There's a bull market for municipal bond analysts as buy-side firms seek experts to help them navigate an investment landscape that has shifted dramatically in recent years.
With triple-A yields sinking ever deeper into record-low territory, money managers are being forced to look farther out the yield curve and down the credit scale to find yield.
Before they dabble in a position in a single-A name in a declining interest rate environment, they need to do their due diligence, especially when it comes to less well-known issuers, said John Mousseau, a managing director and portfolio manager at Cumberland Advisors.
"There's no question that, in a world where you have very low nominal municipal bond tax-free rates, there is a chance that you're going to lean a little longer" to get the marginal yield in a low-yield universe, he said.
And in a world where triple-A-rated bond insurance no longer exists, credit surveillance has become more important than ever, Mousseau added. "That is your substitute for bond insurance now," he said, "with so little of the market coming as insured."
Morningstar Inc., which knows the mutual fund space well, has seen a greater need for research analysis in the market. The firm launched a fundamental municipal research offering on July 16 for institutional and more sophisticated market participants.
Jeff Westergaard, the firm's head of muni analytics, has noticed how buy-side firms today have a "heightened awareness" of the importance of having in-house muni analysts. Some larger fund managers, such as Vanguard and Fidelity, already have large research departments, he said.
Investment management firm BlackRock said it has hired one credit research analyst recently. The hire adds to a team of 16 muni credit analysts the firm organizes by region and sector, with an average of 16 years of experience.
The muni market has changed dramatically since the height of the financial crisis in 2008, during which all muni insurers lost their triple-A ratings. It has gone from being commoditized to a credit market. Insurance penetration in the muni market has fallen to 5.2% through 2011 from a high of 57.1% in 2005.
While it's true that defaults in single-A bonds are quite low, they can still happen, said Phil Condon, chief investment strategist for fixed income and lead muni portfolio manager at DWS Investments, which itself is looking for a muni analyst. DWS is a subsidiary of Deutsche Bank, which manages a group of mutual funds.
Fund managers are under pressure to put to work all the cash that has been cascading into muni funds, which have seen positive inflows for 44 of the past 47 weeks. Money managers at the same time have to deal with more headline risk in the market, said Joe Rosenblum, director of municipal credit research at AllianceBernstein.
Now that the media has been paying more attention to the muni market — and writing stories about troubled issuers such as Stockton, Calif., Harrisburg, Pa., and Jefferson County, Ala. — there's a realization that firms do need to do a lot of in-depth research.
"People needed to be reminded that it's a credit market," Condon added. "Now that we're transitioning from a non-credit market to a credit market, people have to do their research. They understand there are always going to be problems; there are always going to be headlines."
The less well-known a credit is, the more work you have to do on it, Mousseau said. There is ongoing research for big issuers such as California, the Jacksonville, Fla., Electric Authority, or New York's Metropolitan Transportation Authority because they come to market frequently.
When investors begin to look down the list towards, say, a double- or single-A rated water district, they aren't sure what the status of that issuer's rating will be three years hence, as the major rating agencies may well not revisit it as often.
"Ratings can get stale the smaller the issuer you have, which isn't a reason not to buy an issuer, per se," Mousseau said. "But it's certainly the flag to do more homework."
What kinds of candidates do firms seek for an analyst job? Hiring is very firm- and product-specific, said Tom Metzold, co-director of municipal investments at Eaton Vance. Mostly, they're regional, general and sector-based. It depends on the size of the firm, the kind of muni bonds in its funds and how its research department is organized. Most firms have a centralized research department, Metzold added.
They also look for direct need, because if a firm does not have high-yield muni fund or any sector-based funds, they're likely going to look more for generalists; firms must see if they have any holes in their department in a specific area.
Demand for analysts is strong enough to be a seller's market, Metzold added. Analysts are more in the driver's seat, in terms of determining where they want to work, as well as the salary level and scale.
Eaton Vance research analyst numbers have risen since 2008, Metzold said. The research department has seen a net 40% increase in staff, to 14 from 10 in 2008.
But Eaton Vance's research staff was largely promoted from within the firm, Metzold said. If necessary, it would add to that if it found someone with the right skill set and experience level.
"We continually train new people and look for new talent, if there's a good fit," he said. "But you can certainly look in Boston and New York and elsewhere and see that there's been a number of hires by multiple firms. Right now, it's a good time to be a muni analyst."
At Cumberland, bulking up muni research goes beyond personnel, Mousseau said. The firm has added more resources in the last few years to do research, both from in-house personnel devoted to research as well as investing in its own in-house credit-scoring system.
"The more we can add in-house, that would give us some comfort level from just an economic standpoint on certain credits," Mousseau said. "We're planning on adding more."