Well, I would say, I would claim that the financial industry, the municipal market has created a monster in terms of investors and how we invest in the municipal market.
And what I mean by that is, investors have been lulled into buying bonds and investing bonds in one way. Nearly a generation of investors—think about that: a generation of investors, from the early 1980s till currently, bought bonds or have been buying bonds one way. That is, buying those bonds and holding them to maturity. Now, during most of that period of time, yields were falling and you had bond insurance protecting you on the downside of a credit event. So where was the risk? There was none. But now we’re in an environment where that has changed.
We’re in a post-2008 world, where yields are likely trending up rather than down, and you no longer have bond insurance. So the question I pose to all investors out there is: if you believe—and it has—but if you believe that the market has changed, why then would you manage a bond portfolio today in a post-2008 world as you did in a pre-2008 world?
For example, there’s no more bond insurance. So now there’s credit risk in bonds. Pre-2008, most bonds that you bought were AA- and AAA-rated. Now you have bonds that are single-A, BBB, noninvestment grade. So, having the ability to move in and out of that market when it makes sense for your clients is the right thing to do.
Another way we think about the market that has changed is having the ability to add taxable bonds in our portfolios. We’re municipal guys and gals here; that’s what we do. But we’re not so myopic in our thought process where we don’t look at other areas of the fixed-income market, primarily [US] Treasuries, if there’s an opportunity. And, for example, today, as municipals are expensive relative to Treasuries, why not sell some of those expensive municipals, buy into US Treasuries, wait for municipals to become a little bit more reasonably priced, then sell out of those very, very liquid Treasuries and move back into municipal bonds at a higher yield? What you do there is reduce volatility and improve after-tax returns. What that allows us to do is provide our clients with higher risk-adjusted returns.