Uncommon Opportunity in the Municipal Bond Market. April 2009
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- Deirdre Wade
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1 Uncommon Opportunity in the Municipal Bond Market April 2009
2 Disclosures 2 Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value of an investment will fluctuate thus an investor s shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, visit our website at Mutual fund investing involves risk, including possible loss of principal. Bonds offer a relatively stable level of income, although bond prices will fluctuate providing the potential for principal gain or loss. Bonds are subject to the risk that principal value reacts in opposition to the movement of interest rates and that a rising interest rate environment increases the risk of loss of principal. A Fund s income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax. The geographical concentration of portfolio holdings in this Fund may involve increased risk. This presentation reflects the analysis and opinions of RidgeWorth Investments as of April Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may change without notice. The analysis and opinions may not be relied upon as investment advice. Statements of fact are from sources considered reliable but no representation or warranty is made as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy. Opinions expressed reflect prevailing market conditions, and are subject to change. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from reliable sources. An investor should consider the fund s investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information about the RidgeWorth Funds can be found in the fund s prospectus. To obtain a prospectus, please call or visit Please read the prospectus carefully before investing RidgeWorth Funds. RidgeWorth Funds are distributed by RidgeWorth Distributors LLC. RidgeWorth Investments is the trade name for RidgeWorth Capital Management, Inc., the adviser to the RidgeWorth Funds, and is not affiliated with the distributor.
3 Table of Contents 3 Historical Perspective Recent Performance of Municipal Bonds... Changing Dynamics Exacerbated Issues... Municipal Outlook Should Improve in Conclusion Page 4 Page 9 Page 10 Page 15 Page 16
4 Historical Perspective 4 Municipal bonds should appeal to both the affluent and average investor The marginal tax rate for an average investor with a household income of $150,000 was 54% in 1979 compared to 28% in The tax-equivalent yield of a municipal bond for a household in the 28% marginal tax bracket has outpaced the yield of Treasuries since Past performance does not guarantee future results.
5 Historical Perspective 5 Tax-exempt income is not the only benefit of investing in municipal bonds, they have historically provided: Low Default Rates Low Volatility Diversification
6 Historical Perspective 6 Municipal bonds have had lower default rates than their corporate counterparts The relative stability may be attributed to the fact that many municipal issues support special projects which generate income to repay bondholders. Other issues include general obligation bonds, which can be paid off by tax and fee revenues generated by the municipality. Past performance does not guarantee future results.
7 Historical Perspective 7 Municipal bonds have offered lower volatility than other asset classes Volatility increased in 2008 across all credit markets. However, municipal bonds remain less volatile than those of government, corporate and high yield indices as well as the broad equity market. Past performance does not guarantee future results.
8 Historical Perspective 8 Municipal bonds help diversify a portfolio Municipal bond returns have had a very low correlation with stock returns over the past 10 years, which may help smooth out the volatility of a portfolio. They can also add a measure of diversification to a portfolio with heavy concentrations in corporate or government bonds. Correlation Matrix April March ) Barclays Capital U.S. Municipal Bond 1 2) Barclays Capital U.S. Corporate Investment Grade ) Barclays Capital U.S. Government: Intermediate ) Barclays Capital U.S. Corporate High Yield ) S&P
9 Recent Performance of Municipal Bonds 9 The credit and liquidity crisis skewed many traditional investment relationships Municipal bonds have historically yielded % of Treasuries because they are exempt from state and federal taxes. The flight to safety pressured municipal bond prices down to historic lows, while bidding up Treasury prices. At year end 2008, a 10-year AAA-rated municipal bond yielded 175% of a 10-year Treasury. Past performance does not guarantee future results.
10 Changing Dynamics Exacerbated Issues 10 A confluence of events put severe pressure on the municipal market Volatility mounts as leverage unwinds Structured products take down the monoline model New single rating system levels the field Needed regulatory reform falls short
11 Changing Dynamics Exacerbated Issues 11 Volatility mounts as leverage unwinds Monthly price volatility in 2008 exceeded the 10-year average in 11 out of 12 months. This increased volatility was due to several issues, including less appetite from dealers and other large buyers and the market collapse of structured products.
12 Changing Dynamics Exacerbated Issues 12 Structured products take down the monoline model The monolines started insuring riskier securities involving subprime mortgages and other structured products. When defaults soared, the monolines were downgraded and experienced severe losses, leading to municipal bond downgrades, safety net dissolution and reduced surveillance.
13 Changing Dynamics Exacerbated Issues 13 New single rating system levels the field Moody s has historically used distinct rating scales for municipal and corporate bond issues. In 2008, Moody s announced it will convert to a global rating system for corporate and municipal bonds. The new methodology brings greater parity to corporate and municipal bond ratings which should lower the cost of municipal debt. Municipal Rating System Global Rating System Corporate Rating System
14 Changing Dynamics Exacerbated Issues 14 Needed regulatory reform falls short The Municipal Market is self-regulated. It s regulatory and disclosure requirements have failed to keep pace with the increase in new issue and structured products. The SEC proposed new disclosure requirements, but Congress failed to respond. SEC established a repository for disclosure documents Electronic Municipal Market Access. The new system will add transparency to the municipal market, but does not address all the issues.
15 Municipal Outlook Should Improve in Indications are that most parts of the municipal market are functioning well We believe the extreme volatility and the collapse of historical relationships will abate and the market will return to normal. The market is already showing signs of improvement: Demand is picking up The flight to quality is cooling off Attractiveness has increased
16 Conclusion 16 Municipal bonds offer an uncommon investment opportunity Last year s unprecedented volatility and supply/demand imbalance was the result of technical factors, not the fundamentals. High yields and unsustainably low prices present an uncommom opportunity. The opportunity is most attractive to affluent investors, but should also appeal to the average investor as municipal bonds have provided: Tax exempt income Low default rates Low volatility Diversification We believe investing in an actively managed municipal bond mutual fund can amplify these advantages. An experienced manager who has navigated such downturns in the past has the potential to provide very competitive after-tax total returns to investors.
17 Thank You
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