Tax-managed funds back in the spotlight

Nov 11, 2012 @ 12:01 am

By Jason Kephart

The tax-exempt status of municipal bonds, which makes them particularly attractive to high-net-worth investors, is up in the air as Congress wrestles with the fiscal cliff.

“This election makes the administration's proposal for a 28% cap much more plausible,” Matt Posner, legislative coordinator at Municipal Market Advisors Inc., said at the Bloomberg event.

Any changes to the tax status of the bonds could send notoriously fickle muni bond fund investors fleeing for the exits.

“There's going to be a negative reaction [to a change in the tax-exempt status of munis] and it could lead to sustained redemptions,” said Peter Coffin, president of Breckinridge Capital Advisors Inc.

Muni bond investors have shown that they are susceptible to factors that have nothing to do with the underlying fundamentals of the market.

In late 2010, for example, well-known analyst Meredith Whitney, founder of an eponymous research firm, triggered a massive sell-off in the market when she predicted a near-apocalyptic scenario for the asset class. To date, the raft of defaults Ms. Whitney predicted has failed to materialize.

Because performance of muni bond funds is largely tied to asset flows, sustained withdrawals would mean sustained losses in the funds, which generally are not liquid investments. That illiquidity could get even worse if the tax exemption were threatened, as it would make the narrow investor base even narrower.

“If you start limiting the exemption, you're only going to make the market less efficient and more vulnerable,” Mr. Coffin said.

This story was supplemented with reporting from Bloomberg News.

jkephart@investmentnews.com Twitter: @jasonkephart

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

The business case for hiring NextGen talent

Firms hiring nextgen talent have reaped the benefits from greater productivity to revenue growth. Clearly, there's a business case to be made for hiring millennials. Kate Healy of TD Ameritrade breaks it down.

Latest news & opinion

Retirement planning for women

Longer lifespans and lower savings require creative income strategies.

Sean Spicer resigns as press secretary after Anthony Scaramucci is appointed communications director

Scaramucci is known as an ardent foe of the DOL fiduciary rule, having said during the campaign that Trump would repeal it .

Redoing the math on a 4% retirement withdrawal rate

Given the current interest-rate environment and other factors, advisers disagree about whether the number is too conservative or not conservative enough.

House panel passes bill to replace DOL fiduciary rule with one requiring disclosure of conflicts

Measure likely to continue in partisan advance in House, but could stall in Senate.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print