News Items Of Interest

The State of the Municipal Bond Market

Municipal bonds have recently received a great deal of negative media attention. For many months now, because we were keenly aware of risk in the municipal bond market, we have been emphasizing a more conservative approach that relies on investment managers with strong credit skills -- a demonstrated ability to differentiate "money good" bonds from those that are less credit worthy. I reviewed that approach in "Taking Stock" which we published two months ago and we still have confidence in that strategy.

60 Minutes recently ran a segment on "State Budgets: The Day of Reckoning" discussing the significant financial challenges faced by many state and local municipalities. The program featured commentary by Meredith Whitney, a prominent Wall Street analyst and noted critic of bank finances prior to the credit crisis. She believes the financial situation in many municipalities is worse than perceived and that the potential for more and larger municipal bond defaults is higher today than in the past. While we understand her concerns, those concerns have been in the press for more than a year, as have many of the specific state and municipal market issues that she highlighted.

At our annual investors' conference last Spring in Philadelphia, we highlighted the municipal bond market as an area of interest, featuring it in one our most well attended afternoon breakout sessions. One of the most important takeaways from that session was that the municipal bond market is large, fragmented, and a difficult market about which to generalize. There are many distressed issues and issuers (which is the case in all bond markets) and potential areas for credit deterioration or default. At the same time, there are many strong credits that are not capturing the current media attention.

The municipal bond market stress that we anticipated and warned about is here, but our municipal bond portfolios have been well diversified among high quality securities in order to provide a steady, stable source of reliable income. We believe that changing strategies now would be a mistake. In our experience, changing strategies in response to market sentiment is a sure way to destroy investment returns and wealth. That is not what we do. It is important that we stick to our discipline.

On February 3rd, 2011 we hosted a webcast to discuss the municipal bond market, click here for highlights from the presentation.