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Our style of municipal bond management is based on the premise that our clients value tax exempt income over taxable capital gains. When weighing the decision to buy or sell a security, we strive to balance the value of the tax exempt income, the credit risk of the issuer, and the price volatility of the bond. We further add value through an investment process which emphasizes high quality securities and diversification to reduce credit risk, and interest rate management and yield curve analysis to minimize price risk.
This process begins with analysis of economic indicators, inflation trends, monetary policy, consumer retail activity as well as technical factors. Recent trends are assessed against historical norms to develop an analysis of the likely path of interest rates in the future.
Once our view on interest rates has been determined, the fixed income process is centered on determining relative value among sectors of the municipal bond market. We evaluate the tax equivalent yield of municipals versus U.S. Treasuries to determine whether current spreads are attractive relative to historical norms. The excess income gain for municipals on a tax equivalent basis must compensate for holding an asset that carries more risk than U.S. Treasuries.
Our portfolios will typically have an average maturity of between three and ten years. Maturity structure will be determined through our interest rate management process and client objectives.
The portfolios are well diversified among 20-30 different holdings with typically a 5% maximum exposure in any one issuer. We emphasize high quality securities with a majority of the tax exempt securities rated AAA.
This fixed income process should produce over time a conservative approach to adding relative value (on an after-tax basis) in the municipal bond market.
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