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Waiting for a Buying Opportunity in the Muni Market
"In this game the market has to keep pitching, but you don't have to swing. You can stand there with the bat on your shoulder for six months until you get a fat pitch." --Warren Buffet
There are two sides to every rational argument. The real problems faced by a number of local governments have caused investors to flee the municipal bond market, as shown in this article. When one considers these issues with Meredith Whitney’s view that muni bonds are facing collapse, there is little wonder why there is so much nervousness among investors.
These views should be considered in the context of other opinions, including those of Bill Gross, who believes that the impact of a slower economy will not be as severe. Going one step further, Jeff Gundlach of DoubleLine Capital believes that muni bonds represent a better bet than the high yield sector, since the former has about the same after-tax yield and much less chance of default.
I think that investors already in munis should sit tight. There will likely be a chance of buying them at lower levels if investor sentiment continues trending lower. One way to track this is to monitor the NAV discounts of the tax-free bonds, which can be found at www.cefconnect.com. Currently, discounts on leveraged closed-end muni funds are around 4.5%, a level that does not indicate enough panic for the asset class to be compelling. I will alert readers when valuations become more interesting.
Disclosure -- QES portfolios include the following mentioned investments: DoubleLine Total Return Fund (DBLTX).
About the Author
Ben Warwick, Quantitative Equity Strategies
Veteran investment strategist Ben Warwick brings 20 years of investment management expertise to AdvisorOne.com in his blog, Searching for Alpha. His market and economic insights provide readers with an insider’s view on generating alpha through asset allocation, the use of strategic portfolio “tilts” and alternative investments.
Ben Warwick founded Quantitative Equity Strategies (QES) in 2002 as a platform for implementing his quantitative investment strategies. The firm manages assets with traditional long-only equity and fixed income, private equity, managed futures and alternative investment mandates. QES has developed an industry leading expertise in building investment programs that can replicate alternative returns, while offering daily liquidity and transparency. These products include the HFRq, a hedge fund replication strategy developed in concert with Hedge Fund Research in Chicago; the Managed Futures Beta Index, with Aspen Partners; and the Nomura QES Modeled Private Equity Returns Index (PERI), which was developed with Nomura Bank and Preqin, the leading source of information in the private equity industry.
He is the author of several books, including "Searching for Alpha: The Quest for Exceptional Investment Performance," (Wiley, 2000) and "The Handbook of Managed Futures," with Carl Peters, (McGraw-Hill, 1996). He can be reached at ben@qesinvest.com.
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