Black­rock‘s Head of Mu­nic­i­pal Bonds

With taxes top of mind, we sat down with Black­rock’s Peter Hayes to un­der­stand how mu­nic­i­pal in­vest­ments can im­prove the tax-effiency of your port­fo­lios.

Financial Planning - - High Net Worth -

Peter, what im­pact has tax re­form had on mu­nic­i­pal bonds?

Tax re­form had the largest pos­i­tive im­pact on cor­po­ra­tions with their tax rate drop­ping from 35% to 21%. For in­di­vid­ual in­vestors, the top tax rate fell just 2.6% to 40.8%. Plus, with de­duc­tions on the pre­vi­ously un­lim­ited state and lo­ca­tion taxes (SALT) now capped, we are see­ing in­creased ap­petite for tax shel­ters from in­di­vid­ual in­vestors in high-tax states. We be­lieve mu­nic­i­pal bonds still look at­trac­tive when con­sid­ered on an af­ter tax ba­sis.

What is your out­look for mu­nic­i­pal bonds?

We see po­ten­tial for height­ened volatil­ity should un­cer­tainty in­crease around Fed pol­i­cy­mak­ing de­ci­sions, the midterm elec­tions and geopo­lit­i­cal

de­vel­op­ments. Amid height­ened volatil­ity and higher val­u­a­tions for eq­ui­ties, mu­nic­i­pal bonds re­main an at­trac­tive di­ver­si­fier as the as­set class is neg­a­tively cor­re­lated to eq­ui­ties. Longer-term ef­fects on is­suer fun­da­men­tals height­ens the need for dili­gent credit re­search. We be­lieve the US econ­omy will re­main strong into next year and in­ter­est rates will con­tinue on a mod­er­ate up­ward pro­gres­sion. That said, higher in­ter­est rates have led to more de­mand for per­ceived ‘safe’ as­sets as fixed in­come yields look more at­trac­tive.

How can mu­nic­i­pals help your port­fo­lio if eq­uity mar­kets weaken?

In­vestors need to make sure their port­fo­lios are diver­si­fied. One thing to con­sider is build­ing bal­last or shock ab­sorbers into port­fo­lios. Mu­nic­i­pal bonds can help add bal­last to eq­uity risk be­cause they have

a neg­a­tive cor­re­la­tion to the S&P 500. Our anal­y­sis found that in the 12 months since 2010 in which the S&P 500 In­dex was down more than 2%, mu­nic­i­pal bonds were up an av­er­age of +0.76% — which was more than tax­able bonds1.

How should in­vestors use mu­nic­i­pal prod­ucts to build a port­fo­lio?

It de­pends upon the in­vestor’s in­vest­ment ob­jec­tive and what role the in­vest­ment is play­ing in the port­fo­lio. For in­stance, an in­vestor that is more risk ad­verse or maybe has a shorter time frame may want to con­sider the ishares Short-term Na­tional Muni Bond ETF (SUB) which pro­vides in­tra­day liq­uid­ity, pre­ci­sion ex­po­sure to short term muni bonds and has the low­est ex­penses of any mu­nic­i­pal bond ETF in the in­dus­try at just 0.07%. Ad­di­tion­ally, we of­fer the Black­rock Strate­gic Mu­nic­i­pal Op­por­tu­ni­ties Fund (MAMTX), a flex­i­ble, mu­nic­i­pal so­lu­tion that seeks to pro­vide in­vestors at­trac­tive tax-ad­van­tage in­come and re­turns through di­verse mar­ket en­vi­ron­ments.

What dif­fer­en­ti­ates the Black­rock ap­proach to­wards mu­nic­i­pal in­vest­ing?

To­day ac­cess to in­ven­tory is crit­i­cal. As one of the largest man­agers of mu­nic­i­pal as­sets, Black­rock has both the re­sources to seek out bonds at fa­vor­able prices and the re­search to avoid ones that may be vul­ner­a­ble to down­grades. Our scale, credit re­search and risk man­age­ment ca­pa­bil­i­ties have helped us de­liver long term value to our clients.

PETER HAYES is Chief In­vest­ment Of­fi­cer and Head of the Mu­nic­i­pal Bond Group within Global Fixed In­come. He is a mem­ber of the Global Fixed In­come Ex­ec­u­tive Com­mit­tee and Black­rock’s Global Op­er­at­ing Com­mit­tee.

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