Making informed investment decisions in the municipal bond market requires especially knowledgeable investment professionals who can generate insightful research. With more than 55,000 issues, the market is so vast that opportunities may be easy to miss — and problems possibly easy to overlook. Over a more than 20-year career, T. Rowe Price credit analyst Marcy Lash has specialized in investigating opportunities and trying to avoid potential losses in the hospital sector. InvestmentNews Content Strategy Studio (INCSS) recently discussed her approach to credit analysis and how it has rewarded investors. Her edited comments follow:
INCSS: Tell us about your process in analyzing hospital bonds.
MARCY LASH: It all starts with the numbers. Like all of our analysts, I'm a credit geek, so first I analyze the financials. After that, the qualitative part of the job begins, which in many ways is more difficult than going over the numbers, and that's where experience and really understanding hospital management is so valuable. Because I know so many managers, the challenges hospitals face, their histories and the markets in which they operate, I can look at four hospitals whose financials would appear to be roughly the same and tell what differentiates one from the other.
INCSS: Give us an example of how your approach works in practice.
MARCY LASH: Many years ago, we were looking at the financials of a hospital in the suburbs northwest of New York City. The numbers were deteriorating, and we sought to understand what was happening. I decided to see for myself. First-hand research by a credit analyst is unusual at buy-side firms; the attitude at other asset managers generally is that analysts should just concentrate on the numbers. But T. Rowe Price believes in going beyond the numbers and supports us in getting the full story.
INCSS: What did you find?
MARCY LASH: The hospital was clearly uncompetitive, and the situation was likely to worsen. The hospital was 19 years old, versus an average age of nine years for the competition, but the numbers didn't reveal how dingy and uninviting it was compared to several brand-new, gleaming hospitals just 10 minutes away in New Jersey. It was clear that people in the area would continue to choose other hospitals, which would further damage the New York hospital's financials. Worse, the hospital's management didn't acknowledge the problem or propose a remedy. I shared my findings with the portfolio manager and we got out of the investment long before the rating agencies caught on to how bad things were getting.
INCSS: Have you ever found a hidden gem the same way?
MARCY LASH: Yes. A few years ago, I was looking at hospitals facing challenges in the Midwest and found one whose new management really impressed me with their plans for improvement. The plans were sound quantitatively, and because I knew the managers from their successful work at other hospitals, I had the sense they would be capable of meeting or exceeding all of their targets. I felt the rating agencies weren't recognizing the potential for improvement, so we bought the issue at what I thought was a cheap price. It turns out I was right, and the issue has demonstrated that going deeper and doing our homework helps us make better decisions.
INCSS: As a credit analyst, how does that feel?
MARCY LASH: I have to admit, there's something nice about making a credit call and being vindicated — even if it takes a year or two or sometimes even longer to bear fruit; and it's nice to see my credit recommendations make their way into our portfolios.
INCSS: How does your work as a credit analyst mesh with the roles of portfolio managers and traders?
MARCY LASH: I really love what I do as an analyst, and I consider myself fortunate that our firm values the work and considers it a distinct career path, not just as a stepping stone to portfolio management. Because of that, analysts are able to build expertise over many years, which means that our portfolio managers respect us and know that we can stand up to their challenging questions and defend the reasons for our opinions. Finally, there are our traders, who must execute the decisions we help portfolio managers make in a market where buying and selling at a favorable price takes great skill. We believe that all of us working together and applying our talents helps bring value for clients.
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1 T. Rowe Price The views contained herein are those of speaker as of March 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates. This information is for informational purposes and is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision. The specific securities identified and described do not necessarily represent securities purchased, sold, or recommended and no assumptions should be made that the securities identified and discussed were or will be profitable. Past performance cannot guarantee future results. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only. T. Rowe Price Investment Services, Inc. Distributor. © 2019 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc. 201904-782521
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