For Bill Walsh, there isn’t much room in a retail investor’s municipal bond portfolio for volatility or variability. Even though his individual clients’ incomes may ebb and flow and their tax rates may rise and fall, their tax-free portfolios should remain as stable and sound as possible, according to the president of Hennion & Walsh Inc.
That’s why in his 23 years as chief executive officer of the Parisippany, N.J.-based wealth manager he has advocated a buy-and-hold strategy for investing in tax-free bonds for the mom and pop clients heading for retirement who make up an increasing share of his customer base.
The firm promotes investing in high-quality paper that provides income and principal protection, combined with a personalized approach to building portfolios that seeks to increase clients’ comfort level and offer an alternative to large wirehouses.
The full-service securities firm — which he established in 1990 with partner Richard Hennion — sells fixed-income securities and equities and operates as three companies: Hennion & Walsh, Inc., Hennion & Walsh Asset Management Company, and Hennion & Walsh Wealth Advisors. Over the last four years, the firm has doubled its assets under supervision to $3.5 billion for approximately 18,000 clients firmwide, according to Walsh.
Most of Walsh’s retail municipal clients are between 60 and 70 years old and are among the estimated 78 million U.S. baby boomers who are at, or approaching, retirement age and scrambling to redirect their investable assets into a conservative nest egg.
His conservative philosophy is rooted in building portfolios of individuals bonds for retail investors in high tax brackets that satisfy life goals and objectives. “It’s simple, but it sometimes gets lost in the mix” within the grand scheme of the market, according to Walsh, who has been in the industry for 33 years and has appeared on CNBC. “As things get more institutionalized — by that I mean become more cookie cutter — our biggest strategy is to find out what the investor is trying to accomplish.”
Hennion & Walsh is among the shops competing for the business of high net worth investors who were burned by invesment losses during the latest recession and many of whom are turning to small, independent advisors as an alternative to large Wall Street firms for their retirement and financial planning needs.
“Our objectives are different than the bigger wire houses,” he said. The firm avoids squeezing investors into a pre-determined investment mold based on their age or other demographics, or assuming heavy risks to achieve high income.
Instead, the firm tailors each portfolio to clients’ target objectives based on their future retirement or financial goals, and attempts to maximize yield without compromising quality.
That means he foregoes building bond ladders — a strategy of including securities with different maturities in a portfolio to minimize interest rate risk and increase liquidity — or stretching for high-yield paper.
“We believe in buying good quality bonds and investing toward what your goal is,” he said. “I don’t see the advantage of bond ladders.”
As interest rates hover at historic lows and the yield curve remains steep, Walsh suggests retail investors aim for investment objectives that provide a realistic outcome in today’s market. “Everyone wants to grow money, but every person might be a little different – they need to know what they want,” he said.
Sometimes that means extending slightly on the yield curve, if the opportunity arises, and other times shortening duration.
“If investors need money on a certain day, then let’s invest for that maturity day. If you need college money in five years, then buy a five-year bond,” he said.
Creating a bond ladder in the absence of an objective – or a crystal ball to foresee future volatility — lacks efficiency or a hedge against potentially rising rates, Walsh said. “What have you accomplished? You don’t know when interest rates are going up. It’s safe to say that most of the portfolio is not going to mature the day interest rates do go up, so none of the portfolio maximizes your income.”
According to Walsh, preserving and protecting clients’ earnings is a crucial step when it comes to meeting their goals – be it their next stage in life, starting their own business, or retirement.
With this in mind, he said mom and pop investors typically begin transitioning their asset allocation from equity-laden growth vehicles to more income-oriented securities — chiefly municipals — in their late 50s and early 60s. His biggest municipal bond buyers are among the estimated 40 million of the nation’s oldest baby boomers who may have lost money in their equity portfolios during the latest financial downturn between 2008 and 2010, and have modest incomes consisting of Social Security payments, income from other assets, and private or government pensions.
Municipals are a good option for these risk-averse clients because of the securities’ high quality and historically-low default rate, Walsh said.
Despite any recent isolated cases of bankruptcies and defaults in places like California, Illinois, or Detroit, he said investment-grade municipalities have a strong commitment to the debt service backing their full faith and credit pledge.
“I can’t imagine the state of New Jersey not paying its bills, or not paying their bond holders,” he said.
Overall, Walsh advises investors to stay safe and avoid the temptation for risky market moves that could derail a portfolio’s high-quality foundation for the sake of a one-shot opportunity.
“Don’t reach for yield and forgo quality,” he noted. “For individuals, there are times when the high-yield market has more total return value, but most individual investors are not equipped to take advantage of that. It might be fine if you are a bond fund manager, but it’s hard for retail investors to be total return managers.”
He recommends staying with general obligation and essential service revenue bonds that have a predictable income stream. “You might not be squeezing the last ounce of yield out of it, but you will have that 3.5% tax-free coupon for as long as you hold the bond — and for high-income bond buyers that translates to a 5.5% or 6% taxable-equivalent return,” he said.
On Tuesday, the ratio of 30-year municipals to comparable Treasuries hovered at 94%, according to Municipal Market Data. Over the last three months, the ratio has averaged 97.6%, while over the last year the ratio has been as low as 87.9% and as high as 120.2%, according to MMD.
Walsh also cautions his clients not to panic over the daily ups and downs of the municipal or fixed-income markets — especially the media hyperbole.
“The whole world lives and trades on headlines from the TV news and Twitter, or other social media, but we tend to avoid getting caught up in day trading of bonds for our investors,” Walsh said. “It’s easy for them to get caught in the headlines and hot investment strategies of the day, but individuals investors are just that – investors – they are not day traders.”
Most minor hiccups in the market won’t have any long-term effects on a retail client’s portfolio, but indivdiuals can damage their investment plan if they make flip judgments influenced by poor headlines or an analyst’s take on the market on a given day, he said. “If income is something they need, we don’t worry that bonds are up 1/8 point on any day – that might not mean anything to their portfolios,” Walsh said.
With tax-exempt money market funds yielding nearly zero, municipals offer good relative value compared to Treasuries, and a tax-free alternative to riskier preferred and corporate bonds, Walsh said.
Bonds are typically long-term investments that are historically purchased and held for income, he said.
“If you just want growth, then you probably shouldn’t be in bonds,” he said. At the same time, he added, “the growth side might lead you back to bonds when the stock market gets scary.”