Tax Exempt Municipal Bonds
Investment Philosophy
We believe that diversified and controlled exposure to a variety of risks associated with the tax-exempt municipal bond market provides the best opportunity to achieve above-market after-tax returns over the long term.
Investment Process
Complete Understanding of Client Guidelines/Benchmark: Our Tax-Exempt Municipal Bond investment process does not begin until we develop a clear understanding of each client's investment guidelines, tax situation and the applicable benchmark. Portfolio construction is dependent on benchmark selection and can be significantly different if the benchmark is a 5 Year Index versus a 10 Year Index or some other index, including customized benchmarks. Also, the allocation between "in-state" and "out-of-state" municipal bonds is dependent on both investment guideline limitations as well as whether the portfolio is subject to state tax.
Duration and Yield Curve Strategy: Once the constraints are identified for an individual portfolio, our Tax-Exempt Municipal Bond investment process begins with an analysis of the expected impact of economic conditions on municipal credits in general as well as specific issuers. Our strategy for interest rate risk management is to be duration neutral (defined as + / - 5%) versus the applicable benchmark under most economic conditions and to ladder each portfolio across the yield curve, especially in the case of bulleted benchmarks, such as 5 Year or 10 Year indices. Our duration and yield curve strategies are largely a result of our objective to limit the relatively expensive transaction costs in the municipal market and also to minimize the risk of generating realized gains which would adversely impact after-tax return.
Sector Allocations / Credit Risk: Sector weightings are based on both our relative value analysis among the sectors as well as the credit risk strategy that is being deployed. Credit risk is minimized for each portfolio by limiting all holdings to investment grade ratings and maintaining an overall average credit rating for each portfolio of “AA” or higher. In evaluating potential investments, including insured issues, we perform a thorough analysis of each underlying credit.
Tax-Efficient Management: Every potential trade that we consider for our Tax-Exempt Municipal Bond portfolios is analyzed in terms of its expected incremental after-tax return versus the potential realized gain or loss. Overall portfolio annual net realized gains are held to a minimum. Consistent with our objective of minimizing transaction costs, active tax loss harvesting is not practiced with our Tax-Exempt Municipal Bond product.
Risk/Return (10 Years) (%)
| R2 vs Barclays Capital 10-Year Municipal |
0.98 |
| Barclays Capital 10-Year Municipal Standard Deviation |
3.89 |
| Composite Standard Deviation |
3.98 |
| Tracking Error vs Barclays Capital 10-Year Municipal |
0.63 |
Past performance is no guarantee of future results.
Quality vs. Benchmark (%)*
Periods ending 12/31/09.
*Material is supplemental to the Institutional Performance & Disclosure contained in the Product Profile. Holdings are subject to change. Indices are not available for direct investment.
IRS Circular 230 Disclosure: Any information contained in this communication (including any attachments) is not intended to be used, and cannot be used, to avoid penalties imposed under the U. S. Internal Revenue Code. This communication was written to support the promotion or marketing of the transactions or matters addressed here. Individuals should seek independent tax advice based on their own circumstances.
Contact Information
Please direct inquiries to Dave Krause at (312) 917-6548 or Kyle West at (312) 917-6526.
Investment team
Tim Heaney, CFA- Senior Portfolio Manager
Lisa Leonard- Senior Portfolio Manager