Municipal bonds on the intermediate part of the curve outperformed long term maturities, producing a positive return with less volatility in the past 18 months, according to Granite Springs Asset Management.
"The Barclays Long Muni Bond Index since Dec. 31, 2012, through June 30, 2014, the total return was 3.57%, while the Barclays 7-year was up 3.22%, in the same period," Tom Dalpiaz, managing director at the firm, which is approaching $200 million in assets under management and has offices in New York and Summit, N.J. "In the intermediate part of the curve, you are getting about 90% of the total return with about 40% expected volatility."
The intermediate part of the curve has produced returns ranging between 2.4% to 6.0% during the first seven months of 2014, according to Granite Springs' July Municipal Bond review.
In the beginning of 2014, market participants predicted another negative year for munis with the Federal Reserve expected to raise interest rates in an improving economy.
"Instead supply was tight and muni demand reversed itself and has been very resilient," Dalpiaz said. "When people did their taxes, they realized that there were higher tax rates and munis were one of the few investments to deal with that."
With taxes going up people looked to the intermediate part of the curve for both return and safety during the past 18 months, which has encompassed periods of falling, flat and rising rates.
"The intermediate space is in many ways a sweet spot in terms of capturing attractive yield while still managing volatility, preserving capital and keeping safety in mind," Dalpiaz said.
Despite its high demand, intermediate maturities have continued to drive value in the market.
"If you look at the yield curve and see how much additional yield you get each year, the curve is fairly steep, but it starts to flatten out in 10-15 years," Dalpiaz said. "The additional yield pick up as you go out beyond that tends not to be great. When you look at the addition yield and the additional duration you take on, intermediate maturities tend to give you an effective bang for your buck."
Dalpiaz believes that if the Federal Reserve raises interest rates from their current levels the market should be able to endure the volatility of intermediate bonds.
According to Granite Springs' report, when interest rates rose in 1994, 1999 and 2013, bond investors faced difficult times. Intermediate bonds as measured by the Barclays 7 Year Muni Index had negative returns of 2.77% in 1994, 0.14% in 1999 and 0.97% in 2013.
"I can only look at past history as a guide and it shows that the intermediate area can hold up pretty well," he said. "If rates go up in a gradual fashion the markets can handle it. There may be a surprise for how quickly they go up and the market will react to that. The intermediate area should hold up reasonably well but it won't be immune to it."
Granite Springs, a 5-year-old privately owned emerging investment firm, has expanded its capacity to operate in the muni bond market and the high yield corporate bond area with the addition of Dalpiaz and Randy Masel as managing directors earlier this year.
The firm specializes in fixed income portfolio management and tactical asset allocation investment strategies for financial advisors and their clients, as well as institutional and private investors.
With over 30-years of muni experience, Dalpiaz manages muni portfolios for individual clients and wealth advisors.
"There are so many muni credits to choose from unlike the equity market," Dalpiaz said. "We don't work with an approved list. It depends on what is available each day and what you can find. It's about turning over every rock and seeing if it works for the client and if there is value."
He has also overseen bond portfolios at Advisors Asset Management, Neuberger Berman, Sage Capital Management, and Weiss, Peck & Greer. Prior to that, Dalpiaz was a credit analyst at Weiss, Peck & Greer, Merrill Lynch, and The Bank of New York.
Masel launched Granite Springs' corporate bond unit and has over 30 years of experience as a banker, credit analyst, and a portfolio manager.
The two joined Bernard Garruppo, chief executive officer, whose background is in sales and trading, and Patrick Smith, chief investment officer, who focuses on munis.
"The bottom line for us is expertise and experience in a boutique setting," Dalpiaz said. "We have a lot of seasoned people who know their markets and have been through a variety of environments and bring that to separate account management."
The four industry veterans manage separate accounts in munis, high yield corporate bonds, and investment grade bonds. The firm offers exchange traded fund based strategies in domestic and global equities as well as balanced strategies.
"The access our clients receive is not something you may get with a large firm," Dalpiaz said. "We provide personalization and can be nimble about our investing and not get caught up with large bureaucratic departments. We find value every single day in the market that meets the objectives that our clients have laid out. Being in a small setting helps you to focus on that."
Granite Springs prides itself on its ability to meet its client's goals and objectives and believes that is the key for growth.
"We can preserve value and have satisfied clients by providing attractive yields that are overlooked or misunderstood and by doing extra leg work to uncover value and put them in carefully constructed portfolios," Dalpiaz said. "If we do all those things, our investment performance will be good, and our assets will increase. Growth will happen with customer satisfaction."
Dalpiaz said that the firm is likely to surpass its nearly $200 million in assets soon.
