When I was growing up, there was a troublemaker on our block named Tom. I’m ashamed to say I developed a bad attitude toward anyone named Tom, and assumed they too would be troublemakers. That is, until I met a guy in high school who ultimately became my best friend … his name was Tom. Similarly, municipal bonds can sometimes be unfairly judged when they have a name that’s similar to, or in some cases actually the same as, a troubled municipality. For investors who actively dig beneath surface assumptions, I believe these situations can present opportunities.
When is ‘Detroit’ not Detroit?
Take, for example, bonds issued by the Detroit Metropolitan Wayne County Airport. These bonds hit a low in 2013, when the City of Detroit filed for bankruptcy. However, the airport and the city are completely separate municipal entities. Investors who didn’t make a snap judgment about all bonds named “Detroit” were rewarded as the Detroit Metropolitan Wayne County Airport bonds due in 2037 recovered 17% by the end of 2014. (As of Sept. 30, 2015, this bond accounted for 4.9%, 4.5%, 4.3% and 4.4% of Investment Grade Municipal Trust Portfolios 166, 170, 171 and 173, respectively.1)
Currently, some Illinois municipalities’ bonds are trading at attractive levels as the state of Illinois has struggled financially. In May 2015, Illinois was assigned a negative outlook from S&P, and that was followed by negative outlooks for the state from Moody’s and Fitch as well. This negative news about Illinois, which has the lowest credit rating of any state,2 seems to have unjustifiably hurt the pricing on several high-quality municipal credits in the state, in our view. By taking the time to analyze and understand individual Illinois municipal credits, Invesco Unit Trusts has found very attractive opportunities from financially strong municipalities.
How Invesco Unit Trusts assesses municipal bonds
The lesson? It’s important to examine every aspect of a municipality, including its legal structure and revenue sources, when deciding whether to invest in its bonds. At Invesco Unit Trusts, we take the time to perform a complete fundamental analysis and review of every municipal bond investment to take advantage of market inefficiencies.
- We study the legal structure of each municipality in a struggling area, as they are often a separate legal entity from the troubled municipality. If a city faces financial distress, that does not necessarily mean that every separate legal entity inside that city also faces financial distress.
- Many municipalities —especially in the health care, public higher education, transportation, utility and school district sectors – typically have various revenue sources. Even if a municipality does receive funds from a financially challenged city or other entity, it’s often not their only revenue source.
Talk to your advisor
Just as it’s important to really get to know the people we meet, it is equally important to thoroughly evaluate potential investments, and not judge them based on surface factors like their name. In doing this, we may be greatly rewarded with best friends like Tom as well as a portfolio of investments with excellent potential.
Talk to your advisor about whether municipal unit trusts are right for your portfolio, including our Investment Grade Municipal Trust 10-20 Year and our Investment Grade Municipal Trust 20+ Year.
1 These trusts are trading in the secondary market and have limited availability for purchase.
2 Source: Crain’s Chicago Business, “Fitch downgrades Illinois’ credit rating, citing budget fight,” Oct. 19, 2015
Important information
A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations, including specific securities, money market instruments or other debts. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest); ratings are subject to change without notice. NR indicates the debtor was not rated, and should not be interpreted as indicating low quality. For more information on rating methodologies, please visit the following NRSRO websites: www.standardandpoors.com and select ‘Understanding Ratings’ under Rating Resources on the homepage; www.moodys.com and select ‘Rating Methodologies’ under Research and Ratings on the homepage; www.fitchratings.com and select ‘Ratings Definitions’ on the homepage.
About Risk
There is no assurance that a unit investment trust will achieve its investment objective. An investment in a unit trust is subject to market risk, which is the possibility that the market values of securities owned by the trust will decline and that the value of trust units may therefore be less than what you paid for them. Unit trusts are unmanaged. Accordingly, you can lose money investing in a trust.
An investment in a trust should be made with an understanding of the risks associated therewith, such as the inability of the issuer or an insurer to pay the principal of or interest on a bond when due, volatile interest rates, early call provisions and changes to the tax status of the bonds. As interest rates rise, bond prices fall.
Investments in fixed income trusts may be subject to interest rate risk. If interest rates rise, the value of the bonds in a trust may decline and if interest rates decline the value of the bonds may increase. Also, the longer the period to maturity, the greater the sensitivity to interest rate changes tends to be.
A bond issuer may cease to be rated or its ratings may be downgraded. Such action may adversely affect the value of the bond in the trust and the value of the units.
Invesco and its representatives do not provide tax advice. Individuals should consult their personal tax advisors before making any tax-related investment decisions.
Investment Grade Municipal Trust 10-20 Year Risks
This trust is concentrated in bonds of issuers in the health care sector. The ability of health care issuers, such as hospitals and hospital systems, to make payments on bonds depends on factors such as facility occupancy levels, government regulation, cost of malpractice insurance and claims, and government financial assistance (such as Medicare and Medicaid).
Investment Grade Municipal Trust 20+ Year Risks
The trust should be considered as part of a long-term investment strategy and you should consider your ability to pursue it by investing in successive trusts, if available. You will realize tax consequences associated with investing from one series to the next.
