[PPT] - BALANCING INCOME GENERATION IN A WORLD OF VUCA April 2017 FPA PowerPoint Presentation

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BALANCING INCOME GENERATION IN A WORLD OF VUCA

April 2017 FPA Arne Espe, CFA, Mutual Funds Portfolio Manager USAA Mutual Funds

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About our Presenter from USAA

Arne Espe, CFA

Mutual Funds Portfolio Manager USAA Mutual Funds

Portfolio Manager of Flexible Income Fund. Bond portion of

Cornerstone Strategy Funds, First Start Growth, and Real Return.

30+ Years of investment management experience; has been at

USAA since 2000

Education: MBA University of Oregon and B.S. Willamette University

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Founded in 1922 by 25 U.S. Army

Officers in San Antonio, Texas

A privately-held reciprocal

company with over 11 million members

One of only a few financial

companies with the highest possible financial strength ratings from Moody’s & AM Best

About USAA

Proudly serving the military community and their families for 93 years

USAA’s Investment Solutions are Available to the General Public

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Defining VUCA
USAA’s Investment Outlook
Strategies for Income

Generation

Agenda

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DEFINING VUCA

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It’s Crazy Out There!

Volatility
Uncertainty
Complexity
Ambiguity

Defining VUCA

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Volatility

Stock Market

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VIX Index (Chicago Board Options Exchange SPX Volatility Index) Source: Bloomberg as of 3/31/17

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(6.00) (4.00) (2.00)

2.00

4.00 6.00 8.00 10.00 12.00 14.00 16.00 1950 1960 1970 1980 1990 2000 2010

Real GDP YoY

Volatility

Economic Growth

GDP CYOY Index (GDP US Chained 2009 Dollars YoY SA) Real GDP YoY Quarterly 31DE Source: Bloomberg as of 3/31/17

2.0

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Fed vs Market Expectations

Uncertainty

Interest Rates Rising Soon?

0% 1% 2% 3% 2016 2017 2018 2019 Source: Bloomberg Fed projection is the median of the FOMC Members' Dot projections. The Market Expectation is the implied Fed Funds Target Rate.

FUTURE FED FUNDS TARGET RATE

Fed Projection
Market Expectation
Current Rate

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Complexity

Overwhelming Regulatory Rules

Source: SEC

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Ambiguity

Earnings and Prices Have Diverged

Source: Bloomberg as of 11/01/16

80 90 100 110 120 130 140 150 160 170 11-2011 05-2012 11-2012 05-2013 11-2013 05-2014 11-2014 05-2015 11-2015 05-2016 11-2016

Earnings vs. Prices

MSCI World Prices MSCI World Earnings

Large gap between earnings and prices

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“VUCA environments thus become invitations for inaction — people are befuddled by the turmoil and don’t act. And to succeed, you must act!”

General George Casey, Army Chief of Staff and Commanding General of the Multinational Force in Iraq

Dealing with VUCA, the New Normal

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USAA’S INVESTMENT OUTLOOK

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Total Nonfinancial Debt as a % of GDP

Excluding Off Balance Sheet Liabilities

Source: Federal Reserve through Q4 2016

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Global Government Debt

Source: Bloomberg as of 9/30/16

Developed Market Debt Weighs on Global Growth

Government Debt/GDP

50% 60% 70% 80% 90% 100% 110%

Eurozone United States

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GDP Growth Remains Sluggish

Source: Thomson Reuters Datastream as of 9/30/2016

US Real GDP Growth

2
1

1 2 3 4 5 6

% GROWTH — QoQ

2010 2011 2012 2013 2014 2015 2016

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“Lower for Longer” Interest Rates Will Likely Persist

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Source: Robert Shiller of Yale University as of 9/30/2016

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Equities

A Cyclical Pattern to Global Outperformance

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Value Stocks vs. Expensive Stocks

“Cheap” stocks have historically produced higher returns than “expensive” stocks

Cheap vs. Expensive U.S. Stock Returns

0.1 1 10 100 1000 10000 100000 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 Growth of $1 (log scale) "Cheap" Stocks "Expensive" Stocks

Historic Annualized Return (%) Cheap Stocks 14.84% Expensive Stocks 10.02% Average Stocks 12.05%

Source: Fama French database, data as of 3/31/2016 “Cheap” defined as top 30% of stocks in the S&P500 sorted on book to market, “Expensive” defined as lowest 30% of stocks in the S%P500 sorted on book to market, average stocks defined as middle 40% of stocks in S&P500 sorted on book to market. Past performance is no guarantee of future results

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6.21% 5.47% 3.37% 3.09% 3.01% 2.40% 2.36% 0.78% 0.15% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% High Yield EM Debt IG Corporate Municipal CMBS 10 Yr Treasury S&P 500 T-Bills Tips

Multi Asset Class Yields

High Yield Bonds are Currently Offering Attractive Yields Relative to Other Fixed Income Asset Classes

Source: Barclays Capital as of 4/17/17 Past performance is no guarantee of future results.

