Municipal Bonds: Finding Value in a Fragmented Market

Voiceover: At MFS, our specialized team of Municipal Bond portfolio managers, analysts, and traders works together, creating a unified approach based on shared global insights to build long-term conviction.

<<Jason>> Municipal fixed income is a unique asset class. With over a million individual issues across a multitude of sectors and sub-sectors, it is among the broadest bond markets in the world. That breadth results in a high degree of fragmentation, variable levels of liquidity, and ultimately inefficiencies which create opportunities for investors. We believe these opportunities are best captured through an active approach based on rigorous fundamental, bottom up, research in concert with top down, macro insights to generate long-term conviction.

VO: When constructing portfolios, the team’s focus is aligning risk with our views on fundamentals and valuations.

<<Megan>> Our approach has four tenets. First, we combine bottom-up and top-down perspectives. Security selection is complemented by risk management at the portfolio level that seeks to optimally position each strategy for anticipated risks and opportunities in the muni market. Second, collaboration, leveraging the entirety of the MFS global research platform (Chief Economist, equity & corporate analysts, quantitative team), is essential to the consistent generation of differentiated investment ideas. Third, we seek to drive alpha primarily through the most repeatable sources, including credit selection, quality allocation, and sector allocation, and secondarily through duration and curve-related positioning. Fourth, active risk is continually monitored through a robust process enhanced with a variety of quantitative tools, including input from our Chief Investment Risk Officer.

<<Mike D.>> Given the size and complexity of the municipal market, we utilize our expertise which is built on a framework of sound judgement and discipline to identify a range of investment opportunities. We look for ideas across different sectors in market, as well as credit quality and yield curve positioning. Our team can then assess the best relative value options to construct diversified portfolios, with our primary goal to deliver a consistency of returns for the benefit of our clients over the long term. We work to mitigate our exposure to credit events that negatively impact to the downside by avoiding the riskiest, most speculative projects that fail to meet our investment criteria.

VO: Our global investment teams regularly share information through open dialogue and connection - which is key to our active fixed income approach. 

<<Tom>> We have a deep and highly skilled team of municipal credit analysts who are fully integrated into the MFS global research platform. They also work closely with our dedicated in-house legal team specializing in fixed income.  Our analysts cover multiple sectors, with overlapping coverage to encourage collaboration, foster debate, and maintain continuity of expertise over time. This integration with our broader investment team is critical. For example, trends like the health of the housing market, regulatory changes impacting hospitals, or insights from other markets—such as corporate or securitized—often have a direct influence on the municipal market. To ensure we make well-informed investment decisions, we rely on robust internal communication tools and forums. These help us share critical information efficiently and keep our team aligned and up to date.

<<Dan>> The team has an open-door policy and we’re continuously exchanging information, but there are two formal occasions for sharing investment ideas that are particularly important to the process, and those are daily morning meetings and bi-monthly municipal strategy meetings. Each of these forums include participation from all roles within the team, including PMs, analysts, associates, attorneys, and traders. The daily meeting provides an opportunity to discuss actionable investment opportunities where our dedicated traders lead a discussion centered around new issue and secondary market activity and general market tone. At the bi-monthly strategy meeting the analysts offer higher level sector and quality views based on evolving fundamentals and relative value. The output of this discussion then serves as a roadmap for portfolio managers to implement the sector and quality relative value recommendations of the analysts.

VO: Our disciplined actively managed approach offers clients access to comprehensive Fixed Income expertise, a range of strategies, and active returns for long-term goals.

<<Mike A.>> Our value proposition consists of, first, a collaborative, team-oriented structure to portfolio management and research, which ensures continuity of style and adherence to the investment process over time. Second, our approach to alpha generation incorporates the full set of credit and rate-oriented sources, designed to produce consistent value added through various market environments. And finally, the depth of resources enables accessibility to the team and the ability to tailor our capabilities to individual client objectives.

 

 

 

Investments in debt instruments may decline in value as the result of, or perception of, declines in the credit quality of the issuer, borrower, counterparty, or other entity responsible for payment, underlying collateral, or changes in economic, political, issuer-specific, or other conditions. Certain types of debt instruments can be more sensitive to these factors and therefore more volatile. In addition, debt instruments entail interest rate risk (as interest rates rise, prices usually fall). Therefore, the portfolio’s value may decline during rising rates. The views expressed are those of the author(s) and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice. No forecasts can be guaranteed.

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