Those embarking on a journey into today’s municipal market must be clear in their objectives and choose their guide wisely. Be wary of convention. Be skeptical of consensus. Don’t follow the herd.
Investors seeking wealth preservation with a balanced perspective between risk and return stand to benefit from the direct ownership of tax exempt securities that are carefully selected for their individual needs and circumstances. For this reason, fiduciary responsibility is a critical attribute of a fixed income manager.
Most successful investors recognize they can do better with managers bound to serving their best interests, yet even the most sophisticated private investors tend to overlook the value of a municipal bond manager’s agility. In the municipal bond market, scale does not create advantage. In fact, size is often a liability.
Large firms provide the illusion of safety through enhanced risk management and robust credit analysis capabilities, but they are often handicapped by their size. Even among managers with a fiduciary duty, rising assets under management inevitably leads to conveyor belt processing. Large firms must purchase blocks of bonds at size, often moving the market when they trade. They must then allocate purchases across client accounts on a pro-rata basis, rather than beginning the credit selection process based on an individual client’s circumstances. While this may not conflict with a firm’s fiduciary duty, it is an inferior model.
The ideal municipal bond manager is agile, focused, and informed. Leading asset managers may possess the latter qualities, but frequently lack the former.