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Safety First, Says Muni Bond Manager
01/30/2012 7:00 am EST
Investors seeking income in the muni field should stick with general obligation and essential revenue bonds, says Bill Walsh, who manages a muni portfolio for his clients. He advises staying away from more speculative instruments.
Kate Stalter: We’re talking about municipal bonds today with Bill Walsh, of advisory firm Hennion & Walsh.
Bill, tell our listeners why you believe munis are a good investment in today’s economy, and with the volatile equities market.
Bill Walsh: Well, I think municipal bonds have proven, in this economy—and certainly with the volatility of the equity market—to be a very, very good place for people that are looking for conservative income to invest in.
I think it proves out that bonds are…I always say bonds are boring. You know, last year, I guess there were some headlines on it, and they tried to get them to be something more than what they are. But historically, if you buy high-quality bonds, you get your income every six months, and when principal comes due, you get your money back.
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So it’s a pretty boring investment. But it’s certainly proved to be something worthwhile for the individual investor over the course of the last 50 or even 100 years.
Kate Stalter: You mentioned some of the headlines in the past year or so, and one thing obviously comes to mind: There were some dire predictions from some analysts about potential defaults, which did not pan out as predicted. Do you think some investors were scared off by that?
Bill Walsh: There’s no question. I think there were definitely investors who were scared off by that, which again was—I guess “silly” is the right word—but because of their fears and because of the headline fear or trying to trade the headline, created liquidations.
A lot of mutual funds had liquidations putting a lot of single-issue bonds in to the market, and the people that actually understand bonds and wanted to take advantage of it really got a tremendous value when that happened.
Kate Stalter: So it represented a buying opportunity, for those who understood?
Bill Walsh: Yeah, definitely, definitely. It was a huge buying opportunity, and enabled investors to lock in to some very, very attractive tax-free yields.
Kate Stalter: I wanted to talk a little bit, Bill, about your investment philosophy specifically. How you invest in bonds on behalf of your clients?
Bill Walsh: Well, again, we look at it very, very simply. We look at each investor and each client individually, and we want to know what’s their goal and what’s their objective.
But I would say for most of our clients, their objective is income, and they don’t want to be speculating. They don’t want to have the volatility that other investments will provide. So they want safety.
With income and safety, it’s a pretty easy process. For individual investors we always suggest they look at high-quality bonds, being like general obligation bonds, essential purpose revenue bonds, especially like a year ago when there were dire predictions.
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We say, “Well alright, in a bad economy what, what pays?” Stay with high-quality, stay with essential revenue, things that need to be and will be paid and you’ll be fine.
So that’s always really been our philosophy in good times and in bad. High quality, don’t speculate with your safe money, and buy the best yield available.
Kate Stalter: Any particular holdings or even classes of holdings within the muni bond universe that stand out right now?
Bill Walsh: Again, no. I don’t know if there’s any one class at this moment.
What we suggest for the individual investor is still based on the things we were even talking about a year ago. The rates are lower on the bonds, because the supply is diminished. The demand is stronger, again, because people aren’t being scared out of them, but that’s for safety.
You know, if your goal is income, then invest for safety. If your goal is growth, then I don’t know if bonds really fall into that category. You might want to be looking at other investments.
There’s Euro coupon bonds and things of that nature, but in general, income and safety…invest for safety. Stay with general obligation bonds, which are backed by the full faith and credit of a municipality. Stay with essential-purpose revenue bonds, whether it be a water and sewer authority or a highway authority, something like that. Something that you know the revenue is there. Don’t speculate in this market.
Really, in the last couple years, the full ratio on bonds, historically, are negligible. But things that you saw that did have issues were basically these land deals and these community development districts. Stay away from those. Normally when they come out, they’re nonrated and they’re speculative and you might get a touch higher yield, but you run the risk of losing your principal dollars. So stay away from those.
High-quality sectors—GOs [general obligations] and essential purpose revenue bonds—are what I would say would be the two main types of categories.
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