(pictured: Cindy Clemson)
For decades American leaders, businessmen and everyday citizens have complained about the state of the nation’s infrastructure. But municipal governments and the states are leading the charge in new development. Municipal bonds for foreign investors may be a good way to participate.
Cindy Clemson, a vice president and portfolio manager at global manager Eaton Vance in Boston, says recent studies have given US infrastructure a “D Grade”. “I’d give it an ‘F’, she says. But the bonds which pay for the building of an estimated 75 per cent of US infrastructure projects – municipal (muni) bonds – are highly rated. In the taxable market, which is where non-US investors congregate, they tend to be ‘A’ or better. And there are about 60,000 of them, Clemson says.
She is co-director of Municipal Investments at Eaton Vance, who was speaking last week ahead of a visit to Australia early May where she will meet with institutional investors and consultants.
The manager has about US$30 billion in managed municipal bond assets and has been a leader in the field since 1979. The taxable market, which is a more recent development, totals about US$500 billion and is growing at about US$30 billion a year.
Eaton Vance’s style is active, often taking positions in unpopular issues. For instance, when the market became nervous about Detroit, the manager was a big buyer of some of its water and sewer bonds that were trading at 85c in the dollar, later selling at $1.05. “We made a lot of money out of it,” Clemson says. Similarly, it has done well from having a small position in Chicago, Illinois, issues, which are unpopular right now. Overall, the muni market has been steady, she says, but the trick to adding value is in issue selection.
Duncan Hodnett, the company’s Australian office head, says that for Australian investors, the yield can be in 3-4 per cent range, converting back to the Aussie dollar. “You are getting a fixed-income portfolio underpinned by infrastructure.”
Clemson says the sector has a remarkable credit history of low defaults, as most issues are backed by a taxing authority or dedicated project revenue streams. “Local municipalities have been making good on their debt going back hundreds of years,” she says.
“Among global investment-grade fixed-income sectors, taxable muni bonds have generated the highest total return over the past 10 years.”