Municipal Asset Management?

Hey everyone, 

Just wanted to ask people's thoughts on working on the Muni side. Currently working in a different part of Fixed Income but a spot is opening up on our Muni desk in a more desirable seat. I don't know much about it, but I think it seems interesting on the surface, there doesn't seem to be a lot of info on here about it outside of the public finance/IB side. I think infrastructure investing is really interesting, but I know that is a very niche part of it. I would assume it is a pretty safe spot but may not allow for as lucrative/as high-paying of a career. Do you think working in munis would be sustainable given current industry trends? Am I making it out to be more exciting than it is and it's pretty slow-moving? Is there a significant discount in terms of pay compared to the corporate side? Thanks.

 
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I'm going to do my best to answer your questions then talk a little more about the difference in markets dynamics

1. Do I think sustainable- Yes, we are aging as a country and the rich are getting richer and looking for tax-advantaged investments.  Also I see munis as the last market to be taken over by tech or passive.  Its so hard to index the market, there are just so many issuers and structures.  
2. Is it exciting and fast moving- The speed of transactions is for sure slower than corporates.  In IG deals price in one day, in munis they happen over several days.  There is for sure less sense of urgency in munis in than in corporates.  
3. Pay discount- On the sell-side there is but that is based on the fact that trades in size don't happen as much and the bid ask while a lot wider does not make for it.  I would assume that applies to the buy-side but I assume it would depend on the firm.  

I think in terms of working in one vs the other you have to understand the major differences in how markets work and decide which you like better.  Personally I find munis more interesting as the information as less perfect and their is a lot of opportunity to find value given various structures, but I think credit is boring and fall asleep when I listen to people talk about credit analysis.  Here are a couple of big differences I think about. 

1. No shorting and minimal derivatives- You can't short individual muni CUSIPs, and there is very limited derivatives.  You can do some things with muni ETFs but that is not nearly as efficient or liquid as what you can do in CDS markets.  
2. Munis are way less liquid- In corporates most CUSIPs are 300MM+ and there are quoted 2 sided markets on pretty much everything.  In munis basically its this is what we are long and here are some types of bonds we are trying to buy.  You will see some bid sides on indvidual bonds but generally from recent deals that that dealer underwrote.  In munis you have CUSIPs that are much smaller and therefore the bid/ask is going to be wider. 
3. In IG most of the bonds are bullets, and there is very limited structural features to consider, sure there is a liquidity premium for higher dollar bonds but nobody really is too focused on cpn in IG.  In munis there is a lot of focus on structure (cpn, call date, etc.) and their is a lot alpha generated that way.  
4.  Munis are more technical-  There is ton of "news" or earnings that is going to move the price of an individual credits like in IG.  What moves prices is more about supply and demand, and macro forces driving an entire sector.  So understanding what everybody else is doing is even more important.  Its not to say that there is not individual credit analysis done, but if you doing HQ munis most of the credits are AA type credits so taking a view on one CA school district over another is not really going to drive performance like buying corp credit A over corp credit B.  
5. There is way more retail in the muni markets and all of them have different tax rates so they will find value in things that some institutions don't.  Some retail be SMA structure with very specific constraints and others will be funds who can have a wider mandate.       
6. Everything is quoted in yield vs a spread vs the UST curve, there is like this index that people use you can't trade the index so sometimes you will see things quoted in spreads vs it but its not too common.  Some people will look how different maturities look vs UST but others don't care at all.   
7. Relative value is way harder to quantify, there is so many people with different goals that things will happen that will make no sense but investor constraints drive a lot of things.  Also individual credits are so esoteric that comparing one to another can be tough.

These are just my thoughts from a sell-side sales person who does all FI products would love to see some buy side muni guys comment.            

 

Hey, I appreciate the response. A few follow ups if you don’t mind, I know you aren’t on the AM side but any insight to these is hugely helpful:

1) I know you mentioned there isn’t as much credit analysis given the nature of the markets, but do you see being on the research as being as lucrative? I know relval and just general technicals also drive decisions on the research side but just want to understand how lucrative this would be in comparison to other asset classes or even roles within munis.

2) Any insight on how the pay gap is even on the sell-side? Really seems like there is limited info on this, outside of the lower pay for public finance IB, but it seems like a decent amount of that is returned via the better w/l balance.

3) With how low yields are do you see active muni managers getting priced-out, or comp getting cut? I know you said its a lot harder to index but I’m curious if we might see something similar to what we are seeing active money market funds with yields putting downward pressure on fees.

Thanks!

 

A few broad comments: 

1.) I'm not sure i'd use the term 'lucrative' when you discuss anything related to public finance. What you really end up with is a lot of analysis on the structure, issuer itself and, like it was said, overall market dynamics/macro factors - think tax policy. That really influences the markets and appetite in high tax states - NY, CA, etc. The taxable equivalent yields can be pretty astounding sometimes. The real 'credit' work, so to speak, is really around the fine print - when you look at GO bonds, what's the tax pledge? Is it actually good? It should be - but you also need to look at the underlying dynamics of the tax base, can they really levy it, etc. Same with revenue bonds - which are obviously going to be more of a due diligence than your standard GO tax pledge. There's a uniqueness to Munis that, at times, can really blend more of a public policy lens with a traditional financial evaluation - and those are becoming ever more blurred. I guess you are asking about is the experience worth while? I think it is - there's a lot of places that it could be useful, although it's certainly more niche than a traditional credit analyst on corporate debt or something. 

2.) I don't have much perspective on this for you. If I were guessing, I'd say you'd get paid pretty well if you are working on a good performing strategy. Where you often see pay concessions is on the advisory side... when the public sector is paying the fees, for whatever that's worth. 

3.) Fees are coming down everywhere - but I'd argue that some part of MS acquiring Eaton was for their actively managed muni stuff. To your point - the bet is that in markets that are not as efficient, with Muni FI being one of those, active management can work. I think that's a fair bet. Generally the challenge with muni's can be the disparate information - MSRB has done a good job, and there are some providers out there who help aggregate data, but it's certainly can be more time intensive than some other areas just to get the information you want.

For what it's worth - I would draw a distinction between active management and what you are seeing in the money market space. Liquidity is just a challenging business with rates at historic lows, with little end in sight - you have to either have another franchise to offset the fees or, well, hang on until you can recapture them when rates rise. If you are talking about tax exempt money markets - that's a whole different issue, those were crushed by money market reform which, in turn, suppressed (to be kind) the VRDN market (basically - long term floating rate debt with a put option.. thus the on-demand part). Regardless - money markets are interest rate sensitive, and after money market reform even more so. 

 

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