Portfolio Manager Perspectives

Jeff Benjamin

Surprise! Muni bonds starting to look more appealing

Rising taxes, puny money fund rates leading investors to public-debt sector; not all munis the same

Mar 29, 2010 @ 11:21 am

By Jeff Benjamin

The biggest risk in the municipal bond space right now is painting the entire market with a broad brush, according to Thomas Dalpiaz, portfolio manager at Advisors Asset Management Inc.

“There are certainly challenges in the muni bond space,” said Mr. Dalpiaz, who manages $200 million in muni bond separate-account portfolios. “But for every negative story, there are hundreds of municipalities that are working their way through this.” The firm, which has $4.2 billion under supervision, provides mostly subadvisory services for financial advisers.

Mr. Dalpiaz's muni bond strategy has generated a 4.4% annualized total return over the past five years.

The appeal of that kind of steady tax-free income is illustrated in the growth of the assets he manages, which was at just $32 million in June 2006.

While Mr. Dalpiaz acknowledges the general uncertainty surrounding the fiscal health of most municipalities, he uses that fear as a reason investors should turn to a professional money manager like himself.

“I can't deny that there are a lot of states, cities and municipalities that are in trouble. But you have to remember that they can't run a deficit,” he said. “And there are more than 50,000 separate issuers of muni bonds, so you have to be careful not to paint the entire muni bond market with a broad brush.”

Mr. Dalpiaz believes that the growing appeal of muni bonds has to do with the expectations of higher tax rates and “people getting tired of earning next to nothing on their cash.”

“The Bush tax cuts are going to expire at the end of the year, and there will be new taxes coming with this health care,” he said. “That creates demand for tax-exempt muni paper.”

Another thing that creates demand is the growing popularity of Build America Bonds, which are federally subsidized and taxable muni bonds that were introduced a year ago.

The popularity of Build America Bonds, which give municipalities another means of issuing debt, “has helped the traditional muni market because it has been sucking out supply,” Mr. Dalpiaz said. “That means the total return of traditional muni bonds goes up.”

In addition to a separate-account manager such as Mr. Dalpiaz, investors can gain exposure to the muni bond market through mutual funds. Bonds can also be purchased individually by investors and advisers.

Going it alone has gotten dicier over the past few years, however. The financial crisis hammered the credit ratings of bond insurers such as MBIA Inc. and Ambac Financial Group Inc. That, in turn, has led more issuers and investors to take a pass on the insurance.

Indeed, less than 15% of new muni bond issues are wrapped in insurance. Just a few years ago, that number was closer to 60%.

The lack of a backstop means higher yields — and potentially more risk.

“The muni world has changed over the past two years,” he said. “In the old days, you could buy bonds wrapped in a warm blanked of triple-A insurance, but now investors need to know more about the issuing municipality before buying these bonds.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

0
Comments

What do you think?

View comments

Most watched

INTV

Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

INTV

Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime

4 strategies for Roth conversions

There's never been a better time to do a Roth conversion, and here are several ways to go about it.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print