Outlook 2019 – Training your SWAN:
Munis are a “late-cycle” haven. Their historical performance in a Fed rate hike environment is good and their credit quality is improving. Munis have always been, and will continue to be, a safe haven for “long-term” investors – even late in an economic cycle.
We see value in 2019, as fundamentals and technicals are attractive and, historically, munis are in a good spot to remain a top performing asset class. That being said, we do see some long-term concerns and changes developing that, we feel, should be monitored.
Munis have become an asset class that needs to be individually and professionally managed by a muni expert. We consider it risky and expensive to buy any issuer at the given price. Long-term credit concerns are evolving, the cost to buy munis from secondary firms is too expensive, and relative value of certain types of bonds and investment strategies can make a big difference in a SWAN’s performance.
Mainline feels it’s time to start training your SWAN to do the following:
- Actively look to protect principal and liquidity. Own bonds that maintain their high principal repayment ability, and bid side price, through any type of fiscal and operational mishaps in the market. There is a change occurring in the ‘gold standard” of muni credit.
- Minimize costs and receive bonds allocations. Investors should be executing the purchase and sale of bonds at the highest level of efficiency, while not paying high management fees. A study released in 2018 shows muni investors are grossly overpaying for bonds. Investors should insist on institutional access to purchase bonds and a competitive bid process to sell them. This will also ensure investors access to bonds, as we feel supply will be decreasing and demand increasing, impacting the ability to be allocated bonds.
- Maximize your after tax income. It’s about earning the most after-tax income on bonds based on the investor’s tax status, investment objectives and horizon. This involves one strategy, unique for the investor, and not one shared by others and/or disguised by a mutual fund.