They are the primary objectives of municipal bond investing: Safety. Income. After-tax return. But the market doesn’t always provide the ideal environment, and the coming year looks to be no exception. How can muni investors avoid getting knocked off course in 2018? They can adhere to these five strategies.
The Wall Street Journal published an article on January 7 challenging the safety of municipal bonds as “not [being] the reliable bet they once were.” While its headline may startle some investors, we’ve been endorsing this view for years. Municipal bonds simply aren’t a set-it-and-forget-it choice.
Cigarettes come with warning labels. Tobacco bonds should, too. These securities are highly volatile, and at current prices they have nowhere to go but down. There are healthier alternatives in the high-yield municipal bond market.
Changing the tax code is disruptive. Some of the proposals would affect the municipal bond market if they were to become law. But it’s far from certain they will. What should investors do? Keep their cool and see what develops. And we have one more piece of advice.
Now that talk of tax reform has taken center stage in Washington, the biggest concern for municipal investors is whether the upside of lower taxes could spell downside for their municipal bond valuations. The good news is that not every proposed change is likely to have a negative impact.
Passive strategies have gained ground in some asset classes. But when it comes to municipal bonds, they don’t have a leg to stand on. In a market this complex and illiquid, an active manager is essential.
Never before in the US have we experienced a natural disaster of the magnitude of Harvey. The damage is of such a degree that we find it nearly impossible to comprehend. Yet Harvey does not stand alone. Climate events that preceded it give us much-needed insight into how municipalities recover, and whether disasters precipitate credit defaults.
We demonstrate a smart beta that produces positive excess returns from sustainably faster growth in EPS. This simple, systematic strategy represents a significant improvement from today’s growth indices that fail to produce faster growth in EPS and have provided negative excess returns.
Our analysis of three first-generation smart beta strategies shows factor-replicated portfolios are ineffective substitutes for their smart beta counterparts, exhibiting poorer performance, high turnover, and low capacity.
There’s a lot of uncertainty today for municipal bond investors: how do you hang onto the income you have in the face of rising rates and the potential for tax reform, and where should you look for more? We think muni credit is a good place to point the shovel.