We place great emphasis on our ability to evaluate
the universe of municipal securities available. This evaluation
includes maturity, quality, sector, and duration analysis. We can
then structure individual portfolios to seek to maximize returns on
an after-tax basis, working within the guidelines of each client's
localized tax constraints and risk profile.
The municipal bond investment seeks to produce
high levels of tax free income and a strong total after-tax return in all
interest rate environments through active management. This philosophy
incorporates the use of both quantitative and fundamental approaches to the
Our municipal specialists believe that our ability to anticipate and respond to shifts in tax policy and marginal tax rates is critical to identifying optimal positions along the yield curve. Our risk/reward discipline aids us in identifying bonds that offer the highest yield available and still meet our stringent risk control parameters. We do not seek to anticipate the direction of interest rates, but establish the duration of our portfolios through the use of quantitative tools that “shock test” the portfolio assuming various parallel and non-parallel interest rate scenarios.
Sector Selection Process
Staying abreast of the political environment, the allocation of
federal grants, as well as state and local revenue spending
patterns, and demographic shifts are keys to finding attractive
sectors in the municipal markets. We compare municipal sectors to
each other and then to U.S. Treasuries by performing break-even
studies to seek to identify superior investment candidates.
Underlying credit quality must be at least investment grade.
Credit enhancements such as municipal insurance or collateral asset
backing are considered if the cost is reasonable.
Security Selection Process
When selecting municipal securities we evaluate the demographics
of the issuer, looking for changes in the tax base or population
profile. We also evaluate certain legal, environmental, or
socioeconomic considerations that might affect the locality or
viability of projects being financed. We then examine the structure
of each issue reviewing protective covenants and embedded options.
Then screening for credit enhancements such as municipal insurance
or collateralization, will help indicate the issuer's ability to meet
interest payments and return of principal. Our aggregate trading
prerogative allows us to add value and minimize transaction costs.
We believe there is no substitute for experience and the ability
to properly assess important factors such as the political climate,
supply and demand of issues, tax policy, and financial statement
data. Although we have direct broker/dealer coverage and rely on
such services as the Bloomberg, JJ Kenny/Drake Wire, and Munifax to
assure the widest possible access to the markets, we feel the
integration of the professional judgment of our seasoned portfolio
managers provides superior performance without taking undue risk. In
addition, we chart economic and interest rate patterns and keep a
close watch on shifting tax policy to monitor ongoing market
developments. Sector allocation, quality structure, and overall
portfolio duration are monitored and adjusted as a function of our
bond sell discipline is virtually embedded in our buy discipline in order to
avoid surprises. We have found that waiting for any signs of deterioration or
downgrading to be disseminated through the rating services is typically too late
to react effectively. We believe that any municipal bond not adequately
discounted for possible negative ramifications can cause disappointments.
Therefore, before structuring our municipal bond portfolios, RNC Genter looks at
every buy candidate by means of vigorous critical analysis for the worst case
scenario. Turnover in municipal bond portfolios generally results from ongoing
maintenance employing the same rigorous disciplines used in the initial
structuring. However, anytime a nationally recognized rating service places an
issue (held in an RNC Genter municipal bond portfolio) on credit watch with
negative implications, a thorough re-evaluation of the issuer will occur.