It wasn’t the typical path to a career in municipal bonds.
But for Michael Brooks, senior portfolio manager at AllianceBernstein, it turned out to be the perfect preparation.
Brooks arrived at AllianceBernstein having built a solid foundation in economic forecasting, planning, modeling, taxation and fiscal analysis of cities and regions before he so much as glanced at his first muni credit.
Today, he’s logged untold hours in front of audiences large and small, explaining the dynamics and trends in the municipal market that concern the firm’s investors the most, and in the process paring down the most obscure or byzantine concepts into easily ingestible terms.
Along the way, Brooks has used the firm’s research-first approach to investing to uncover opportunities for investors while navigating the market’s rougher patches over the past several years.
But the seeds of Brooks’ interest in munis grew from a deep interest in cities, having grown up in the nation’s largest.
Since his earliest days studying urban economics at the City College of New York, Brooks, a native of Brooklyn, had a strong curiosity about city and regional planning. He wanted to know how cities work — what worked, what didn’t, how it could be fixed and the relationships among a city’s many different parts.
“I was always interested in municipal issues, not necessarily municipal bonds,” he said.
After graduation, Brooks drove a cab in the city for a year before he became an auditor for the Internal Revenue Service. And while it wasn’t exactly a city planning job, which he sought, it was work.
But it also presented an opportunity to impart some important lessons on taxation.
“And municipal bonds are all about taxation,” he said. “And I’ve kept that up over the years.”
It also taught Brooks how to meet and address the public at large, a talent that grew quickly and has served him well over the years.
Next, he went to Rutgers University in New Jersey for graduate school in urban planning, where he learned about econometrics and modeling for transportation and housing before graduating in 1976. Brooks took a one-year contract job as a planning consultant in Trenton, N.J., with an 80-minute commute by car from his home in Brooklyn.
He was tasked with forecasting the social and economic impact of nuclear power plant development on the eastern shore of Maryland. It involved more econometrics and understanding relationships, a perfect fit.
When it ended, he was soon offered a position with the New York State Comptroller, in what became the office of the state deputy comptroller. His ultimate mission: monitor the finances of New York City, which he did for the next 13 years.
Brooks grew to direct the bureau of fiscal and economic analysis. He was tasked with forecasting the city’s tax revenues and its economy, evaluating its financial plan and capital program, and detecting potential storm clouds out to four years.
“I would alert the public in speeches, written reports or press releases, all of which would go out under the comptroller’s name,” he said. “I gained an appreciation for city finances, for budgets. And I was hooked, in a sense.”
But in starting his job with the state comptroller in the late ‘70s, Brooks returned to a New York City that was just emerging from a depression. Between 1968 and 1978, the city lost 641,000 jobs, Brooks said, more than the population of Boston.
In the 1980s, though, the city’s economy improved, and Brooks’ work became more routine. Around the middle of the decade, a friend who worked at Bernstein, as it was then called, inquired if Brooks would be interested in working as a securities analyst in equities, studying corporations.
“But I was doing the most interesting work in my career, really interesting, state-of-the-art stuff,” Brooks said. “And I said, ‘I’m just not interested in equities. I’m interested in municipals.’”
Around 1989, Bernstein was starting municipal mutual funds for the first time. By January 1991, it brought Brooks aboard as a credit research analyst.
Now, it was somewhat odd that a municipal analyst came from government, he said; it’s far more common for them to arrive trained from the credit ratings agencies.
“When I came here, I didn’t know what ratings were,” Brooks said. “I wasn’t interested in ratings. I was interested in municipal finance and what impacts municipalities.”
But he picked up credit ratings quickly. And after about six years, he moved into muni portfolio management.
Around that time, his supervisors discovered quickly that Brooks had a talent for public speaking. Soon, he would talk to clients at conferences.
And eventually, after adding public speaking to his duties for a couple of years, Brooks gave up his credit research responsibilities around 1996 and became a senior PM, the position he’s held since.
“The job of the senior PM, in addition to managing the bond portfolios here, is also to talk to clients, to hold their hands when they’re nervous, talk to prospective clients, to solve problems for clients,” he said, “and that’s a big part of what I do.”
