Municipal Bonds

Client-Specific Concerns

Typical for German institutional investors, the client wanted the investment to be housed in a dedicated fund structure with a local management company (KVG) and a local custodian. However, municipal bond managers traditionally have a very US centric client base. The major challenge was to identify a manager combining both a solid expertise in municipal bonds and a deep understanding of the German regulatory and operational requirements.

Outcome

• In the initial phase of the manager selection process the team scoured the full municipal bond manager universe to identify those who could satisfy the specific requirements for this German asset owner. This resulted in a thirty-strong longlist.
• From the perspective of a non-US investor, taxable municipal bonds are more attractive as they tend to offer higher yields than tax-exempt bonds with the same level of risk. Yet taxable munis represent a very small segment of the market; tax-exempt bonds have been the natural habitat of most municipal bond managers with their historically US-dominated client base.
• Taxable municipal strategies also, as a result, have far shorter track records than tax-exempt strategies. As a result, quantative analysis was only of limited value and more qualitative analysis of the teams and investment processes proved to be critical in selection.
• The research highlighted five managers that united outstanding skills in the asset class and the necessary German specific experience. After a round of due diligence, one was ultimately selected by the investor.