Investing in the High Yield Municipal Market: How to Profit from the Current Municipal Credit Crisis and Earn Attractive Tax-Exempt Interest Income

Actively Managed Products

Due to their very nature, high yield investments generally require constant monitoring (hence an active management style) and considerable credit research resources. No wonder the sector has historically been dominated by active professional managers at large mutual fund complexes with sizeable research staffs. Through these fund groups, the average investor can access the sector through a variety of open-end and closed-end fund products. Until recently, separately managed account platforms have largely steered clear of credit exposure, as their primary high net worth clientele is more concerned with capital preservation than wealth creation.

There are signs this may be changing, however, as the persistently low interest rate environment and proliferation of credit opportunities in the municipal market may spur greater interest in income-oriented SMA strategies. More aggressive investors who can afford a minimum starting investment of $1 million may also participate in a new breed of private limited partnerships or hedge funds devoted to municipal credit opportunities, including distressed debt. Let us take a look at each type of actively managed vehicle in greater detail.

Open-End High Yield Municipal Funds

The overwhelming majority of high yield municipal bonds are held in open-end mutual funds. As we saw in Chapter 2, the mutual fund industry provided the initial impetus for the growth of the high yield tax-exempt investment style some 30 years ago. ...