For retail fixed-income investors, there are three main approaches to owning municipal securities: buying actively managed mutual funds, buying individual securities and laddering them to mature at intervals (see explanation below), or buying municipal ETFs like BlackRock’s MUB.
Because investors have different goals and needs as well as varying amounts of knowledge and time to research their options, there are advantages to each approach. AllianceBernstein sent over this blog post, which makes a very good argument for active management through mutual funds. It’s from Guy Davidson, the director of municipal bond management. I’m hoping to run pieces from other professionals in the next week or so advocating the other approaches.
The importance of being active: The problem with ladders
By Guy Davidson
Laddering entails buying bonds with a range of maturities and holding them to maturity. In our view, laddering has always left potential gains on the table that an active manager could scoop up, but the strategy has become especially problematic today.
Before 2008, about half of newly issued bonds came to the market as AAA-insured bonds. This made it appear fairly safe for individuals or their advisers to choose among the wide array of available bonds.
But several of the major bond insurers went out of business in the last few years after expanding into subprime mortgages tied to individual homes. As a result, only about 5 percent of bonds have come to the market with insurance so far this year, and the pool of AAA-rated municipal bonds has been dramatically reduced. Individual investors can no longer rely on a AAA rating for safety. Now more than ever you have to understand the credit particulars of the bonds you buy.