Strategy Description

Our active management strategy reflects our goal of providing maximum tax-free income, enhanced risk-adjusted returns while utilizing defensive high-grade municipal securities that offer downside protection in a rising rate environment. Safety of principal and liquidity are integral to our process. The management team has the flexibility to structure portfolios anywhere from 1 to 15 years average maturity dependent upon their analysis of the economic and market environment.

Highlights:

  • Experienced team
  • Income and capital preservation emphasis
  • Bottom-up credit analysis
  • Top-down macroeconomic analysis
  • Relative value focus
  • Strong execution capability

Management Process

Our tax-exempt strategies differ with regard to credit and risk emphasis, but the underlying construction process and philosophy remain consistent.
We attempt to balance risk and reward in all our investment strategies but understand that our responsibility increases as the duration of a portfolio increases. In this regard, we closely monitor term structure dynamics as they react to economic, political, monetary policy and other forces to determine the portfolio’s appropriate duration target. We utilize our bottom-up credit research and top-down macroeconomic analysis to further enhance our duration management process. Our extensive trading and execution experience allows us to take advantage of pricing anomalies that support our return objectives.

Eligible Securities:

  • Primarily investment grade municipal securities
  • Unrated or non-rated municipal securities on a case by case basis subject to thorough bottom-up research
  • U.S treasury and investment grade corporates limited to 10% of portfolio value
  • No state G.Os with unfunded pension liability below the 60% threshold

Parameters:

  • Maturity range:     1-15 years
  • Duration target:    12-years or less
  • Average rating:      A-1 – A+
  • Call features:         1-10 years
  • Benchmark:          Barclay’s Muni Bond 10 yr Modified Duration

The portfolio construction process involves the implementation of a constrained optimization routine. Our framework enables us to properly manage the risk of the portfolio in a disciplined manner. Our collective experience has taught us that employing a well-structured risk management discipline together with security selection will lead us to being able to seek to deliver desirable long-term investment performance to our clients.

Portfolio construction is conceptually similar across all of our fixed income strategies. We start with a universe of bonds that meet our security selection criteria. Each bond will possess various attributes that enable us to measure its contribution to the portfolio in terms of risk adjusted expected return. The attributes will also be used to measure investment characteristics relative to our benchmark thus establishing risk constraints. The optimization will then establish a portfolio that simultaneously maximizes risk adjusted expected return and meets our risk constraints.

 

The framework allows our portfolio managers and our investment committee to perform risk analysis on candidate bonds or to evaluate different interest rate scenarios. This ability is extraordinarily important in active management. It enables our team to measure the effects of active management decisions on portfolio risk prior to implementation and to subsequently monitor risk in a concise manner.

Successful execution is a critical component of our active management process. While we employ various strategies from credit and yield curve analysis to duration management, and a host of other valuation metrics to help drive returns for our clients, what is not fully understood by many investors is the value-added derived from expert securities execution. We believe that every incremental basis point of return is critical, particularly in the current low interest rate environment. It is important to remember that unlike the equity markets, most bonds are not traded on a consolidated exchange with a best bid and offer system. Bond markets function in an over-the-counter, dealer to dealer marketplace. Inexperienced bond investors are often at a disadvantage by not having access to multiple bid and ask prices at the same time. Simply stated, investors are often unaware of the actual spread and mark-ups they are paying.

Our execution capabilities rely upon decades of extensive professional trading experience. Methodologies we employ in an attempt to enhance returns through better execution:

  • We rely on a relative value approach within and across product sectors.
  • We exhibit patience in an attempt to purchase securities on the bid-side of the market
  • We monitor dealer inventories and product flows in order to assess the impact of supply/demand upon spreads and prices.
  • Experience allows us to identify and take advantage of short-term pricing dislocations
  • We will aggregate as feasible odd lot holdings (bought cheaper) into larger positions, in order to exploit the pricing differential between the odd-lot and round-lot markets.
  • We leverage our years of experience and extensive network of dealer relationships to seek to negotiate better prices for our clients.