Brooks works on the private client side at AllianceBernstein, which counts roughly $24 billion of the firm’s overall $31 billion in munis under management. Among the 28 people covering munis, AllianceBernstein ranks five senior PMs, eight associate PMs, eight muni credit research analysts, one quantitative analyst, four traders and two who provide administrative support.
Collectively, they concentrate on the private client and retail investors, whose investments are parked in mutual funds and separately managed accounts. The investments of pension funds and foundations fall on the taxable side of the fence, who aren’t as concerned about taxes, Brooks said.
“We [on the private client side] care about taxes a lot, with all that’s going on,” he added. “I’m sort of the internal tax expert here, because of my background.”
Brooks appreciates the educational aspect of his public speaking. As there is a spectrum of muni bond knowledge among investors, so Brooks likes making the topic comprehensible for everyone.
“I love it when I can talk to someone who’s not very knowledgeable about how municipals work, how bond management works, and I can simplify it enough so they can understand it,” Brooks said. “I also love it when someone’s challenging me and we can banter back and forth. That’s fun.”
Brooks can untangle otherwise dense market concepts for investors because he understands them so well. And he earned a degree of that education through proximity to a firm with a strong research department.
AllianceBernstein prides itself on being a research-heavy firm. Leaning on research, it found opportunities in some of the larger shifts in the market over the past several years, Brooks said.
For one, the firm would never depend upon the ratings of the bond insurers. Instead, it always looked through the insurance for the underlying rating, Brooks said.
Before the collapse of the monolines, insured bonds were seen as a commodity. And it didn’t make sense to Brooks to buy lower-rated wrapped bonds when investors could buy a better-rated insured bond for the same price. So AllianceBernstein always bought the higher-rated paper.
The monoline collapse “gave us the ability to capture the yields that were previously being, in my view, stolen by the bond insurers. We didn’t need them to do the research; we could do it ourselves,” Brooks said.
Also, the failure of thousands of auction-rate securities in 2008 presented another opportunity for the firm. Researchers there discovered that when an auction failed, some of these ARS offered the maximum rate permitted under the bond indenture, which, in many cases, was 15%, Brooks said.
“You could own an ARS and get a yield of 15%,” he added. “And sometimes it was only a failed auction for two weeks, but not all the bonds were like that. So we identified the bonds that we needed — that were good like that — and we built up a portfolio of almost $1 billion of ARS that were offering us these high yields. Now that game is over. The world changed, but we took advantage of it.”
It’s still changing, leading to concerns Brooks sees in the short term. The chief among them: the possibility that the Federal government will start to tax municipal bonds.
As the resident tax expert at the firm, Brooks has crunched the numbers on what outcomes could mean for the marketplace and the firm’s portfolios. He concludes that it wouldn’t have much impact on intermediate-duration portfolios, or just 1%.
And the firm’s short portfolios, which have a duration of about two years, would be hit only about 30 basis points. But longer bonds would get pounded, he said.
There’s a larger possibility that the federal government would take away the tax exemption of bonds such as those for industrial development, universities, hospitals, student loans, or private-activity bonds, Brooks said.
“So maybe they’ll trim around the edges, but I doubt they’ll take the whole thing away,” he said. “That’s highly unlikely. But it’s a concern.”
It’s one of a few, in fact. Another involves the likelihood that state and local governments will realize that they’re facing the lowest cost of capital in their professional lifetimes and accelerate their capital programs, thereby increasing supply tremendously.
“Once that supply satisfies the hunger of municipal investors, then they’re going to have to move the rest of the merchandise,” Brooks said. “How do you move merchandise? You lower the price. So yields could go up from that.”
Finally, demand for municipal bonds could fade if investors start moving out of municipals and into equities, if the latter continue their ascent. Balanced investors won’t really care, but many others might, causing interest rates to climb as demand falls.
But a cushion exists: the cash investors hold. Brooks has talked to many investors, and the vast majority of them are sitting on a pile of cash that’s earning next to nothing.
“And that’s what’s going to go into equities before they start pulling their money out of bonds,” Brooks said. “So, provides a little bit of a cushion. But those kinds of things could cause interest rates to go up.”