The Handbook of Municipal Bonds

CHAPTER 46

Managing a Buy-Side Municipal Bond Research Department

Richard A. Ciccarone Managing Director and Chief Research Officer McDonnell Investment Management LLC and President Merritt Research Services LLC

 

 

 

As an investment asset class, most professional and casual investors often fail to grasp the vast number of issuers, diversity of credit types, unique security structures, and risk parameters that make up the municipal bond market. As such, municipal bond research managers spend a lot of time trying to educate others, especially from outside the municipal market, about the challenges they face.

Municipal bond analysis is rarely taught in the halls of higher education. The relatively low default rate for traditional municipal bonds is probably one of the biggest reasons that business schools and investment courses do not spend a lot of time on municipal security analysis. Munis are deemed relatively staid investments that one shouldn’t lose too much sleep over. However, municipal bonds can and do experience problems that may result in lowered ratings, lowered prices, and sometimes defaults. When it comes to managing a municipal bond buy-side investment portfolio and the associated research effort in particular, predicting credit outcomes is a critical function but it is not the whole story. Research managers are under pressure to ensure that their analyst teams are identifying bonds that will provide consistently higher yields and total returns than the portfolio next ...