.S. Treasury Rates
(%) 12/30/2016 3/31/2017 6/30/2017 9/30/2017 12/31/2017
QoQ
Change
YoY
Change
2Y UST 1.19 1.26 1.38 1.49 1.89 0.40 0.70
5YR UST 1.93 1.92 1.89 1.94 2.21 0.27 0.28
7YR UST 2.24 2.21 2.14 2.17 2.33 0.16 0.09
10YR UST 2.45 2.39 2.31 2.33 2.41 0.08 -0.04
30YR UST 3.06 3.01 2.84 2.86 2.74 -0.12 -0.32
Source: Bloomberg
Taxable Fixed Income
115 South LaSalle Street, 34th Floor, Chicago, Illinois 60603 P 312.993.5800 rmbcap.com
2
2017 experienced the most aggressive tightening in monetary policy since the Great Recession, with three 0.25% Fed Fund
rate hikes and a reduction in the Fed’s bond buying program. Despite this, U.S. interest rates in the 10- and 30-year parts of
the curve ended slightly lower than year-end 2016. Looking back at the events in the fourth quarter of 2016, the surprise
election of Donald Trump to the Presidency and the market’s view that a more supportive fiscal policy would spark above
trend inflation, caused rates to rapidly increase. Rates at the longer end of the curve trended downward throughout 2017 as
some anticipated fiscal policy measures ended up as disappointments and inflation surprisingly softened to below the Fed’s
2% objective throughout the summer months of the year.
Source: Bloomberg
The recent flattening of the U.S. Treasury yield curve has been a focus of many investment discussions recently, as a
declining spread between short-term and long-term bonds typically associates as a recessionary indicator. The chart below
plots the spread between the five-year and thirty-year U.S. Treasury and demonstrates the significant compression between
the two sectors experienced throughout 2017. The year-end level of +0.53% matches levels seen in October 2007. While this
trend warrants further caution and monitoring, there are important differences when comparing today’s economy to 2007.
Signs of extreme leverage and economic weakness were being displayed in 2007, which had already prompted the Fed to
lower rates. This compares to today’s economic backdrop which remains supportive; corresponding with tight labor markets
and easy financial conditions. It is hard to compare this current market with 2007, however, with the unemployment rate
situated at the lowest levels since the early 2000’s, it is prudent to believe we may be closer to the end of this business cycle
than at the beginning.
0.00
0.50
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2.00
2.50
3.00
3.50
2Y UST 5YR UST 7YR UST 10YR UST 30YR UST
U.S. Treasury Yield Curve
12/30/2016 12/29/2017
Taxable Fixed Income
115 South LaSalle Street, 34th Floor, Chicago, Illinois 60603 P 312.993.5800 rmbcap.com
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Source: Bloomberg
Other important events during the fourth quarter included the appointment of Jerome Powell as the next Chairman of the
Federal Reserve. Powell is expected to approach monetary policy in a similar manner as his predecessors, Janet Yellen and
Ben Bernanke, both of whom leaned more accommodative or dovish when making policy decisions. The markets viewed his
appointing as “more of the status quo” and no major impact followed in regards to U.S. interest rates. The “Tax Cuts and Jobs
Act” was passed through Congress and signed into law in December by President Trump, which enacted meaningful tax
reform for U.S. corporations and individuals. U.S. interest rates responded with a moderate increase during the month of
December as many view the tax reform to follow through with a higher growth output in the near-term while it is also
projected to add to the U.S. budget deficit.
Outlook and Portfolio Structure
U.S.-based fixed income assets continue to be in high demand by both domestic and foreign market participants. Although
interest rates are at an historically low point, bonds trading in the domestic markets appear attractive to those trading abroad.
