A fund manager looks over muniland

September 3, 2013

Here is a broad sweeping statement for you: there is a lot of group-thinking in all markets, and when I talk to participants far outside of New York, I tend to find their thinking more individual and reasoned. I recently chatted with Jeffery Elswick of Frost Investment Advisors’ Total Return Bond Fund, who is based in San Antonio, Texas. The fund is generally classified as a core, intermediate investment grade bond fund that buys all kinds of bonds, including taxable munis. Morningstar gives the fund five stars.

Here is some of our chat:

Cate Long: Do loads on retail mutual fund share classes slow down redemptions?

Jeffery Elswick: That is an interesting question and logically it should, but I’m not sure that retail investors take it into account when selling bond funds.

CL: Do the big dealers running thinner trading books have an effect on your redemption strategies?

JE: Yes, we have been discussing that. We do business with about 100 broker dealers of all sizes and the biggest dealers have told me numerous times lately that they just can’t buy something I need to sell. The traders at the biggest dealers are getting pressure from their management about taking on too much risk and we are developing different strategies.

CL: What kind of strategies?

JE: We are holding more floating rate bonds and U.S. Treasuries. We invest our overnight cash ourselves by doing repo and buying commercial paper.

CL: Are you buying munis? Are you a crossover buyer?

JE: Yes, in our Total Return Fund we buy taxable munis.

CL: Do you buy Puerto Rico bonds?

JE: Historically, we have not bought Puerto Rico bonds, but the yields versus risk have become very attractive.

CL: Do you rely on credit ratings?

JE: We are a pretty big credit shop and do our own analysis. About 10 percent of our view of a credit is a rating. We do use the research that the rating agencies publish, which is usually very good.

CL: Any views on tax reform and the muni tax exemption?

JE: It’s been a big issue as we talk to our high net worth clients. [Frost handles separately managed accounts (SMAs), which include muni bonds]. In the next year or two we see little to no risk of Congress acting to cap or remove the muni bond tax exemption. But in the longer term, up to the next ten years, it seems the muni tax exemption will be a logical target for lawmakers.

CL: Do you find retail investors more skittish lately?

JE: Yes, retail investors have been kind of skittish and tend to be the first sellers when conditions worsen. That is why we have seen high-yield muni bond funds hit so hard because retail is their biggest investor class. Retail is definitely more leery than they were five years ago. They were burned by stocks and have been warned about a bear market in bonds.

CL: Thanks for the chat.

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