Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Opportunity for non-US investment in taxable US municipal bonds
An allocation to municipal bonds by non-US investors may provide a high quality and differentiated fixed income exposure to a portfolio.
With an increase in issuance and market size, investors outside the United States are expanding their search for yield to a hitherto unexpected place: US municipal bonds. US municipal bonds offer generally higher nominal yields
than comparable Treasury securities and lower default rates and price volatility than comparable corporate. As such, we believe US municipal bonds continue to offer a compelling opportunity to the non-US domiciled investor.
In this paper we will explore how an allocation to US municipal bonds by non-US investors can potentially provide
another source of attractive, high-quality income to a portfolio while also diversifying from a credit standpoint. We believe partnering with an expert is critical, given the nuanced nature of the municipal bond market.
Key arguments for institutional investors:
- Income at an attractive relative value
- Higher quality exposure vs Corporates
- Longer duration asset class to match liabilities
- Access to infrastructure related investments
- Expanding universe of green munis
