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2016-01-15 TIA Annual PIP Review

January 15, 2016

Dear Mr. and Mrs. Smith,

2015 marked the seventh year of TIA’s Preferred Income Portfolio (PIP). It was an outstanding year with total returns outperforming other fixed income sectors and the major stock market averages. PIP continued to deliver almost 7% income while its average share price on December 31, 2015 was within a nickel of its December 31, 2014 price. PIP’s stability and performance was in marked contrast to other market sectors. The major stock averages were flat to lower while the fixed income market’s volatility diminished returns.

All fixed income investment yields are priced by their relationship to the Treasury yield curve. As of December 31, 2015, the PIP current yield was 6.78% which is a 5.02% yield spread over the 5-year Treasury’s 1.776% yield. We believe this yield spread will revert to its historical 2.00% spread with Treasury yields rising rather than preferred prices declining.

This is our “Bridge to Higher Interest Rates” fixed income strategy for the next several years. We expect most, if not all, of the 30 issues held in the portfolio to be called because of their average coupon rate of 7.03%. Since 2002, almost all preferred issues with a coupon rate of over 6.50% have been called on schedule. If they are not called, their 6.78% current income returns should be very competitive with equity returns and superior to other fixed income investments in the future.

TIA developed our Preferred Income Portfolio (PIP) as an alternative to other fixed income investments. The primary risk in fixed income investment is a credit default. PIP’s diversification across sectors enhances credit default protection. While 49% of the holdings are commercial banks, it is spread among 15 issues. The 39% REIT allocation is among 12 issues and the balance of the portfolio is spread among appropriate sectors.

PIP did not miss any dividends in the worst financial period in three generations. We now have three preferred portfolio styles for the three typical objectives in fixed income portfolios. PIP is a diversified portfolio with both cumulative and non-cumulative issues suitable for most investors. Non-cumulative preferreds serve as an alternative to municipal bonds while shorter call preferreds are a cash management tool. PIP’s current yield of 6.78% and 5.39% yield to call with 33 months of income guarantee are exceptional in this low interest rate environment. TIA individually designs each client’s portfolio with respect to their tax status and income needs.

TIA expects interest rates and inflation to remain lower longer than in previous economic cycles. We welcome your inquiries regarding our Preferred Income Portfolio.

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