Today’s complex, fragmented, fast-moving muni market is rapidly outpacing the capability and capacity of traditional portfolio-construction methods. The market has changed a lot over the last 20 years, even as most investors have barely adjusted their trading, research or portfolio-management approaches.
Finding success in today’s muni market, in our view, requires a highly integrated trading, portfolio construction and management process that can take client portfolios from conception to execution faster and more efficiently. That need was the impetus behind our development of AbbieOptimizer, a portfolio-management engine that digitally connects all of our investment systems.
We think all muni managers should stand ready to provide specific examples of how they’ve improved client outcomes using built or bought technology. They should also have an explicit technology strategy that anticipates new developments in artificial intelligence, machine learning and market conditions.
In short, muni managers should be able to answer these key client questions:
1) What are you doing to adapt to changing liquidity in the muni marketplace? When liquidity is scarce, seconds matter. Managers who aren’t addressing liquidity conditions with a tech-powered solution could find themselves in the desert when markets dry up. With the sprawling nature and disjointed liquidity of today’s municipal market, managers that aren’t tapping into technological innovation are falling behind, in our view. And they are leaving alpha and opportunities on the table.
2) What methods does your organization use to find liquidity? And where do you look? Finding liquidity means scanning the entire market, not just Bloomberg. Being shut out of the vast array of segregated venues hinders liquidity and execution while adding unnecessary costs. That can translate into lost returns and missed opportunities. Sourcing liquidity across multiple trading platforms simultaneously gives investors a better chance of benefiting from trading alpha. And technology should highlight opportunities that meet client needs, not just present data to be analyzed manually.
3) Can your firm dynamically screen the market in real time based on individual client needs and preferences? Finding bonds is only half the battle—they also have to be priced appropriately and fit each client’s specifications. And this needs to happen dynamically. When optimizing portfolios, muni managers must bring together portfolio manager intelligence, unique client preferences, fundamental research and real-time liquidity analysis into a trade list for hundreds of portfolios and positions.
4) If market conditions permit and opportunities exist, can you invest new portfolios faster than 30 to 90 days? Trading alpha—finding and exploiting opportunities to buy bonds at a discount—requires speed, especially when markets are stressed. If a manager is overwhelmed, it could mean missed opportunities—or worse. And faster investing adds value for clients—muni assets that are invested earn more interest than those that aren’t.
5) How does your team know what types of bonds, issues and maturities thousands of separately managed accounts need in real time? What does that reporting look like? Without integrated, real-time systems, it’s impossible for a team to efficiently build and manage customized portfolios. And when evaluating potential bonds, unnecessary operational friction can cause managers to lose out on trades if others can move faster and more efficiently.
The muni market will continue to change and evolve, but pools of muni liquidity are shallow and far-flung. And market information is flying at lightspeed. Muni bond managers owe it to their clients to harness the power of technology and innovation to raise the bar on muni investing.
Terrance Hults is a Co-Head of Municipal Portfolio Management at AB, Matthew Norton is a Co-Head of Municipal Portfolio Management at AB, and Gavin Romm, CFA, is a Senior Vice President of Fixed Income Investments/Technology at AB.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to change over time.