In a recent AWM Insights we welcomed special guest Alan Trice, Head of Advisory Services, at Gurtin. Here is a breakdown of the 4 key takeaways you should know regarding municipal bonds in your investment portfolio:
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If you are in the top tax brackets and your advisor isn’t minimizing the taxes you pay while also factoring their impact on your returns, then you aren’t getting the advice you deserve. After-tax returns are what matter and tax consequences need to be evaluated when making investment decisions.
Why even own muni bonds? For tax-free income and diversification benefits. ”The first of it is to provide steady and consistent income, but more importantly we see it as providing kind of a ballast in the portfolio. There to provide safety, is there to provide diversification from Equity risk. It’s that part of their portfolio you really don’t want to see ever having losses within it and when you had a big drawdown in the equity market like we saw last spring you want this to be something that you can go to without fear of really taking big losses on that portfolio.” As Alan Trice of Gurtin Municipal Bond Management explains. -
The Municipal Bond Market is not like the Corporate Credit Market. Alan differentiates the two: “They [Municipal Issuers] have heavy taxing authority. And generally, have sovereign powers as well. I mean if you think of a state for instance, a state basically has all of the same powers that the federal government has with the exception that they can raise an army and they can’t print their own currency, but beyond that and they can basically do anything that the US government can do and then if you think about you know the worst case scenario of going through, you know a bankruptcy in the muni market, you can’t liquidate a city or a county, it’s very different from what happens when you go through bankruptcy in the corporate market and so there’s a lot of differences”. Just as you diversify the equity portion of your portfolio, the same should be done for your bonds.
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Professional Management can add value. The municipal bond market is not like the US stock market. It is a much bigger pool of individual securities each with their own unique characteristics. Professionals are more likely to achieve better price execution due to the large spreads and markups in a thinly traded market. Ongoing evaluation of a muni portfolio with frequent monitoring of the issuers obligations should increase your chances of avoiding bonds that have a high potential of being downgraded by the credit rating agencies and the subsequent price drop. Tax loss harvesting is another lever that can increase after-tax returns for investors.