For example, other developed nations, including Germany and Japan, are seeing sovereign bond rates close to 0% or even
negative. Ten-year German sovereigns ended the quarter at 0.42% whereas Japanese sovereigns were 0.04%, which
artificially keeps a limit to how high rates can rise. We are, however, keeping a close eye on other foreign central banks,
namely the European Central Bank (ECB) and the Bank of Japan (BOJ) for any clues of tightening in their respective monetary
policies. More recently, the ECB announced its intent to begin tapering their bond buying program in 2018. With more supply
of Eurobonds, it is possible Eurozone interest rates could be pressured to go higher. Combined with the Fed’s tapering
program, the pace of balance sheet growth of G4 banks is set to slow meaningfully, which may translate into higher global
interest rates.
As of the end of the fourth quarter, the Federal Reserve’s forward guidance projects three additional rate hikes by the end of
2018. Forward guidance is a useful monetary policy tool intended to help the market adjust to any policy changes. Shown
below is each Federal Open Market Committee (FOMC) member’s prediction on where the Fed Funds rate will be at the end of
2018, 2019, 2020, and longer term. The median for year-end 2018 is about 2.125%, which is approximately 0.75% higher
than today’s Fed Funds level, or a total of three 0.25% hikes for the year.
0.560.53
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%
5- to 30-Year U.S. Treasury Spread
Taxable Fixed Income
115 South LaSalle Street, 34th Floor, Chicago, Illinois 60603 P 312.993.5800 rmbcap.com
4
While labor markets continue to tighten and inflation likely returns to trend, we anticipate interest rates to be somewhat
higher across the maturity spectrum in 2018. The move to higher interest rates may be more pronounced in the front-end of
the yield curve, which is sensitive to a rising Fed Funds rate. U.S. Treasury bond issuance is also expected to increase with
budget deficits widening as a result of tax cuts. The additional supply is projected to be in the short-end, which may further
pressure rates to increase. Long-term bond yields may also increase but at a slower pace than short-term bonds which may
cause the yield curve to continue to flatten. Bonds further out the curve could remain anchored by a low neutral Fed Funds
rate as well as low trend growth; should the recent fiscal stimulus measures not translate into higher GDP readings.
The strategy’s bias remains skewed toward shorter maturity bonds and a lower average duration than the benchmark in order
to reduce interest rate risk. Portfolios are constructed this way to have less sensitivity to changes in interest rates relative to
the benchmark. In addition, the recent flattening of the yield curve means less incentive for extending the strategy’s average
maturity. While we do not anticipate a sudden spike in rates in the near future, we do feel there is a growing risk that interest
rates may rise more and faster than the market anticipates. While the Fed has been careful in communicating projected Fed
Fund increases, it is possible the Fed may choose to hike four times as opposed to their projected three. Their decision could
be influenced if labor market slack continues to diminish faster than the Committee anticipates and inflation runs meaningfully
above their 2% objective. Managing interest rate and duration risk is very important going forward.
The strategy continues to have a meaningful overweight to corporate bonds. Net supply of corporate bonds may be lower in
2018 due to recent changes in the U.S. tax code, namely a limitation on the deduction of interest expense and repatriation of
overseas earnings, as well as higher refinancing rates which may be a strong tailwind for the sector. This could lead to
outperformance of corporates relative to treasuries as U.S. Treasury bond issuance is projected to be substantially higher
should the U.S. budget deficit increase. While strong demand for corporates throughout 2017 has pushed credit spreads to
very tight levels, fundamentals appear strong and default risk still remains low. Recognizing that credit spreads read rich to
their long-term averages, we have taken this as an opportunity to move up in quality and position the portfolio more
Taxable Fixed Income
115 South LaSalle Street, 34th Floor, Chicago, Illinois 60603 P 312.993.5800 rmbcap.com
5
defensively. The average rating of the corporate allocation in the RMB Taxable Fixed Income strategy has moved up from “A”
to “A+” from year-end 2016 to year-end 2017.
With an expectation that interest rates may rise and that credit spreads have little room to tighten, we anticipate total returns
for the portfolio to remain muted for 2018. The reinvestment of coupon income and maturities will continue to benefit from
higher interest rates and we are committed to seeking high quality investment opportunities as this economic cycle
progresses.
