M.R. Beal is the latest municipal bond underwriter to bolster their distribution network in response to increased retail demand for tax-exempt securities by forming an alliance with a brokerage house that has a broader footprint with investors.
The partnership between the New York City-based underwriter and TD Ameritrade was announced Tuesday. It comes on the heels of a similar pairing in September between Goldman, Sachs & Co. and Chicago-based distributor Incapital LLC.
JPMorgan, a top muni underwriter known for its institutional distribution, tapped into the retail network of Charles Schwab in April, while also extending a 2008 agreement with UBS Wealth Management for an additional two years to 2013.
“We don’t have the person-power to cover, manage, and maintain individual retail accounts, so that’s why having this partnership is strategically so important to us,” said Stan Grayson, chief operating officer at M.R. Beal.
TD Ameritrade will now have primary market access to all municipal deals distributed by M.R. Beal, allowing the underwriter to become a presence in retail order periods that typically precede the institutional buying period. M.R. Beal, founded in 1988, was senior underwriter on 21 deals totaling $2.1 billion so far in 2010. It has co-managed 154 issues worth $3.9 billion, according to Thomson Reuters.
James Grady, director of the fixed-income trading desk at TD Ameritrade, said customer demand for Treasuries and certificates of deposit is lower than in previous years, but investor appetite for tax-exempts is up sharply. Giving clients access to the primary market allows them to purchase munis without forming a relationship with a bulge-bracket firm, he said.
“You’re dealing with fixed-price offerings,” Grady said. “Customers can buy bonds knowing they are getting the same price that everyone else is.”
Grayson said his firm also benefits by marketing their broader distribution to issuer clients.
“We can now flag and highlight our participation during retail order periods,” he said. “It adds another layer of polish to our efforts.”
Primary market access is key in giving retail investors more choice and flexibility, he said.
“In retail order periods, you as an investor can pick which maturity you want and how much, and that’s the first priority,” Grayson said. “In the secondary market, you may want a 2018 bond but you can only find a 2016.”
The success of these alliances is in part dependent on how retail demand holds up going forward — a trend that isn’t always clear in the data.
In the week ending Nov. 17, municipal bond mutual funds reported record net outflow of $4.78 billion, followed by a net outflow of $3.07 billion the following week, according to Investment Company Institute. Data from Lipper FMI indicates those were the biggest and third-biggest weekly outflows ever.
Grady said that data doesn’t say much about the appetite of his clients at TD Ameritrade, who crave the access to individual bonds the partnership provides.
“Most mutual fund buyers tend to be thinking solely from the standpoint of asset diversification, whereas the individual bond buyer is looking for a pre-determined return of principal,” he said. “They want that fixed maturity date, as well as regular income that they know is predictable.”
One problem in measuring retail demand is in defining it.
Federal Reserve data indicates that household holdings of municipal bonds make up about 36% of the muni market. If “retail” is defined to include pension funds, mutual funds, and others who purchase on behalf of individuals, then households own about two-thirds of the market.
Richard Ryffel, managing director at Edward Jones, said individual buyers could be a major presence in 2011 depending on the rate environment. That would make efforts to increase retail participation pay off quickly.
If yields rise — a strong possibility if the Build America Bond program expires at the end of this month — then retail customers will flock to the market through the partnerships and the access they provide to the retail order period.
Ryffel said retail investors took advantage of the market in mid-November when yields soared owing to a surge in supply. That allowed his firm to sell “substantially more” munis to retail in the two weeks preceding Thanksgiving than in any similar period in the prior five months.
“Retail really came back into the market,” he said. “If it had been a little quiet on the retail front, before the surge in supply, it got pretty fast and furious there the week before the holiday.”
Despite recent volatility, Grady said he thinks the broader trend is one of fleeing equities and turning to fixed-income products perceived as more stable.
“The American investor, having lost money in real estate a few years ago, and losing money in the dot-com bubble before that, is certainly going to be looking for the type of safe and steady return that a fixed-income portfolio can give,” he said.
California signaled retail demand can be robust on Nov. 22, when it came to market with $1.25 billion of general obligation bonds — 98.7% was sold to retail.
“It’s pretty astounding,” said Tom Dresslar, spokesman for state Treasurer Bill Lockyer. “I can’t imagine there has ever been a higher number.”
A week earlier, California issued $10 billion of revenue anticipation notes and sold 60% to retail.
Dresslar said the retail order period is increasingly important to issuers who are struggling to reduce taxpayer costs. Broader demand puts state and local governments in a better position to price bonds for institutions and the new partnerships are a welcome development for them.
“To the extent it helps increase retail purchase, we support those efforts,” Dresslar said. “The more retail demand you have, the better shot you have of getting a better deal for taxpayers.”