Hi-Yield Muni
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Anyone (Bondguy?) been looking at or using hi-yield muni funds lately? Average weighted price of 66 and current yields of 7-8 tax-free w/low default rates, any thoughts?
High yield muni still screams buy. Spreads have been tightening the last couple weeks, but still are in the 400 BP range over comperable AAA GO’s. When this spread dips between 200-250, lighten up. Historic default rates are low in this asset class, and will continue to be. Recovery rates are high even on those muni’s that do default. I use Van Kampen’s High Yield Muni, Opp Rochester, and a couple close-ended funds that are trading at nice discounts. Other than 2008, believe it or not, HYM has been one of the least volitile asset classes…actually 40% less volitile than high quality muni’s. As we continue the trend toward normalization, you should get the best return with the least amount of risk in the HYM (high yield muni) space.
Good post ranks!
I buy munis for income and rarely as part of an asset allocation program. I use high yield funds for the high income. Opco, in particular, manages it's muni funds including high yield to maximize income. The distinction is that many managers, recognizing that their fund's biggest source of money comes from asset allocator fee programs, manage for total return. Those types of managers typically screw long term income buyers, sacrificing income to look good on a quarterly basis. The flip side is that income generator managers do little or nothing to protect the downside when the markets/interest rates turn against them. Being long term income oriented, they ride it out. So, yes, i use high yield munis, however, I understand what the managers of those funds are trying to accomplish. Put the client in the wrong type of fund, either side of the equation, and fireworks are guaranteed. Never a good thing. And yes, these funds are still a buy.Hi Bond Guy. Interesting stuff.
Three questions:
So, what should you look for in a HY muni bond fund?
This issue with running the portfolio for total return - is the result lower returns or lower cash flow?
If I’m running a portfolio for capital gains / total returns, then do i care?
And, I agree - screaming buy
Bonds worry me quite a bit. Once rates start moving up they will be hit. When do you make your move to cut back on your high yield positions?
Hi yield muni is a totally different animal, usually trades 1-200 over 30 yr AAA muni or 1-150 over 30 year treasury. Historical range w/ current yield of 8% 30 year would have to trade to 7% to present issues. Hope this makes sense, in a rush out the door.
[quote=san fran broker]Hi Bond Guy. Interesting stuff.
Three questions:
So, what should you look for in a HY muni bond fund?
This issue with running the portfolio for total return - is the result lower returns or lower cash flow? Lower cash flow. This can become a big issue for income buyers who watch their income shrink as the manager shortens maturities to protect against an up interest move or other market event. The fact is, over the short term the total return mananger will probably out perform the income guy. Yet the thing that usually causes the short term fluctuation is the interest rate cycle. And the thing about cycles is that they are just that-cycles. What goes up will come down. Long term both types of managers may have similar results. However, you can't spend total return. At least not on an ongoing basis without reducing principle. The result being an income investor invested with a total return guy isn't going to be happy. Another issue is window dressing. Managers cleaning themselves up to look good at quarter end. The mother of all window dressing events took place in 1994 during a very bad year for bonds. Managers shortened maturities, reducing income and locking in loses on longer term bonds. This was done across the board in all long term bond segments. Many of those funds have never recovered those loses. Others took a decade or more to recover. The few funds that didn't change course, that rode out the two or three bad quarters recovered within two or three years. A drop in the bucket of time to a long term income investor. I have to say, that's when i gave up on bond funds for anything except high yield or small investors.
If I'm running a portfolio for capital gains / total returns, then do i care? Total return buyers have to buy into funds that will react to the short term moves of the market and economy. Or, they need to be invested in funds that will have little reaction to rate moves and economic events. The idea, as you already know, is not so much to get the best return as it is to reduce risk. I'd look for short duration funds to get diversification away from stocks and commodities.
And, I agree - screaming buy[/quote]
[quote=BondGuy][quote=san fran broker]Hi Bond Guy. Interesting stuff.
Three questions:
So, what should you look for in a HY muni bond fund?
This issue with running the portfolio for total return - is the result lower returns or lower cash flow? Lower cash flow. This can become a big issue for income buyers who watch their income shrink as the manager shortens maturities to protect against an up interest move or other market event. The fact is, over the short term the total return mananger will probably out perform the income guy. Yet the thing that usually causes the short term fluctuation is the interest rate cycle. And the thing about cycles is that they are just that-cycles. What goes up will come down. Long term both types of managers may have similar results. However, you can't spend total return. At least not on an ongoing basis without reducing principle. The result being an income investor invested with a total return guy isn't going to be happy. Another issue is window dressing. Managers cleaning themselves up to look good at quarter end. The mother of all window dressing events took place in 1994 during a very bad year for bonds. Managers shortened maturities, reducing income and locking in loses on longer term bonds. This was done across the board in all long term bond segments. Many of those funds have never recovered those loses. Others took a decade or more to recover. The few funds that didn't change course, that rode out the two or three bad quarters recovered within two or three years. A drop in the bucket of time to a long term income investor. I have to say, that's when i gave up on bond funds for anything except high yield or small investors.
If I'm running a portfolio for capital gains / total returns, then do i care? Total return buyers should look for funds in which the fund managers react to the short term moves of the market and economy to maximize total return and give a smooth ride. Or, they need to be invested in funds that will have little reaction to rate moves and economic events. The idea, as you already know, is not so much to get the best return as it is to reduce risk. I'd look for short duration funds to get diversification away from stocks and commodities.
And, I agree - screaming buy[/quote] [/quote] Screwed up that one pretty good. I couldn't even understand what i was trying to say! A neat trick without beer!
[quote=san fran broker]So, what should you look for in a HY muni bond fund?[/quote]
Total Return, YTD and long term, while staying within their risk parameters.
I. Yield is a component of Total Return.
II Also, the way yield is calculated, the percentage stated can be increased as a result of either actually paying more income OR.. a decrease in NAV .. hence leading to a misleading yield number when compared to like funds.(you'll own less by comparison if that's the cause)
III If income payout really is an issue, simply take more out.. If Total Return is higher by comparison, you'll be afforded to do so.
IV Total Return is easier to pitch. The numbers are higher and clients can understand what it means. I'd leave yield rates for the individual bonds.
KB
[quote=KingBobby]If income payout really is an issue, simply take more out.. If Total Return is higher by comparison, you'll be afforded to do so.[/quote]
^^^wrong.
redemptions will be subject to capital gains tax, the fund distributions are not. If the fund seeks high tax free yield and your prospect seeks high tax free yield, find the highest tax free yield. You can always adjust downward from the top based on risk concerns.