INSIGHTS

On May 27, 2011

10 Reasons to Think about Munis and Professional Bond Management

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Municipal (muni) bonds remain a very workable asset class – one worthy of investment in spite of the recent uncertainty and volatility of the past six months. Properly done, munis can provide dependable, attractive levels of after-tax income with modest expected volatility for conservative investors. Here are some reasons to think about munis and professional bond management right now:

 

 

1. Municipal bonds make sense for top tax bracket investors. Check the yields. The 10-year Treasury bond now yields 3.09% or 2.0% “in your pocket” after Federal taxes of 35% are paid. Even the highest of the high-grade muni bonds in that maturity range now yield about 2.65%. Carefully researched, quality 10 year muni bonds rated single A or better can be secured at yields of 3.15% to 3.85% currently. These yields can be attractive given today’s alternatives and should trend higher should the general level of interest rates rise.


2. Municipal bond credit quality challenges are real, but muni bond issuers have the self-interest, resiliency and tools to help remedy their difficult budget situations. Pension/health care obligations are sizable, but there is time to reduce the funding gaps. Difficult political choices and reforms are being debated and implemented every day.


3. Conservative budgeting, reduced debt issuance and the momentum of gradual economic growth are helping to deal with budget deficits. First-quarter tax revenue collected by U.S. states rose 9.1 percent year over year, the fifth-straight quarter of growth, according to data from the Nelson A. Rockefeller Institute of Government.


4. The municipal bond market is too huge and diverse to be painted with a single negative broad brush. With over 70,000 separate issuers of bonds, numerous sectors, and types of security, the muni market cries out for value to be uncovered through diligent, experienced credit research. It remains a bond picker’s market, in our opinion.


5. This is no time to go it alone in the muni market. The municipal bond market has fundamentally changed in the past three and a half years and has suffered two very severe bouts of volatility at the end of 2008 and the end of 2010. The simple golden rule of laddering insured bonds has long since gone away and attempts to replace that rule with a new simple approach (just buy General Obligations, just buy pre-refundeds, etc.) are too restrictive and can leave a large amount of value on the table. Current municipal bond credit quality challenges are real but can be navigated successfully. IT IS QUITE SIMPLY A TIME TO KNOW WHAT YOU OWN AND TO SEEK THE EXPERTISE AVAILABLE FOR YOUR MUNICIPAL BOND JOURNEY


6. Two reasons for concern, two reasons to seek guidance. Two of the biggest concerns currently for muni bond investors -- challenging credit quality and rising interest rates -- happen to be the “bread and butter” of professional municipal bond portfolio managers. Experienced municipal portfolio managers can be skillful in navigating credit quality successfully and creating opportunities to help capture higher rates as they materialize.


7. Fee-based muncipal portfolio management can provide tailored, customized portfolios at a reasonable fee that is transparent and knowable. Other muni alternatives may be “cookie-cutter” or have higher costs or commissions/markups that are unknowable.


8. Fee-based muni portfolio management can provide opportunities for objective investment advice and the alignment of manager and client objectives. Fee-based muni portfolio managers can be as active or as patient as they need to be to meet client objectives. The annual fee provides incentives for managers to achieve capital preservation and appropriate growth, thereby lining up manager and client objectives.


9. Fee-based muni portfolio management can provide advisors with more time for a more focused investment advisory practice. Outsourcing day-to-day muni portfolio management presents opportunities to focus on gathering assets, strengthening client relationships and pursuing higher value-added consultative client services.


10. Municipal bonds remain a very workable asset class, one worthy of investment in spite of the recent uncertainty and volatility of the past six months. Properly done, munis can provide dependable, attractive levels of after-tax income with modest expected volatility for conservative investors.

Municipal bonds and professional bond management… Think about it.

An investment in municipal bonds is subject to a variety of risks and investors should consult a financial professional before making any investment decision. Neither AAM nor its representatives provide tax advice and investors should consult their personal tax professional before making any tax-related investment decisions.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com/blog. For additional commentary or financial resources, please visit www.aamlive.com.