With over 30,000 individual issuers and one million distinct securities, the supply of municipal bonds is highly fragmented.

Despite the advantages for larger, better-networked investors, the demand side of the muni market is equally fragmented,1,2 with retail investors accounting for 70% of muni ownership both directly and through commingled funds.3

Retail investors often make buy and sell decisions without the benefit of the marketlevel and security-specific information that professional investors possess.

Moreover, individuals are often motivated by liquidity needs and emotional responses that arise in the absence of any fundamental change in the value of their investments. As a result, individual muni issues are often mispriced relative to other securities of similar credit quality, coupon and maturity.

The municipal market's unique combination of illiquidity and fragmentation renders it structurally inefficient, meaning that information about a particular muni bond, issuer or sector is often not quickly reflected in prices. The resulting mispricings can create significant opportunities for experienced investment teams.

Limitations of the Mutual Fund Structure

By availing themselves of active, professional management, investors in municipal securities can exploit mispricings, avoid security-specific and macro pitfalls and attain best execution. No matter how talented the manager, however, if she is operating within the confines of a liquid structure, i.e. a '40 Act mutual fund, certain avoidable risks and missed opportunities remain.

Mutual fund managers are hampered by three factors that are designed to protect retail investors from risk: investment restrictions, mandated liquidity provisions and taxes levied at the investment company level.