The Municipal bond market is considered one of the most diverse and highly complex marketplaces in the world. With estimates of over 1.4 million different issues totaling more than $3.4 trillion in size, the investment choices are overwhelming. Even more remarkable is that there are over 60,000 different types of issuers within its realm. States, cities, school districts, colleges/universities, hospitals, airports, power facilities, water and sewer authorities, toll roads and bridges as well as other private districts are the make-up of these vast borrowing entities making the investment choices endless.
The investors’ motivation for investing in Municipal bonds is their tax advantage. In most cases, the interest income on a Municipal security is exempt from taxation on the federal level and in some cases at the state and local levels as well. The household or individual investor whose investment objective is to generate tax-exempt income while preserving principal is the largest holder of individual securities in this market. These investors are termed, ‘retail clients’ and seek tax-exempt interest income through a variety of strategies such as laddered portfolios, indexed strategies, and/or mutual fund investments. They make up over 50 percent of the overall investor holdings in the marketplace. Institutional investors such
as pension funds (cross-over buyers), insurance companies, commercial banks and thrifts, mutual funds, and arbitrageurs complete the investor pool.
As noted above, there are so many different investors’ hands dabbling in this huge universe of bonds. But unlike other high quality fixed income products whose respective markets are priced efficiently, the tax-exempt bond market is priced inefficiently.
By implemeting the conventional "buy and hold" managed approach for your Municipal strategy, you as the investor are assuming that the Muni market is efficient. Most passively managed strategies (ie: ladders) do not control risk and tend to under-perform the market's returns.
Have your Municipal bond portfolio managed ACTIVELY and reap the benefits through the exploitation of the market's inefficiency!
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