Thank you for a very prosperous 2017, and we look forward to serving you in the year to come.
Past performance is not indicative of future performance, and there is a possibility of loss. The opinions and analyses expressed in this newsletter are
based on RMB Capital Management, LLC’s (“RMB Capital”) research and professional experience, and are expressed as of the date of our mailing of this
newsletter. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of
future performance, nor is it intended to speak to any future time periods. RMB Capital makes no warranty or representation, express or implied, nor
does RMB Capital accept any liability, with respect to the information and data set forth herein, and RMB Capital specifically disclaims any duty to
update any of the information and data contained in this newsletter. The information and data in this newsletter does not constitute legal, tax,
accounting, investment, or other professional advice. The information provided in this newsletter should not be considered a recommendation to
purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in the Portfolio at the time you receive
this newsletter or that securities sold have not been repurchased. The securities discussed do not represent the entire Portfolio and in the aggregate
may represent only a small percentage of their holdings. It should not be assumed that any securities transaction or holding discussed was or will prove
to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance
of the securities discussed herein. A complete list of security recommendations made during the past 12 months is available upon request. An
investment cannot be made directly in an index. The index data assumes reinvestment of all income and does not account for fees, taxes or transaction
costs. The index covers the U.S. investment-grade fixed-rate bond market, with index components for government and corporate securities, mortgage
pass-through securities, and asset-backed securities. Duration is roughly 5 years. The index is roughly 35% U.S. Treasuries, 32% MBS/ CMBS, 20%
corporate bonds, 6% government-related and 7% other types of bonds. There are no TIPS in this index. The Bloomberg Barclays Intermediate
Gov/Credit Index measures the performance of securities with maturities in the intermediate range of the U.S. Government/Credit Index. The U.S.
Government Index includes treasuries and agencies, while the U.S. Credit Index includes U.S. corporates, foreign debentures, and secured notes. The
securities within the Intermediate Index must have at least one year to final maturity regardless of call features, and must have a maturity from 1 up to
(but not including) 10 years. They must either be a U.S. government or investment-grade credit security and must have at least $250 million par
amount outstanding. The average credit quality is AA+/AA. The Bloomberg Barclays Intermediate Gov/Credit Index serves as a good proxy for
intermediate-term portfolios consisting of high-quality government and corporate fixed income securities. Bonds must be rated investment grade to be
included in the index. The index has four main sectors: general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The duration
is roughly 4 years and the average quality is AA/AA-.
Taxable Fixed Income
115 South LaSalle Street, 34th Floor, Chicago, Illinois 60603 P 312.993.5800 rmbcap.com
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RMB Capital Management, LLC Taxable Fixed Income Composite// Annual Disclosure Presentation
Organization | RMB Capital Management, LLC (“RMB”) is an independent investment advisor registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. RMB was established in 2005. RMB claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. RMB has been independently verified for the period April 1, 2005 through December 31, 2015. Verification assesses whether: (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis; and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The TFI (Investment Grade Taxable Fixed Income) composite has been examined for the period April 15, 2005 through December 31, 2015. The verification and performance examination reports are available upon request. RMB maintains a complete list and description of composites, which are also available upon request.
Description | The TFI Composite reflects the performance of fully discretionary fee-paying bond accounts, which have an investment objective of providing clients with regular income and capital preservation and, for comparison purposes, is measured against the Barclays 1-5Yr Government Credit Index. The product is primarily invested in high-grade, non-callable U.S. government, agency, and corporate bonds. Credit exposure is diversified across corporate sectors and avoids significant concentrations of industry risk. The use of laddered maturities enables the portfolio to reduce duration risk and provide increased liquidity. The Taxable Fixed Income Composite was created on April 15, 2005. An account is included in the Composite on the first day of the first full month following becoming fully invested. An account is removed from the Composite as of the last day of its last full month. Account performance is based on total assets in the account, including cash and cash equivalents. Results are based on fully discretionary accounts under management, including those accounts no longer managed by RMB. Valuations and returns are computed and stated in U.S. Dollars.
