How Goldman's Barber exploits market inefficiencies for muni clients
Ben Barber is a multi-tasker.
As head of municipal bonds at Goldman Sachs Asset Management, Barber takes a bird’s eye view of the entire municipal bond landscape, seeing opportunities arising from market inefficiencies to meet the diverse objectives of $26 billion in municipal separately-managed accounts and $11.5 billion of mutual funds.
Barber and his team manage the mutual funds and the SMAs very differently based on size and investment objective. Since investors’ risk appetite varies, some will accept less yield in exchange for low volatility, while others will assume higher volatility to capture more yield, he said in an interview this month.
“The key is finding the right type of mix for each investor” determined by their risk tolerance, asset allocation models, and overall investment goals, he said.
The 26-year asset management veteran directs the strategies and objectives for the SMAs in its private wealth management division, as well as a wide range of municipal mutual funds.
Barber has spent his entire career on the municipal side of asset and portfolio management, and knows how to translate inefficiencies into value-added, risk-adjusted, after-tax returns for investors.
Before assuming his current position in 2002, he joined Goldman as a portfolio manager in 1999, after an eight-year stint at Franklin Templeton, where he was a research analyst and portfolio manager.
He and his portfolio management group tailor a broad range of customized strategies for the smaller, more conservative SMA accounts to achieve the appropriate risk management, duration target, and credit quality that meets the high net worth and institutional clients’ investment goals in the private wealth management division.
SMAs are managed to be as tax-efficient as possible – and replicate a chosen benchmark – according to the clients’ tax status, Barber said. He also manages a wide range of larger mutual funds with different objectives.
“On the mutual fund side, we are up and down the spectrum, they are much more diversified pools of investments,” Barber said.
While the products differ in strategy and style, they are managed with one overall objective in mind – achieving the best risk- adjusted returns on after-tax basis.
“We have a lot of different levels of risks we take on depending on the investors goals and it ranges from very low volatility, low duration, and high-quality accounts all the way to very long duration and lower credit quality – and everything in between,” he said. “It allows us to see the nuances in the market – the pressure on the yield curve, different portions of the quality spectrum; or the pressure on coupons or call structures. Because we manage the entire universe it’s easier to find value within the muni market.”
Since the relationship of supply and demand is an important technical factor in the municipal market, Barber said, inefficiencies are available when demand among the traditional audience of retail investors, insurance companies, and other institutional investors, like banks, becomes scattered.
“Inefficiencies can creep up when those main groups of buyers are not moving in lock step; some are sellers and some are buyers for different reasons,” he said. “When supply and demand changes, that, a lot of times, can breed the inefficiencies that can produce very good opportunity for us on the buyside.”
The 2016 post-election sell-off was a recent example of significant market inefficiencies that reaped value, he said.
Managing Duration, Volatility
Barber said he often suggests the firm’s Dynamic Municipal Income Fund as a vehicle for private wealth management clients that are unsure of what volatility level they should maintain.
He views it as an option for these conservative-minded clients, because it is flexible and can be toggled up and down on duration and credit quality risk.
The fund, whose ticker symbol is GSMIX, has a year-to-date total return of 4.67%, as well as 0.91%, 3.25%, 2.99%, and 4.45% over one, three, five, and 10 years, respectively, according to Lipper.
“In general, that fund fits into the intermediate peer group, but has the flexibility to move down shorter or go longer and take in below-investment grade munis -- if that’s appropriate from our perspective,” Barber said. “It’s a nice way to play the market as a core holding in munis. We will position the fund based on the views of our strong research team with its focus on credit fundamentals combined with our yield curve and relative value views.”
Meanwhile, the Goldman Sachs High-Yield Municipal Fund [GHYIX] recently enhanced its value by owning more than triple its previous exposure to the higher-quality portion of the market between the triple-A and single A category.
“After the monoline insurance company downgrades in early 2008, volatility picked up quite a bit within the investment grade space,” Barber said. “Higher volatility has given rise to much more opportunistic investing within certain portions of the higher-quality muni market, and this fund has taken advantage of that.”
Barber said the fund recently increased its exposure to 34.2% as of June 30, up from just 11% back in 2007. That added diversification and liquidity, and enhanced the ability to take advantage of opportunities up and down the credit spectrum.
The fund has a year-to-date total return of 7.76%, according to Lipper, as well as 2.93%, 5.89%, 5.58%, and 4.28%, over one, three, five, and 10 years, respectively.
Barber spends a lot of time managing interest-rate volatility to mirror a chosen benchmark for the SMA accounts.
In addition, though the mutual funds may not trade every day, Barber's team tracks them hourly and compares them with broader market gauges to evaluate performance and value.
“We track fund flows very closely because over time that’s a big factor in what changes the evaluations in munis to LIBOR or Treasuries, or credit spreads within the muni market,” he said. “The key to credit investing in munis is to have a very strong research effort.”
If there is a market event that would cause the account or fund to deviate from its usual strategy and risk tolerance, “all kind of bells and whistles go off,” Barber said.
“As long as we are fully invested and at the duration and yield curve target, then the only changes might be born out of a credit quality or tax loss event that might cause trading,” he said.
In addition, the yield or spread relationship between different states could also trigger a trade.
A state trading too rich might be swapped for a comparable-quality bond in another state with more yield on an after-tax basis, he said.
“There are lots of reasons to have trades in any of the SMAs, but the first level of risk management is duration to the benchmark and credit quality,” Barber explained.
The next criteria for risk management is maximizing yield and tax efficiency to enhance performance and return. For instance, he recently enhanced the performance of the GSAM High-Yield Municipal Fund by decreasing its exposure to the non-profit acute care hospital sector to 9% as of June 30, from slightly more than 20% back in 2012.
The reduced exposure followed mergers and acquisitions driven by passage of the Affordable Care Act, as well as weaker security provisions and tighter spreads in recent years in the sector, which includes facilities ranging from large, multi-state hospital systems to very small critical access hospitals around the country.
One of the growing concerns in recent years was that security provisions for new deals began to weaken due to uncertainty related to the ACA’s impact on certain areas of the healthcare market, Barber said.
Some of the weaknesses include the replacement of a gross revenue pledge with a gross receivables pledge; removal of a mortgage pledge, and in many cases, no longer offering a debt service reserve fund. Additionally, covenants were watered down or outright removed, a new and “very unattractive” Master Trust Indenture substitution or replacement provision was added to many of the new deals, according to Barber.
“This has been happening during a time of tightening spreads – making this sector less attractive from our perspective,” he said.
He continues to be selective when it comes to municipal high yield securities in general, and limits exposure to deals and sectors with extremely low bond holder security, and those with an inability to build up cash and improve their financial story.
Overall, he said municipal evaluations are currently mixed up and down the yield curve, and there is opportunity for investors with different risk parameters.
For instance, yields on the short-end of the municipal yield curve are expensive compared with Treasuries and LIBOR, while on the long end, yields are fair and slightly cheap, Barber said.
He encouraged investors not to shy away from municipals heading into the fourth quarter – and to take advantage of inefficiencies when available.
“Overall, we like the muni market because of the strong fundamentals; we have moderate to light supply and positive demand,” he said. “The credit fundamental story has a lot of risk priced into the market.”