Take a deep breath and tune out the noise of recent market volatility and chatter about the non-action taken by the Federal Reserve (Fed). To me, the simple message that emerges is that over the long term (10 years in the example below) the municipal asset class has touched what I feel are two very important demands of many investors: low volatility and comparatively attractive returns, particularly on a taxable equivalent basis. Couple those elements with historically low default rates1 and one might say, “Oh yeah, munis have been generally steady, as advertised.”
As we enter the final quarter of the year and put behind us a Summer of Discontent, in which China devalued its currency, Greece tiptoed on the precipice of default, and the U.S. economic recovery continued enigmatically while investors hung upon every syllable the Fed uttered, it occurs to me that investors may want to revisit the potential benefits of the municipal asset class.
If doubt about the economy and movement of interest rates is creating uncertainty for investors, munis should be capable, in my opinion, of helping the undecided chart a near-term strategy. If comparative returns and lower relative volatility are important elements in one’s portfolio design, this chart might be helpful in providing one of those “Ah…ha” moments of discovery. Let’s get back to fundamentals while the rest of the world waits to see what happens.
Important Disclosure
Source: FactSet. As of August 31, 2015. Indices are unmanaged and are not securities in which an investment can be made. See below for index descriptions and an explanation of material differences between them. Past performance is not indicative of future results. Standard deviation is the statistical measure of the historical volatility of a portfolio. *Tax-equivalent return is calculated using the 39.6% highest effective federal tax rate. Results would have been substantially lower using lower tax brackets.