Leverage is not for the “Stay Rich” Crowd in #MuniLand
Watkinson Capital Advisors LLC - Municipal Bond Specialists
www.watkinsoncap.com Welcome to the Professional Side of Investing in Municipal Bonds. #MuniBonds #Munis
Re-Examining "Closed –End Funds"
"Paper Losses Turn Real"
We view municipal bonds as the foundation piece of a #StayRich investor’s portfolio. We do not recommend getting cute by deploying leverage to eke out an unnaturally higher yield for this portion of one’s assets because of the huge downside risk which was actualized in 2022. Adding leverage is a double-edged sword as it amplifies returns on the upside and downside. Adding leverage might be more appropriate (if at all) for someone looking to “get rich.”
?This newsletter will address and comment on the Wall Street Journal article: “For Closed-End Fund Investors, Paper Losses Turn Real” by Heather Gillers published January 12th, 2023. Definitely read this article which is good, technical read, and it reinforces our view that a municipal bond investor (especially with $125,000 or more earmarked for #MunicipalBonds) should avoid mutual funds and Closed-End Funds (#CEFs), many of which borrow money or deploy leverage to boost monthly #yield.
Let's Start with 2022 returns:
Not only are the 2022 returns for #CEFs (Closed End Funds) painful, but now monthly distributions are also being cut as much as 45%. Most CEF investors are in retirement or close to retiring and are depending on the monthly distribution for their living expenses. Add rising year over year inflation to cuts in monthly distributions is a horrific combination for these investors.
On what might be a positive note, individual investors and (hopefully) their financial advisors are smarting up to the pitfalls of owning 1940 Act MuniBond Funds and CEFs. 2022 was a record year in terms of #MuniBondFund outflows as investors yanked more than $152 Billion from #MuniBond Funds. The first pitfall is that these Bond Funds have infinite maturities. The investor loses the predictability of return of capital when buying a fund.
The second and perhaps more destructive pitfall is an investor's capital is at risk due to behavior of other investors in the fund. EG, massive forced selling like we saw in 2022 can lead to Bond Fund managers accepting fire-sale pricing in order to liquidate to meet redemptions. The result can be permanent NAV loss or permanent loss of capital, which is unacceptable for an investor looking to #StayRich.
If an financial advisor recommends to an investor to invest $125,000 or more into a municipal bond mutual fund or closed end fund, it is time to play the guessing game that this financial advisor is:
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1.?????Lazy
2.?????Greedy
3.?????Incapable
4. Close Minded
5.?????All of the above
In the #MunicipalBond space, we serve directly individual investors looking for peace of mind provided by predictable tax-exempt income. In addition we serve individual investors in the role as a trusted sub-advisor for other Registered Investment Advisors.
?We continue to take pride in exploiting the inefficiencies of this opaque $4 trillion dollar marketplace for the benefit of our clients. It is fascinating to learn about the different states, counties, townships, and authorities that provide essential services to the citizens of The United States. Most importantly, it is professionally rewarding to have an edge, an expertise that provides our clients with more yield without downgrading in quality or drastically extending maturities.
The Outcome will be more Income,