Adding Value in a Muni Bond Portfolio

A little while ago, an advisor queried his study group for suggestions for a half million dollar municipal bond portfolio.  The usual mutual funds were suggested.  One respondent suggested a separate account manager with a good track record.  These are all good recommendations.

I made the recommendation that the bulk of the portfolio be indexed using two ETFs,SPDR Nuveen Barclays Capital Municipal Bond ETF (TFI) and SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF (SHM).  A 20/80 mix would produce a portfolio with a weighted average maturity of 5.2 years, a duration of 4.2 years, an SEC yield of 1.70% and a Yield to Maturity of 1.98%.

The remainder of the portfolio could then be invested in a laddered portfolio of one to five year bonds with characteristics addressed specifically to the client's needs.  the portfolio could be customized on characteristics like credit quality, state tax exemption, type of issuer, and use of proceeds.  A quick check of the Charles Schwab inventory indicated that individual bonds were available in $25,000 lots across the maturity spectrum providing a yield advantage of 100 to 150 basis points over the generic yield curve yields published by Bloomberg.

This portfolio provided the following values to a client that a typical mutual fund/separate account allocation would not:

1. Fully diversified exposure to the municipal bond market;
2. Management cost of about 14 basis points;
3. Full control of interest rate exposure with easy implementation of policy changes;
4. Annually programmed liquidity events;
5. A significant and visible portion of the portfolio customized specifically for the client.

I recognize that this solution will entail more work on the part of the advisor than the simple managed money option, especially up front.  However,  I would expect the value added through lower cost, higher returns, greater risk control, and a very high degree of customization to enhance the client/advisor relationship.