Bond investors can utilize actively managed municipal bond exchange traded funds to seek out the best opportunities and exploit inefficiencies in the complex muni market.
In the recent webcast, Exploiting Inefficiencies in the Muni Market with Active Management, Chris Franta, vice president and investment director for Franklin Templeton, noted that the municipal bond market valuations appear more attractive after the recent sell-off, with bond yields at their highest level since the COVID-19 pandemic struck and spreads widening. Meanwhile, supply-side fundamentals also appear supportive, with bond issuance falling.
As investors re-evaluate their fixed-income allocations, Franta argued that people should consider an actively managed strategy to better capture the municipal bond market’s relatively complex and inefficient nature. There are over 50,000 issuers for municipal securities compared to 6,000 for corporate securities. There are 1,000,000 Distinct municipal bonds compared to 40,000 distinct corporate bonds. Additionally, there are 10,000 new issues of municipal bonds priced each year, and many of those issuers are infrequent participants.
Given the large universe of municipal debt securities, Franta believed that it is more prudent for investors to rely on a dedicated investment team that combs through the market to target the most attractive opportunities.
“Franklin Templeton is one of the largest municipal bond fund managers in the nation. Our experienced team of 26 investment professionals has an average of 23 years of tenure with the firm. The team’s experience navigating through multiple market cycles helps them uncover opportunities and identify indications of risk others may miss,” Franta said.
“Our team of investment professionals conducts in-depth research across the entire municipal bond landscape, with the ability to review every issue at any time, allowing us to identify potential opportunities and problems.”
Specifically, Franklin Templeton’s investment management team conducts credit research, sector research, and collaborative research process.
The credit research process includes a review at the time of purchase of both primary and secondary market offerings. The surveillance schedule of holdings is dictated by the sector team and is unique to that sector. The goal is for every holding to be reviewed at least annually, with more periodic reviews coming from the surveillance schedule, new information, or significant market changes. All holdings receive some level of input from the credit research team, including the proprietary model insight.
The research process is aligned around a sector-focused model. Each sector team dictates its key metrics, models, and criteria for credit evaluation which is documented. The team utilizes quantitative models and information from various sources, including issuers themselves, to gain a complete picture of the credit.
Lastly, the research analysts leverage key industry relationships and work closely with issuers, which can help with information flow in the less transparent municipal market. Research analyst and portfolio management teams are very closely aligned through constant communication during each trading day. This includes working together on relative value opportunities.
Franklin Templeton offers the actively managed Franklin Dynamic Municipal Bond ETF (NYSEArca: FLMI) and the Franklin Municipal Green Bond ETF (NYSE Arca: FLMB) to help ETF investors better access the municipal debt markets.
The Franklin Liberty Intermediate Municipal Opportunities ETF invests in municipal securities with a maturity of three to 10 years and may include debt of any rating, including those below investment grade and defaulted securities. The fund won’t focus on any single state and will not invest more than 15% of assets of a single state.
The Franklin Liberty Municipal Green Bond ETF was recently renamed on May 3 — FLMB was previously known as the Franklin Liberty Municipal Bond ETF. The new strategic direction will hold at least 80% of its net assets in municipal green bonds. The ETF will provide exposure to municipal securities that intend to use bond proceeds for projects and programs that promote environmental sustainability.
Financial advisors who are interested in learning more about the munis market can watch the webcast here on demand.