Nuveen’s Miller Turns Distressed Land Into Top Gain: Muni Credit

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Nuveen Asset Management’s John Miller said, “The broader theme for these two funds is the real estate market recovery.” Close

Nuveen Asset Management’s John Miller said, “The broader theme for these two funds is... Read More

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Photographer: Jin Lee/Bloomberg

Nuveen Asset Management’s John Miller said, “The broader theme for these two funds is the real estate market recovery.”

Nuveen Asset Management’s John Miller is finding it fruitful to live off the land.

The company’s $390 million California High Yield Municipal Bond Fund (NCHAX) is beating all open-end competitors focused on state and local debt, with an 11.6 percent return this year, data compiled by Bloomberg show. Miller, co-head of fixed income at the Chicago-based company, also runs an $8.6 billion national high-yield muni fund that ranks fourth.

Nuveen’s success is more than a blip -- the California fund has bested 95 percent of peers over the past five years. Miller says the gains reflect a strengthening U.S. housing market and demand for extra yield as the Federal Reserve keeps its benchmark rate near zero. Some of his top performers include land-backed deals like northeast Florida’s Tolomato Community Development District and similar projects in California outside of Los Angeles and Sacramento, he said.

“The broader theme for these two funds is the real estate market recovery,” Miller, 47, said in an interview.

“We bought a lot of land that we felt was not distressed, a lot of property-tax bonds where we felt the project itself was not distressed, but the bonds were available to be purchased at distressed levels,” Miller said. “In fits and starts, and through various ups and downs, they’re still on a recovery trajectory.”

Yield Yearning

Nuveen’s performance epitomizes a trend in the $3.7 trillion municipal market where riskier debt is outperforming as benchmark yields set 11-month lows. Individuals have added money to high-yield muni funds for 18 straight weeks, Lipper US Fund Flows data show.

Speculative-grade munis have surged 8.3 percent this year, while the entire tax-free market has returned 5.4 percent, according to S&P Dow Jones Indices data. Treasuries have earned 2.5 percent, Bank of America Merrill Lynch data show.

The extra yield brings added risk -- junk bonds can look nothing like typical state and city general obligations, which are backed by a municipality’s taxing power.

The biggest holding in Nuveen’s national high-yield fund is American Airlines Group Inc. (AAL), followed by Iowa Finance Authority bonds for Alcoa Inc. (AA)

Tolomato Tale

One of the 20 largest holdings, exemplifying the value of land-backed debt, is from the Tolomato Community district, centered south of downtown Jacksonville, Miller said. Nuveen bought about 90 percent of the issuer’s bonds at 40 cents on the dollar, as the securities defaulted after development stalled, he said.

In a move typical of mortgage-backed securities, in 2012 the district carved up the initial bonds, which were issued in 2007, offering documents show. Payments would stream first to some debt, such as the A-1 class maturing in May 2040. By January, those bonds had appreciated to 99 cents on the dollar.

“In the right location, these districts will eventually be built out,” Miller said. When that happens, “you’re talking about a very secure, very stable cash-flow stream, because you’re just collecting people’s property taxes.”

Other top performers take a different approach.

OppenheimerFunds Inc., which owns more Puerto Rico bonds than any other mutual fund company, focuses on high-yielding debt that it expects will never default, said Michael Camarella, who helps oversee $28 billion of munis from New York.

Tax-Free Focus

“We tend to focus on tax-free income,” he said. “Buying non-income-generating properties and working them out isn’t a core part of our business.”

The company’s Virginia Municipal Fund (ORVAX) and New Jersey Municipal Fund (ONJAX) are this year’s second- and third-best performers. Each can allocate as much as 25 percent to speculative-grade debt, which is ranked below Baa3 by Moody’s Investors Service or lower than BBB- by Standard & Poor’s and Fitch Ratings.

Over five years, the funds have outperformed 97 percent and 99 percent of peers, respectively.

The Virginia fund’s two largest holdings are tobacco bonds. One of the 10 biggest positions in the New Jersey fund is a zero-coupon tobacco bond that had its rating boosted 10 steps this year after the state pledged additional future payments in return for a $92 million cash infusion.

Volatility Spells

“The extra yield and extra return we get from these high-yield bonds will provide a superior total return over a longer period of time,” Camarella said. “It’s unfair to judge a long-term municipal bond manager on three-month data.”

Even as Nuveen’s national high-yield muni fund has beaten most peers over the past five years, it has endured periods of volatility. In 2007, it trailed 66 percent of its peers and it lagged behind 94 percent in 2008, when it fell 40 percent.

In 2009, it recovered some ground with a 42 percent surge, topping 89 percent of competitors.

For Miller, the category of debt that Tolomato falls into, known as dirt bonds, represents a long-term bet.

Land-secured bonds account for more than half of defaulted muni bonds, according to a report from research firm Municipal Market Advisors. Yet the dirt districts are rebounding, evidenced by growing issuance for the projects, Miller said.

Jurisdictions in Florida have sold $301 million of the debt this year, on pace for the most since 2007. The securities are benefiting as Florida home prices reached a four-year high at year-end, Federal Housing Finance Agency data show.

“The bad reputation Florida got came from some locations that didn’t make a lot of sense -- they were far away, in the middle of nowhere, plowed under an orange grove,” Miller said.

“Most of the even reasonably well-located districts have restarted and are in the process of coming back,” he said.

Fund Rankings

Below is a table of the top performing open-end mutual funds with a municipals strategy and at least five years of history.

================================================================
Rank  Ticker  Fund Name                     Total       Assets
                                            Return Ytd  (in mln)
================================================================
1     NCHAX   NUVEEN CA HI YLD MUNI BND-A   11.58%      $390
2     ORVAX   OPPENHEIMER ROCH VIRG MUNI-A  11.50%      $127
3     ONJAX   OPPENHEIMER NJ MUNICIPAL-A    11.47%      $508
4     NHMAX   NUVEEN HIGH YLD MUNI BND-A    10.47%      $8,648
5     GWMEX   AMG GW&K MUNI ENHNCD YLD-I    10.03%      $243
================================================================

SOURCE: Data compiled by Bloomberg, through May 9

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, Justin Blum

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