Income Investor Perspectives

Independent municipal bond market insights for advisors

Tag: Mutual Funds

Muni Bond DIFM is Growing

Screen Shot 2016-03-17 at 2.26.54 PMMuni Bond DIFM Ownership is Growing

Rates are low and the Fed is on hold; municipal finances are stressed and bond market liquidity is down. While there would seem to be lots of reasons for investors to be avoiding municipal bonds, individual investors were actually net buyers of municipal bonds last year—but not through the traditional means of adding individual bonds to their portfolios.

Last year, according to data from the Federal Reserve, fewer individual investors were opting for the DIY (“Do It Yourself”) model of managing individual bonds on their own, and there was growth in the use of professionally managed (“Do It For Me,” or DIFM) mutual funds and ETFs.

Data from the Federal Reserve show that direct individual investor ownership of municipal bonds declined by over $25 billion last year, however, indirect ownership through muni bond mutual funds and ETFs grew significantly.

 

2014

2015

Change

Total Outstanding

$3,652.4B $3,714.8B +$62.4B +2%
Households (direct)

$1,540.4B

$1,514.8B

-$25.6B

-2%

Mutual Funds

$657.7B

$705.4B

+$47.7B

+7%

ETFs

$14.6B

$18.5B

+$3.9B

+27%

The positive flows into mutual funds and ETFs are continuing this year. Through March 9, muni bond mutual funds have attracted $10.7 billion in new assets (according to the Investment Company Institute) and muni ETFs have added almost $1.5 billion (according to FactSet data).

Part of what may be driving the shift away from DIY into DIFM…..

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This is not a recommendation to buy, sell or hold any of the securities or strategies mentioned. The author does not provide investment, tax, legal or accounting advice. Investors should consult with their own advisor and fully understand their own situation when considering changes to their strategy, tactics or individual investments. At the time the article was written, the author did not have any positions in the securities or strategies mentioned. The opinions expressed and the information contained herein is based on sources believed to be reliable, but its accuracy or appropriateness is not guaranteed. Past performance is interesting but is not a guarantee of future results. Investments in bonds, and fixed income funds or ETFs are subject to gains/losses based on the level of interest rates, market conditions and changes in credit quality of bond issuers. Additional information available upon request.

The Benefits of Professional Management

  • When should an investor use a professional manager?
  • If an investor needs more performance (yield or return), should they use a professional manager?
  • Should a manager be selected based on performance?
  • If a manager’s performance is lagging, should they be fired (or sold) by the investor?
  • Will using a professional manager protect from market declines?

SUMMARY: Because so many investors seem to select managers by chasing recent performance, one might imagine that professional managers market themselves only by touting their performance. However, the fundamental reasons to use a professional investment manager are when the investor does not have the time or the necessary expertise to properly make those decisions themselves. Professional managers can be employed for all or a portion of a portfolio and should be selected first based on how well the manager’s strategy fits in with the investor’s goals. Neither performance nor fees should be the primary criteria for manager selection—downplaying the importance of how the strategy fits into the long-term goals could easily lead to improperly balanced risk exposure. While performance is very important, investors should favor those managers who emphasize their process, and be wary of those touting only their recent performance. 

This article discusses the benefits of using a professional manager to manage some or even all of the investment decisions—for example by using mutual funds or a separately managed account (SMA). Beyond the scope of this article is a discussion of using a professional wealth manager—such as a registered investment advisor—to conduct financial planning and to make all of the allocation and investment decisions.

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