Can munis offer diversity for the portfolio? Yes, according to experts. At a recent meeting of NeuGroup’s Treasury Investment Managers’ Peer Group (TIMPG), a portfolio manager from meeting host and sponsor Franklin Templeton made the case that munis are a good yield enhancer and portfolio diversifier, even without the tax write off. And now that US MNCs are investing more US domiciled cash, they may also get that tax break.
Cities and states always have the ability to tax, which, for a reasonably healthy city or state, is a great business to be in if you are going to survive a downturn. This means that in most cases muni’s have a good ability to pay. This should offset concerns about their illiquidity and the mark-to-market value of municipal balance sheets. In addition, muni debt often has a performance letter of credit – meaning the municipality has the creditworthiness to satisfy the security in the event of default – that provides credit protection.
Still, since a substantial chunk of the muni market is individual investors and mutual funds, they don’t trade much in the secondary market on a given day; therefore, liquidity can be an issue. In this case, said the Franklin Templeton portfolio manager, TIMPG members should look at variable rate demand obligations (VRDOs). These are muni securities where the interest rate resets on a periodic basis and holders can liquidate their security through a “put” or “tender” feature, at par. These redemption provisions and credit enhancements with liquidity provisions make them more fitting for corporate cash investment allocations.