1) Seix Market Insights Tax-Exempt Fixed Income Executive Summary yy yy Ron Schwartz, CFA Managing Director, Senior Portfolio Manager The yield curve flattened during the fourth quarter in anticipation of the Federal Reserve Bank’s December interest rate increase. Demand remained strong in the municipal bond market, as did issuer fundamentals. yy We remain bullish on municipal bonds as we enter 2016. Dusty Self Managing Director, Portfolio Manager Christopher D. Carter, CFA Director, Portfolio Manager 4Q15
2) Seix Market Insights Tax-Exempt Fixed Income Municipal bonds had a strong fourth quarter and finished the year as the top-performing major asset class of 2015. The yield curve flattened as the bond market prepared for a higher short-term target rate coming out of the Federal Reserve Bank’s (Fed) midDecember meeting. We continue to be bullish on municipal bonds, in part because high tax rates for investors in top brackets are likely to continue driving demand for tax-exempt sources of income. Yield ratio declines but remains elevated Strong demand was met with unseasonably low fourth quarter issuance leading to a historical outperformance of municipals versus other fixed income products. Net fund flows of approximately $5.9 billion in December brought yields down and narrowed credit spreads. than comparable Treasuries, particularly for investors in the highest tax brackets. Fundamentals remain healthy Municipal issuers’ finances remained solid in the fourth quarter, and overall municipal credit quality continued to improve for the vast majority of issuers with fewer defaults, overall improved pension funding levels and more upgrades than downgrades from the credit rating agencies. Revenues rose 5.7% year-overyear in the third quarter, driven mainly by growth in personal income and sales taxes, and was the 15th consecutive quarter of revenue growth for state and local governments. Exhibit 2: State and Local Government Tax Revenues (4Q13 – 3Q15) Exhibit 1: Municipal Bond Fund Flows (2015) 300 250 4,059 3,403 2,994 Billions ($) Millions ($) 3000 200 2,478 2000 1000 924 707 201.4 208.1 4Q13 4000 276.4 258.6 5000 4,849 1Q14 204.2 213.0 218.7 4Q14 1Q15 211.5 150 100 -361 -1,237 -2,295 -566 -1,898 0 50 -1000 0 -2000 2Q14 3Q14 2Q15 3Q15 Source: Source: U.S. Census Bureau, 2015. -3000 Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Source: Lipper, data pulled 1/20/16. Ratios between the yields on municipal bonds and Treasuries declined, with 10-year AAA municipal bonds finishing the year yielding slightly more than 90% of comparably dated Treasury notes. Even so, ratios remain high by historical standards, and municipal bonds continue to pay significantly higher after-tax yields 4Q15 Low-quality bonds in other parts of the fixed income markets sold off dramatically late in 2015, leading to wider credit spreads. This was not the case in the municipal market, and in fact credit spreads declined in the fourth quarter to extraordinarily tight levels.
3) Outlook We remain very bullish on municipal bonds as we enter 2016. Munis continue to offer high after-tax yields relative to Treasuries, making them attractive to investors in the higher tax brackets. * Volatility was muted in 2015, relative to other fixed income assets, but we expect it to rise in the year to come. In a more volatile market we would not be surprised to see credit spreads widen, as they have in other parts of the fixed income universe. We expect most of the municipal bond market to perform well in 2016. That said, we are concerned about states such as Pennsylvania and Illinois, which haven’t managed to put together budgets even during the economic upswing or resolved significant unfunded pension liabilities. These issuers could be hit hard if the economy were to soften. We expect additional negative headlines about Puerto Rico, as its current fiscal situation is extremely weak and unsustainable. Still, we do not expect the island’s debt crisis to have a meaningful systemic impact on the municipal bond market. We continue to favor bonds backed by revenues from transportation and utilities projects, including toll roads, airports and water and sewer systems. Among states, we especially like bonds issued by various authorities in California, Florida and states in the Southeast and Southwest. Discussions of tax policy around the upcoming presidential campaign may cause investors some pause, but we believe they will have little lasting impact on the market. We believe political dysfunction in Washington makes significant tax reform highly unlikely in the near future. * The average 10-year U.S. Treasury yielded 2.13%. The average 10-year municipal bond yielded 2.09%. Source: Bloomberg, as of 12/31/15.
4) Credit Ratings noted herein are calculated based on S&P, Moody’s and Fitch ratings. Generally, ratings range from AAA, the highest quality rating, to D, the lowest, with BBB and above being called investment grade securities. BB and below are considered below investment grade securities. If the ratings from all three agencies are available, securities will be assigned the median rating based on the numerical equivalents. If the ratings are available from only two of the agencies, the more conservative of the ratings will be assigned to the security. If the rating is available from only one agency, then that rating will be used. Any security not rated by S&P, Moody’s, or Fitch is placed in the NR (Not Rated) category. Ratings do not apply to a fund or to a fund’s shares. Ratings are subject to change. Credit Spreads are the difference between the yields of sector types and/or maturity ranges. Yield Curve is a curve that shows the relationship between yields and maturity dates for a set of similar bonds, usually Treasuries, at any given point in time. Investment Risks: Bonds offer a relatively stable level of income, although bond prices will fluctuate providing the potential for principal gain or loss. Intermediate-term, higher-quality bonds generally offer less risk than longer-term bonds and a lower rate of return. Generally, a fund’s fixed income securities will decrease in value if interest rates rise and vice versa. A fund’s income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax. The views expressed herein are as of the quarter-end specified. This information is general in nature, provided as general guidance on the subject covered, and is not intended to be authoritative. It is subject to change without notice as market conditions change, and is not intended to predict the performance of any individual security, market sector, or RidgeWorth Fund. All information contained herein is believed to be correct, but accuracy cannot be guaranteed. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decision.. Past performance is not indicative of future results. ©2016 Seix Investment Advisors LLC. Seix Investment Advisors LLC is a registered investment adviser with the SEC and a member of the RidgeWorth Capital Management LLC network of investment firms. All third party marks are the property of their respective owners. RFRI-SEIXTX-1215