Who Are The Best Investment Managers for Municipal Bonds?

For Municipal Bonds, 2022 will be one of those years that investment manager selectors look at closely when evaluating portfolio's in the future. Investment Grade Municipal Bonds posted their worst calendar year performance in 20 years, and third worst on record.

The irony for municipal bond investment managers was that across all maturities and ratings, municipal bonds generally outperformed most other fixed income segments, including treasuries and corporate bonds. And yet, outflows were almost double the levels experienced during the 2013 taper tantrum.

To add psychological pain to performance suffering, this all happened in parallel with fundamentals actually also breaking some records. Local tax collections were higher than the previous record set in 2021. And defaults were contained to specific high yield sectors and lower than 2021.

Relatively speaking, municipal bonds had an outstanding 2022. But investors were simply not convinced. As we enter 2023, perhaps the relative fundamental and performance picture will regain investor attention, and some new municipal bond RFP opportunities will get launched on RFPnetworks.

U.S. Taxable Municipal Bonds have been on the watchlist of European Investors for most of this year. For non-US investors they have many appealing characteristics that differentiate from traditional government and corporate bonds. And for some segments of the market, for example Insurance Companies, they are checking more and more boxes.

What's been interesting is how U.S. Taxable Municipal Bonds are now getting noticed. What we see are institutions searching our fixed income feed for terms such as credit quality, low correlation, default rates, yield-to-worst and infrastructure bonds. Our search engine algorithms are returning U.S. Taxable Municipal Bond research. And the subsequent click rates are high.

Muni research is getting a lot of traffic inside RFPnetworks.

Investors today are becoming attracted to Municipal Bonds for three reasons:

1. Muncipal Bonds are trading at attractive valuations.

2. Municipal Bonds exhibit higher yields versus treasuries.

3. Municipal bonds are displaying strong credit fundamentals.

As such, there is a renewed dialogue between Professional Investors and Municipal Bond investment managers taking place.

Looking for the best Municipal Bond investment managers? Start your search inside RFPnetworks.

Municipal Bond investment managers are suggesting that there are 4 reasons why Municipal Bonds could now lift off.

1. Outperformance Often Prevails After Underperformance

Following 39 of the 40 negative 12-month rolling periods for the Bloomberg Municipal Bond Index, subsequent 12-month returns were not only positive, they were abnormally strong, with an average of 14.70%.

2. A Rare Sell-Off in 2022 That May Moderate

The Bloomberg Municipal Bond Index Yield is now just shy of it's 10 year high, having suffered heavy net outflows as a result of the Fed Pivot, rising inflation and the uncertainty surrounding the Russia-Ukraine crisis.

Volumes out for bid in April reached a high for the year, whilst YTD new issuance is on track to outpace the record set in 2020.

Yet looking at the past 6 sell-offs since 2006, the current duration of 16 weeks surpasses the average of 12 weeks. Coupling decelerating seasonal issuance with the upcoming summer redemption period, the demand for municipal bonds is likely to increase and may bring the sell-off to conclusion.

3. Valuations Attractive for Currency Hedged European Investors

For European Investors, the potential yield pick up of taxable Munis on a currency hedged basis is around 125 bps over AA euro sovereign debt and 80 bps over European Corporate debt. A relatively interesting differential.

4. Fundamentals Getting Stronger

Moody’s, S&P and Fitch have upgraded 10 times more par than was downgraded YTD, reflecting robust revenue collections and record cash balances. And with multiple stimulus programmes from the US Federal Government (E.g the American Rescue Plan (ARP), fundamentals are likely to continue to strengthen. For example, credit quality improvements at airports as a result of increasing passenger traffic trends has received a lot of attention, with the top 5 busiest airports globally in 2021 all being US domiciled.

However, uncovering the best Municipal Bond Investment Managers requires a huge amount of qualitative research. If you're looking for data, go inside RFPnetworks to launch your search.