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Corporate Bonds Generally Outperform Treasuries Over Time

Relative Cumulative Performance

Corporate Bonds and Credit Instruments Can Lead to Outperformance

0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1979 1989 1999 2009 When slope on chart is going up, Credit is outperforming Treasuries When slope on chart is going down, Treasuries are outperforming Credit

Source: Datastream and Morningstar Direct as of 3/31/17

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Muni Yields Remain Attractive on Relative Basis

Bond Yields as of 3/31/2017

Treasury Corporate Municipal Tax Adjusted Muni* 1 Year 1.00 1.45 1.32 2.18 3 Year 1.49 2.06 1.78 2.95 10 Year 2.39 3.28 2.98 4.94 30 Year 3.01 4.41 4.13 6.84

Note: Corporate based on A-rated industrial curve. Municipal based on Municipal Market Data A-Rated GO Scale. * Municipal yields are on a 39.6% tax bracket Source: Bloomberg/Municipal Market Data Past performance is no guarantee of future results.

1.00 1.49 2.39 3.01 2.18 2.95 4.94 6.84

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 1 Year 3 Year 10 Year 30 Year Treasuries Corporates Municipals Tax-Adjusted Muni*

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STRATEGIES FOR INCOME GENERATION

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Economy

We project modest economic growth and interest

rates staying “lower-for-longer

Stocks

Expected returns may be greater in International

& Emerging Markets

US “value” stocks appear more attractive at

current levels

Fixed Income

Seek skilled actively-managed corporate bonds

strategies over treasuries – Investment-grade corporate bonds – High-yield bonds – Municipal bonds

Strategies for Income Generation

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We believe a yield focused portfolio, Built bond-by-bond, through fundamental bottom-up analysis, Will generate total returns that can potentially outperform our peers over the long run.

USAA’s Fixed Income Philosophy

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USAA Fixed Income Capabilities

Available to the General Public – Membership not Required

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Morningstar gives its best ratings of five or four stars to the top 32.5% of all funds (of the 32.5%, 10% get five stars and 22.5% get four stars) based on their risk-adjusted returns. The Overall Morningstar Rating is derived from a weighted average of the performance figures associated with a fund's three-, five-, and 10-year (if applicable) Morningstar Rating metrics. Morningstar ratings as of 3/31/17.

USAA Fixed Income Funds with 4 & 5 Star Overall Ratings by Morningstar

Taxable Bonds Morningstar Category Overall Rating/ Funds in Category 3 Year/Funds in Category 5 Year/Funds In Category 10 Year/Funds in Category USAA Short-Term Bond Short Term Bond

★★★★

444

★★★★

444

★★★★

359

★★★★

257

USAA Intermediate-Term Corporate Bond

★★★★

175

★★★

175

★★★★

142

★★★★

80

USAA Income Intermediate-Term Bond

★★★★

851

★★★★

851

★★★★

750

★★★★

538

Municipal Bonds Morningstar Category Overall Rating/ Funds in Category 3 Year/Funds in Category 5 Year/Funds In Category 10 Year/Funds in Category USAA Tax Exempt Short-Term Muni National Short

★★★★

181

★★★

181

★★★★

153

★★★★

96

USAA Tax Exempt Intermediate-Term Muni National Intermediate

★★★★

256

★★★★

256

★★★★

224

★★★★

150

USAA Tax Exempt Long-Term Muni National Long

★★★★

145

★★★★

145

★★★★

132

★★★★

102

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Consider the investment objectives, risks, charges, and expenses of the USAA mutual funds carefully before investing. Contact us at 800-531- 8910 for a prospectus containing this and other information about the funds from USAA Investment Management Company, Distributor. Read it carefully before investing.

Investing in securities products involves risk, including possible loss of principal. Past performance is no guarantee of future results. This material is provided for informational purposes only by USAA Asset Management Company (AMCO) and/or USAA Investment Management Company (IMCO), both registered investment advisers. The material is not investment advice and is not a recommendation, an offer, or a solicitation of an offer, to buy or sell any security, strategy, or investment product. The views and opinions expressed in the material solely reflect the judgment of the authors, but not necessarily those of AMCO, IMCO

r any affiliates as of the date provided and are subject to change at any time. All information and data presented herein has been obtained from sources believed to be

reliable and is believed to be accurate as of the time presented, but AMCO/IMCO do not guarantee its accuracy. The information presented should not be regarded as a complete analysis of the subjects discussed. Any past results provided do not predict or indicate future performance, which may be negative. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of AMCO/IMCO and USAA. The fixed income securities are subject to price volatility and a number of risks, including interest rate risk. Interest rates and bond prices move in opposite directions so that as interest rates rise, bond prices usually fall, and vice versa. Interest rates are currently at historically low levels. Fixed income securities also carry other risks, such as inflation risk, liquidity risk, call risk, and credit and default risks. Lower-quality fixed income securities involve greater risk of default or price changes. Securities

f non-U.S. issuers generally involve greater risks than U.S. investments, and can decline significantly in response to adverse issuer, political, regulatory, market, and

economic risks. Fixed-income securities sold or redeemed prior to maturity may be subject to loss. Images and content used in this presentation do not represent any endorsement, expressed or implied, by the Department of Defense or any other United States government agency. Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers, and affiliates. SOURCES

1Credit vs. Treasuries: BofA Merrill Lynch BBB Index vs. BofA Merrill Lynch Treasury Index (relative cumulative performance) 2Global Diversification: MSCI World TX-USA TR vs. MSCI USA TR (rolling 3-year relative return)

Disclosures

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