U.S. Muni-Index Probe to Benefit Individual Buyers, Mulford Says

The Municipal Securities Rulemaking Board’s examination of indexes tracking the $3.7 trillion local debt market will boost price transparency and benefit retail investors, said Burt Mulford, a portfolio manager in St. Petersburg, Florida, at Eagle Asset Management Inc.

Mulford, whose firm oversees $1.8 billion in munis as a subsidiary of Raymond James Financial Inc., also discussed California bankruptcies, separately managed accounts and threats to the tax-exempt status of munis for today’s Bloomberg Brief: Municipal Market newsletter.

Q: The MSRB is looking into muni indexes and how they’re put together. What do you think about that investigation?

A: This will be a terrific thing for individual investors, because in many instances, you’ve got the same bond that might be trading with a three- or four-point price differential depending on who’s buying the bond. True valuation of municipals is still an ongoing challenge.

Q: Are individuals now more interested in their holdings, or do they still leave the decisions to portfolio managers?

A: Investors are more involved in their portfolios and we do more conference calls and more face-to-face meetings than we have in the past. The No. 1 question we get is about pension liabilities.

We do have full discretion on our accounts. We will get a lot of questions if we buy a California bond. It’s just guilty by association in terms of the retail mentality. They figure that because there have been so many negative headlines in the California market, if it’s from California, it has to be bad.

Q: Are the bankruptcies in California going to be a problem that will spread across the country?

A: It’s certainly not indicative of the overall credit quality of the municipal market. There was competition among municipalities to attract police and firefighters, so they were incentivizing them with these attractive pension and compensation packages. That marketplace was a bit overinflated.

But I don’t think it’s just going to be limited to California. What we look at when we’re buying a local G.O., we’re looking at those that have higher per-capita incomes than the national average, where unemployment rates are lower than the national average, the housing market has been relatively stable, and there’s population growth.

Q: Have you noticed more interest in separately managed accounts? Why are they so active now?

A: It seems to be a trend -- there’s more and more interest in SMAs over funds because clients know what they own, and they have more control over their holdings for year-end tax purposes.

At year-end, you have control if you want to do some tax-law selling and do some bond swaps to offset some gains in other portions of your portfolio. Clients feel more comfortable when they can see on a regular basis what their managers are doing.

Q: Do you think we’ll see a rush to market in the second half of 2013 because of the threat of changes to the tax code, and if so, how much volume could there be?

A: If the tax-exempt status were lost or reduced, it would, in our opinion, grandfather in bonds issued prior to the effective date, and you’d see a rush to buy munis by investors going into that, because those bonds would be more valuable.

Issuance ramping up could be a possibility. When the Build America Bonds program was eliminated, there was a rush to issue in the last quarter of the year before those went out of play.

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