Puerto Rico Pads Franklin Stock Funds on Yield Lure: Muni CreditMichelle Kaske
Franklin Resources Inc., Goldman Sachs Group Inc. and Invesco Advisers Inc. are directing Puerto Rico bonds to their mutual funds that typically buy equities, corporate debt or emerging-market securities.
The money managers join hedge funds, which have been purchasing the Caribbean island’s securities since yields rose to records last year on concern that Puerto Rico and its agencies would fail to repay $73 billion of debt.
With interest rates on top-rated city and state bonds and some corporate debt at an 11-month low, investors beyond the $3.7 trillion municipal market are increasingly willing to stomach the risk of junk-rated Puerto Rico. The island relied on the expanding buyer base when it sold general obligations in March to help balance budgets: Hedge funds bought the bulk of the deal.
“It’s a testament to the extreme lack of spread and yield across the financial market,” said Matt Fabian, managing director at Concord, Massachusetts-based research firm Municipal Market Advisors. “It probably helped invite investors in to chase yield, but it’s hard to assume that they’re still going to be around in five years,” he said of the new mutual-fund buyers.
Puerto Rico securities have earned 8.9 percent this year, according to S&P Dow Jones Indices. Including dividends, the Standard & Poor’s 500 Index has earned about 3 percent. Junk-grade corporate debt has returned about 4 percent, according to Bank of America Merrill Lynch data.
The commonwealth, which lost its investment-grade ratings in February, sold $3.5 billion of tax-exempt general obligations March 11 to help balance budgets, in the biggest-ever junk-rated muni offering. The securities, which mature in July 2035, priced to yield 8.73 percent, equivalent to 14.5 percent for buyers in the top federal tax bracket.
While hedge funds bought most of the deal, mutual funds that don’t focus on munis also added some or purchased them through the secondary market.
“People are falling all over themselves to get yield,” Fabian said.
The bonds have swung in value since pricing at 93 cents on the dollar. They rose as high as 99 cents on March 12 and fell as low as 86 cents April 11, data compiled by Bloomberg show. It traded at an average price of about 89.7 cents yesterday, to yield about 9.1 percent.
Puerto Rico’s Government Development Bank, which handles the island’s debt transactions, declined to comment on the investor base of the island’s bonds, David Millar, a spokesman, wrote in an e-mail.
Franklin Resources had $156.4 million of the new Puerto Rico general obligations as of March 31 across five different funds that focus on equities, Bloomberg data show.
The San Mateo, California-based company’s $25 billion Mutual Global Discovery Fund, with an 85.2 percent allocation to equities and 0.25 percent to munis, held $66.7 million of the island’s March sale. The fund invests mainly in equities that the manager concludes are selling below their value, and its largest holdings as of March 31 included Merck & Co. and Apple Inc.
Managers of the funds weren’t available to comment, Stacey Johnston Coleman, a Franklin spokeswoman, wrote in an e-mail.
Some firms are adding Puerto Rico to taxable funds as interest rates on lower-rated munis are 1.7 percentage points above junk-rated corporate securities, according to Barclays Plc data. That relationship is typically reversed, with company debt yielding more than local borrowings.
“When you look at where Puerto Rico yields are compared to its rating, and then you take that rating and you go and find that yield in the taxable world, you can’t find it,” said Mark Paris, who helps manage Invesco’s $6.6 billion High Yield Municipal Fund in New York.
The firm has been putting Puerto Rico debt in its fixed-income funds, said Robert Waldner, Invesco’s head of multi-sector fixed income.
“We’re thinking about it as less of a muni and more as an investment opportunity in a Caribbean country, more like an emerging-market investment opportunity -- very high yield,” he said.
In one example, the $940 million Invesco Corporate Bond Fund allocated 0.56 percent of net assets as of March 31 to the bonds Puerto Rico sold in March, according to the firm’s website. It directs 83 percent of assets to company debt. Top holdings included debt of Verizon Communications Inc. and insurance provider Voya Financial Inc.
Goldman Sachs Asset Management LP as of March 31 held $12.5 million of the March Puerto Rico obligations across four funds that tend to buy emerging-market sovereign and corporate bonds, Treasuries, securitized debt or developed-market company borrowings, Bloomberg data show. The biggest chunk -- $10.4 million -- was in the $1.9 billion Goldman Sachs Local Emerging Markets Debt Fund.
The New York-based company declined to comment, Arielle Patrick, a spokeswoman, wrote in an e-mail.
RidgeWorth Capital Management Inc. in Atlanta held about $39 million of the new Puerto Rico general obligations as of March 31 in four funds focusing on bank loans, high-yield fixed income or high-yield corporate securities. Managers for the funds didn’t respond to e-mails and voice messages.
While non-traditional muni buyers might not hold Puerto Rico debt as long as investors who purchase local-government securities for the tax-free benefit, the island’s bonds are giving a wider range of investors a boost this year, Fabian said.
Puerto Rico “has been a means to outperform the stock market, but really it’s anyone who is chasing momentum,” Fabian said.