mutual funds is one of total return, pursuing high tax-free income consistent with capital preservation while investing in a quality conscious portfolio of long term municipal securities.
Favorable sectors, according to portfolio managers, include insured issues A-rated or better from particular geographic areas like New York where there is a surge of issuance.
However the firm also invests in debt such as triple-B toll road and lower grade aquarium and paper company issues for their high yield fund.
The firm currently pursues essential purpose revenue bonds, such as water and sewer bonds with specific call features and strong credit quality.
General obligation bonds, said a firm analyst, have a greater tendency to fluctuate in changing economic conditions than revenue bonds.
With interest rates on the rise, the firm's portfolio managers see retail buying steadily coming back into the bond market in the past month or so.
Stein Roe & Farnham Inc.
Total Assets Under Management:
Total Municipal Assets Under Management: $990 million
Number of Funds:
Number of Muni Funds: 3
Address: One S. Wacker Drive
Chicago, Ill. 60606-4614
Telephone Number: 800 338-2550
(Jane McCart)
Name of Fund: Stein Roe High Yield Municipals
Total Net Assets as of 12/31/95: $282.8 million
Total Return, Year to March 31: 8.62%
Income, Year to March 31: 5.92%
(Joanne Costopoulas)
Name of Fund: Stein Roe Intermediate Municipals
Total Net Assets as of 12/31/95: $217.8 million
Total Return, Year to March 31: 7.20%
Income, Year to March 31: 4.83%
(Jane McCart)
Name of Fund: Stein Roe Managed Municipals
Total Net Assets as of 12/31/95: $637.4 million
Total Return, Year to March 31: 7.16%
Income, Year to March 31: 5.49%
Jane McCart, Senior Vice President, Portfolio Manager
Jane McCart's investment philosophy for Stein Roe & Farnham's Managed Municipal Fund is one of total return, pursuing high tax free income consistent with capital preservation and investment in a quality conscious portfolio of long term municipal securities.
"If we feel interest rates are going down, we extend the duration of our funds by buying longer municipal bonds or noncallable bonds," explained McCart, Senior Vice President and portfolio manager of Stein Roe & Farnham's High Yield and Managed Municipal Funds.
The firm believes 40% of the bonds in their Managed Municipal Fund should be noncallable bonds, said McCart.
"We like those (bonds) because if interest rates are going down, there are no call features to get in the way of the price increase of the bond. And you don't have to turn the portfolio over as much to keep up with the market," she said.
Currently favorable sectors, according to McCart, include insured issues from particular geographic areas with high issuance like New York, although the firm also invests in triple-B toll road and lower grade aquarium and paper company issues for its high yield fund.
"Over 40% of the issuance right now is insured, so consequently, you end up with a lot of them," stated McCart.
"Right now, we are looking at some geographic sectors where there are a lot of issues. We look there because we think we might find value because of high issuance.
"Things may tend to come at wider spreads than they would normally come and we try to take advantage of that."
Observing what occurs in the local environment of a particular issue is critical to the firm's evaluation, said McCart.
For example, several years ago she started to worry about the outlook for California.
"The state was losing a lot of jobs, their infrastructure needs and the illegal immigrant issue had us lower our exposure in California credits," she said.
"Our analysts felt the state was cramming down a lot of the cost to the local level, and we felt we would see a lot of stress in the local level of the municipals credit quality.
"We cut back and luckily that kept us out of Orange County."
Joanne T. Costopolous, Senior Vice President
Consistently striving for total return with an emphasis on income is the investment philosophy of Joanne T. Costopolous, Stein Roe & Farnham's senior vice president and manager of the firm's Intermediate Mutual Funds.
"Our philosophy is conservative," said the senior portfolio manager.
"The point is not to call interest rates, but to consistently strive on total return and hence the portfolio's appreciation."
The firm's Intermediate Funds, according to Costopolous, are performing rather well. Costopolous said the one-year return for the fund was in the 26th percentile as of March 31, 1996, and the three-year performance had been rated in the 36th percentile.
Currently attractive sectors in Costopolous' opinion include essential purpose revenue bonds, such as water and sewer bonds.
She does not favor resource recovery and solid waste sectors.
Preferring A-rated or better issues, the structure of the bond, she adds, is also important when she wants to trade.
"If you have a straight clean bond with a specific call feature you can identify and the credit quality is good, you are going to get 20 or 30 bids for that block of bonds," she said.
"But if it is an obscure issue where there is a sinking fund, or prepayment calls or unexpended proceeds calls, it makes the bond very complicated. There is a very limited audience for that," she explained.
At the moment, she added, supply is down because of the rise in interest rates.
However this will not stop her investing, she said.
"If I feel I want to be fully invested or if I feel that I want to make a switch, I'm not going to wait for a rate-sensitive deal to come to the market," said Costopolous.
"I'm going to act right now. Because in order for a rate-sensitive deal to come to the market, that means I'm going to have to wait for rates to come down. And if I feel that going to happen, I'd rather be in the market right now than have to wait."
Vince Anderson, Fixed Income Analyst
In his 10 years scrutinizing municipal credits, Vince Anderson, fixed income analyst for Stein Roe & Farnham, Inc., has noticed a trend toward user fees for transportation projects across the country, including toll roads, toll bridges, and airports.
"There is a trend to where the user actually pays for the project," explained Anderson.
"Although politicians tend to exploit these issues to the public, in my mind it's neither positive nor negative, as long as the feasibility study projections indicate that those fees can in fact cover the debt service for the period of the bonds."
Anderson has no fixed preference as to sector.
"Certain bonds and issuers go in and out of favor, but we try to keep an open mind," said Anderson. "We originally had a relatively low estimate of California bonds' credit quality earlier in the decade, but we've seen California turn around and we're buying California now.
"We don't like to dismiss an entire sector, like health care," he continued, "because continuing retirement centers, hospitals and nursing homes can all offer investment opportunities."
The abundance of insured bonds in the marketplace, according to Anderson, is something he would rather not see.
"With so many insured bonds, it makes it less possible for us (analysts) to add value in the credit analysis process," stated Anderson. "It's harder and harder to find those bonds where credit research will pay back the work."
Politicians' exploitation of the electorate's anti-tax mood is one of the reasons why important infrastructure projects are being neglected, said Anderson.
"There is a lot of deferred maintenance in infrastructure, roads that need to be rebuilt, bridges that need to be maintained," he added.
Commenting on the bankruptcy of Orange County, the revocation of legislative support for the Illinois solid waste facilities, Anderson hopes governments and taxpayers will not back away from their commitments.
"I've seen this as a trend which isn't good for the industry as a whole."
