Munique: The Inefficiencies Driving Muni Alpha Opportunities

Active municipal bond managers have more flexibility to invest across a wider swath of the market and can add alpha by constructing portfolios that outperform their respective benchmarks.

Blog - Munique Muni Inefficiencies

While potential changes to Federal income tax rates often prompt investors to review their municipal bond allocations, they have additional incentive to do so this year with yields hovering near generational highs. As investors assess their muni holdings, a passive approach may be a consideration. However, those taking a passive approach are foregoing the opportunity to capitalize on the market’s myriad of inefficiencies, the most evident of which is index biasing.

By broadening an investment strategy beyond minimizing the tracking error of the index, a strategy that many passive muni funds pursue, active managers have more flexibility to invest across a wider swath of the market. This way, they can construct portfolios that outperform their respective benchmarks, adding alpha to an already attractive tax-equivalent yield.

Index biasing in the municipal bond market is prominent and straightforward. The Bloomberg Municipal Bond Index is a value-weighted index comprised of the largest issuers, which also happen to reside in the most populous states. For example, issuers in California and in New York each account for nearly 17% of the index.

 You can now read the full blog at the link below