Flexible Muni Solutions for Tax-Advantaged Outcomes

Tax-exempt muni bonds hold numerous advantages over corporate bonds—a big one is that the interest investors earn is exempt from federal taxes and most state and local taxes, considered tax-free income. Munis are also known to have low default rates, help offset equity volatility and add stability.

Munis are available as individual investments or through exchange- traded funds (ETFs), mutual funds and separately managed accounts (SMAs), with strategies that range from simple to highly sophisticated. Investors can put their money in individual bonds, a bond ladder strategy that consists of a series of bonds with different interest rates and maturity dates, or a custom solution that uses technology to design a sophisticated basket of muni bonds based on individual preferences.

AB has the unique flexibility to make “crossover” trades into the taxable bond market, for some portions of portfolios, in order to exploit relatively attractive US Treasury valuations, minimize volatility, boost after-tax portfolio yield and provide more liquidity and a safe haven during market stresses. A recent example was March 2020, as COVID-19 intensified.

The added income accrued by investing portfolios faster than the industry average. With AbbieOptimizer we’ve been able to fully invest a new muni portfolio from cash in 10 days, a 71% improvement from the 35-day average in 2017.

Trading Alpha is the average of AB’s execution price less the bond’s end of day evaluation price on that day divided by the account AUM.

A measure of relative outperformance attributable to tax- optimization strategies.

AB’s Municipal Impact Portfolio promotes and favors investments in historically underserved and low-socioeconomic communities.

This solution uses a proprietary scoring model. Each investment has a specific intention, to deliver positive environmental and/or social impact. The team tracks that intention through key performance indicators specific to individual sectors (education, healthcare, energy efficiency, mass transit, sustainable water and economic community development).

When portfolios realize losses, it generates tax savings that can be reinvested at higher market yields. Active tax optimization scans fixed-income SMAs in conjunction with client tax data coded into our systems. This process identifies and trades to generate the best after-tax returns tailored for each client.

AB first used completion funds in 2010, increasing our flexibility to make strategic and tactical shifts in less liquid market segments. These funds bring access to diversification and opportunities that would be hard to get with individual bonds. The general public can’t invest in completion funds (aka income shares or commingled vehicles)—they’re exclusively for SMAs.

As tax-aware investors, we always assess securities and trade ideas, including inflation protection, in after-tax terms. At times, incorporating inflation protection can add returns and preserve real purchasing power. That’s why AB has the flexibility to allocate to tax-efficient inflation protection via Consumer Price Index swaps, which generally have a favorable tax profile versus other approaches.

A municipal bond (or “muni”), is a debt security issued by a government entity to help fund local civic projects. Think of munis as loans that investors make to local governments. They help fund capital projects like building roads and schools. In exchange, investors receive regular interest payments during the bond’s life and the repayment of the bond’s principal amount when the bond matures.