by David Ruxin, Portfolio Manager
Montcalm’s unique municipal and corporate bond strategies, where clients’ portfolios are comprised of direct ownership of individual bonds rather than a stake in a bond fund or ETF, have always provided a reliable haven from the volatility of equity markets without sacrificing opportunities for impact or ESG integrity.
In the face of economic headwinds and market uncertainty, the current bond market, with its historically high yield levels, is proving to be a very attractive place to park hard-earned savings for steady growth and peace of mind. Direct bond ownership to the full maturity of a bond creates a binary risk, where the bond issuer either defaults and is unable to repay bond owners, or fully refunds the bond and its interest payments. This structure avoids the daily turmoil of watching stock tickers, especially with investment grade issuers putting an emphasis on strengthening cash reserves and a municipal historical rate of default <0.1%1, even throughout COVID shutdowns.
Since the 2008 financial crisis, and with the lessons learned during the ongoing pandemic, investment grade issuers, particularly in the municipal bond market, have been building up coffers and rainy-day funds to weather periods of supply chain issues, inflation, and economic downturn. The daily, weekly, or monthly ups and downs in the equity market will not negate this fact. With price-to-earnings ratios in the public equity market at their long-term average despite an approximate 15% year-to-date decrease in prices, it’s becoming ever more apparent that the pre-2022 stock market was out of touch with reality, and the days of consistent, double-digit, positive returns from ETFs may be coming to end. We believe the binary credit risk associated with bonds, and the regular cash flows from bonds picked for their fundamental merits such as cash reserves and solvency ratios, rather than high-frequency trading algorithms dictating performance, will provide comfort for our clients as they think about their portfolios in the coming months.
The intersection of inflation and global political and economic uncertainty has created a bond market with highly attractive yield opportunities without seeing a decline in credit risk (of the bond issuers Montcalm pursues). This, coupled with a relatively new trend in bonds, where issuers can designate a specific use of proceeds from the bond to fund green, sustainability, or social impact projects, has only strengthened our excitement and belief in Montcalm’s bond strategies.
1 Moody’s Investors Service: US Municipal Bond Defaults and Recoveries, 1970-2020