ANNUAL PERFORMANCE RELATIVE TO STATED BENCHMARK
Year End
Total Firm Assets as of 12/31 (M)
Composite Assets Annual Performance Results
USD (M)
# of Accounts Managed
Composite Gross-of-Fees
Composite Net-of-Fees
Barclays 1-5 YR Gov’t Credit Index
Barclays Inter.
Gov’t Credit
Index
Composite 3-YR ST DEV (%)
Barclays 1-5 YR Gov’t ST DEV(%)
% Non-Fee Paying Assets
Composite Dispersion
2015 3,706.0 171.8 399 1.32% 1.00% 0.97% 1.07% 1.58% 1.18% 0.00% 0.15%
2014 3,312.9 184.6 427 2.56% 2.23% 1.42% 3.13% 1.63% 1.06% 0.00% 0.35%
2013 3,248.5 179.4 444 -0.69% -1.00% 0.28% -0.86% 1.88% 1.17% 0.00% 0.38%
2012 2,585.9 198.7 472 3.20% 2.87% 2.23% 3.89% 2.12% 1.32% 0.00% 0.44%
2011 2,218.0 181.2 398 6.07% 5.72% 3.14% 5.80% 2.88% 1.62% 0.00% 0.45%
2010 1,881.9 135.7 348 5.23% 4.90% 4.08% 5.89% 4.15% 2.48% 0.00% 1.1%
2009 1,613.9 129.9 328 6.66% 6.32% 4.62% 5.24% 4.10% 2.50% 0.00% 1.1%
2008 1,113.6 121.9 283 3.38% 3.09% 5.14% 5.08% N/A N/A 0.00% 1.0%
2007 1,420.6 139.1 298 8.62% 8.29% 7.27% 7.39% N/A N/A 0.00% 0.6%
2006 1,070.2 93.0 220 3.43% 3.10% 4.24% 4.08% N/A N/A 0.00% 0.6%
2005* 811.9 82.3 212 1.62% 1.40% 2.10% 2.47%
*Results shown for the year 2005 represent partial period performance from April 1, 2005 through December 31, 2005.
Fees | Effective January 1, 2011, RMB’s management fee schedule is as follows: 0.35% on the first $3.0 million, 0.325% on the next $2.0 million, 0.300%
on the next $5.0 million, 0.275% on the next $15.0 million, and 0.250% over $25.0 million. Actual investment advisory fees incurred by clients may vary.
Composite performance is presented on a gross-of-fees and net-of-fees basis and includes the reinvestment of all income. Gross-of-fees returns are reduced
by the portion of bundled fee which includes trading costs and all fees other than portfolio management. The net returns are reduced by all actual fees and
transactions costs incurred. In addition to a management fee, some accounts pay a bundled fee based on the percentage of assets under management.
Other than brokerage commissions, this fee covers all charges for trading, custody, and other administrative expenses. The annual composite dispersion is
an asset-weighted standard deviation calculated for the accounts in the Composite the entire year. Policies for valuing portfolios, calculating performance,
and preparing compliant presentations are available upon request.
Minimum Market Value Threshold | The account minimum in the TFI product is currently $250.0 thousand.
Comparison with Market Indices | RMB compares its Composite returns to the market index Barclays 1-5 Year Government Credit Index, an index of all
investment-grade bonds with maturities of more than one year and less than five years. This index represents unmanaged portfolios whose characteristics
differ from the Composite portfolios; however, it tends to represent the investment environment existing during the time period shown. The returns of the
index do not include any transaction costs, management fees, or other costs. Benchmark returns presented are not covered by the report of independent
verifiers.
Other | Past performance is no guarantee of future performance. Historical rates of return may not be indicative of future rates of return. Individual client
performance returns may be different that the composite returns listed. Total Firm Assets as of 12/31 for the years 2010, 2011, and 2012 have been revised
to exclude assets from personal trading accounts that were included in previously reported figures.