Finding Value In Today s Muni Bond Market June 2016

Transcription

1 Finding Value In Today s Muni Bond Market June 2016

2 Webinar Speakers Bernard Garruppo, Chief Executive Officer Bernard Garruppo is the Chief Executive Officer of Granite Springs and a Partner and Managing Director of R. Seelaus & Co., Inc., the corporate parent of Granite Springs Asset Management, LLC. Bernard has been with Seelaus for over 20 years and is a veteran portfolio manager. His career spans 25 years of experience in municipal bond trading, bond valuation, and municipal bond sales. Bernard has a strong book of clients assets, manages the firm and helps work with the various portfolio managers in different asset classes. Tom Dalpiaz, Managing Director Tom Dalpiaz has over 30 years of experience in various aspects of the municipal bond business. Currently, he manages bond portfolios for individual clients and financial advisors. Tom has managed bond portfolios at Advisors Asset Management, Neuberger Berman, Sage Capital Management, and Weiss, Peck & Greer. Before managing bond portfolios, Mr. Dalpiaz was a municipal bond credit analyst at Weiss, Peck & Greer, Merrill Lynch, and The Bank of New York. Tom also authored a chapter on muni bond portfolio management for The Handbook of Municipal Bonds. 2

3 The Nature of the Municipal Market Large & Diverse Fragmented Trading Uncertain Price Discovery Regional Supply/Demand Factors Still Predominantly Retail Over 55,000 Issuers Multiple Subsectors Variety of Security Structures Many Issues Trade Infrequently Wide Bid/Ask Spread Idiosyncratic issuers and fragmented markets Lean Toward Buy & Hold Relatively Inefficient Market 3

4 Our Philosophy R. Seelaus and its subsidiary, Granite Springs, craft a philosophy that bests suits our clients and is tailored to the Municipal bond market. Uncovering value Exploit the natural, inherent inefficiencies of the municipal bond market. Look beyond the pristine to bonds that are mispriced, overlooked, or misunderstood Careful security selection De-emphasize interest rate forecasting and heavy trading activity. Develop a keen eye for value among what the market gives you on a daily basis. Let a well-bought coupon do its work. Capitalize on size to remain nimble, but relevant Boutique size allows Seelaus clients to buy smaller pieces of idiosyncratic issues at competitive prices. Portfolio managers and advisors consistently monitor the markets in an effort to reduce transaction costs for clients 4

5 Municipal Bond Market Supply and Demand Fund Supply and Municipal Bond Supply and Demand Fundamentals 5

6 Municipal Bond Market Supply and Demand Over the past decade, new issuance has remained constant and the size of the Municipal bond market has grown, while flows into bond funds have increased dramatically. $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $- New Issuance vs. Bond Fund Flows Bond Fund Flows New Issuance $25,000 $20,000 $15,000 $10,000 $5,000 $- The amount of municipal bonds outstanding is up 17% in 10yrs while muni bond fund flows are 15x larger than in $3,900 $3,800 $3,700 $3,600 $3,500 $3,400 $3,300 $3,200 $3,100 $3,000 $2,900 $2,800 Munis Outstanding vs. Bond Fund Flows $25,000 $20,000 $15,000 $10,000 $5,000 $0 Bond Fund Flows Munis Outstanding 6

7 Taxable Equivalent Yields Rates are low, but the beautiful math of tax-exempt municipal bonds prevails When does 1.75% = 3.09%? In a low rate environment, understanding the tax implications and fees surrounding investing is more important than ever Many times investors overlook the municipal bond market because of the sticker shock of low headline yields. This presents an opportunity for those who understand that grossing up the returns and comparing apples to apples may tells a different story The simplest way to adjust municipal bond yields for an individual s tax burdens is as follows: When does 2.25% = 3.97%? When does 2.75% = 4.85%? When does 3.25% = 5.74%? 39.6% top Federal income tax bracket 3.8% Medicare tax on top earners 43.6% combined rate % = 56.6% (what you keep) 1.75% divided by = 3.09% 7

8 Municipal Bond Market Places To Find Value Municipal Bond Market Places To Find Value 8

9 Places to Find Value in Munis In looking for value in munis, there are three differentiating factors to asses: maturity, structure and sector. Currently, the intermediate maturities of the municipal bond curve offers good value. Specifically in maturities from 4 to 12 years. Examine the additional yield garnered for each year you extend compared to the incremental duration taken on each additional year. Rates are low intermediate maturities should help preserve capital in a rising rate environment compared to longer maturities. In addition to focusing on intermediates, one can argue that coupons above 4% offer value as do municipal bonds callable in the next 2 to 10 years Above average coupon bonds with call features tend to exhibit defensive characteristics in a rising rate environment. Be comfortable with the yield to call. If bonds are not called, the yield garnered kicks up for any time period held past the call. The diversity and depth of the municipal market means that there are usually several sectors worth considering Annual appropriation credits from New Jersey, Illinois, Kentucky, Ohio, Indiana State Single Family Housing credits Selected Hospital credits Selected University and college credits Insured bonds from troubled newspaper risk credits 9

10 Municipal Bond Market Places To Find Value Accessing Munis Through Fee-Only Separate Accounts 10

11 Investment Components of a Muni SMA Many different factors are considered when constructing the proper Municipal Bond portfolio for an investor Careful Security Selection Yield Curve Positioning Duration Management Institutional Execution Bond Swapping Balanced Portfolio Construction Ongoing Credit Monitoring 12

12 Fee-Only Separate Accounts and Munis There are many ways for the average investor to access the Municipal Bond market Fee-only, separate account management is an option that has been increasing in popularity in recent years with investors and regulators alike Changes in market dynamics are continually benefitting a firm of our size Experienced traditional bond/stock pickers can find value among what s available Institutional execution of buys and sells Personalized portfolios Continuous credit monitoring of holdings Direct access to seasoned portfolio managers Fee-only objective portfolio management - fiduciary relationship aligns interests Transparent and comparatively modest cost compared to alternatives A patient, comprehensive, big picture perspective 11