Perceptions Can Mask Muni Bargains
BOSTON (TheStreet) -- There is a temptation among municipal bond investors to be overly "big picture," rather than granular, when choosing plays.
Illustrating the point is how Michigan's municipal bond market is treated. Amid images of shuttered storefronts, idle factories and the ghost town aesthetic of Flint and Detroit, it is easy to be scared away from putting your money to work within its borders. That fear directs investors away from bargains, says Leon LaBrecque, managing partner and founder of
, an independent wealth management firm in Troy, Mich., that manages more than $350 million in assets.
"Michigan Municipal bonds are being painted with a broad stroke while important and positive aspects of the bonds are going unnoticed," he says, stressing that it "is a very diverse state in geography and economy."
Municipalities still need money for infrastructure improvements such as roadwork and capital expenditures and must go to the market for that funding. That gives the advantage to buyers, analysts say. |
"We are seeing fire-sale prices on some issues," he says. "In addition, we see that the lack of a central unified market presents opportunistic buying. We buy on the bid (wholesale) for our portfolios. The spreads tend to be pretty big now."
The lesson for investors, LaBrecque says, is to look beyond the headlines and suppress first-blush reactions.
Michigan has highly industrialized, relatively economically disadvantaged areas such as Detroit, but also booming areas such as Traverse City and Grand Rapids, he says.
"You've got some places that are just making money hand over fist. People are also not seeing Michigan as a huge agricultural state, or that it is not 100% based on the auto industry," he says. "Here's a little secret for you: Our auto industry is doing tremendously right now. Car and truck production in Michigan is up about 43% over last year and the highest growth in jobs in Michigan right now is manufacturing. We even have one client that makes fasteners, and the demand is so great they are exporting their products to China. Our death has been greatly exaggerated."
Although he urges proper due diligence before investing, LaBrecque thinks default fears are overstated.
"The amount of default is still at a historical level," he says. "There are conspicuous defaults, and everyone is waiting for the Bronx parking stadium authority to go down or looking at Harrisburg. But we don't see municipal bond defaults going through the roof. There will be way, way more bargains sitting out there."
Even the impact of the housing crisis won't spell doom for Michigan communities -- in mature markets, the pain of such drops in value will prove temporary, he says.
Among the muni "values" he sees are issues tied to public colleges and universities. "We are seeing enrollments in Michigan state colleges are up dramatically and tuition revenue is also up, as you would probably expect in bad times," he says.
Lower-grade public school projects are also among his favorites, and are similary pulling in students whose families can no longer afford private schools.
"We can find a smaller school district with growth in it," he says. "It's not hard to do."
Among the advice he offers municipal bond investors:
- The market is probably overpricing the risk of the underlying securities -- pricing, on a yield basis, all bonds in all parts of the state the same, for example, irrespective of the underlying issuer. It appears most investors are summarily pricing significant default risk into all bonds.
- Not all parts of a state have the same financial stresses.
- Different types of bond issues carry different risk profiles, and investors should know exactly what it is they're buying. Reading the offering circular and official statement is a tedious but, unfortunately, imperative part of the investment process for guidance on the level of security associated with a bond.
- The major rating agencies have undergone significant shock from the subprime meltdown and, accordingly, are suspect in their ability to correctly evaluate securities. Blindly following ratings is a mistake.
- The rating agencies insuring municipal bonds are in greater financial crisis than many of the municipalities they are insuring. Insurance is not the safety net it once was. Treat insurance like ratings: a nice start, but not determinative. Insured bonds are not necessarily without risk.
- Despite falling revenues, municipalities still need funds for infrastructure and capital expenditures and must go to the market for that funding. Michigan municipal issues, for example, are competing not only with each other, but with all other bonds on the national municipal market. Buyers have the edge.
-- Written by Joe Mont in Boston.
>To contact the writer of this article, click here:
Joe Mont
.
>To follow the writer on Twitter, go to
.
>To submit a news tip, send an email to:
.
RELATED STORIES:
>>Municipal Bonds Safe, But Coasts Are Rocky
>>CIO Offers Nuggets From the Bond Boom
>>Best States for Muni Bonds
>>Strategies to Avoid Bond-Market 'Bubble'
>>Change Bond Mix as Yields Fall
Get more stock ideas and investing advice on our sister site,
