- Continued demand for high yield municipal bonds
- High Yield Municipal team remains selective on credit exposure
- Puerto Rico defaults on general obligation bonds
Demand for high yield municipal bonds remains strong, as evidenced by 49 weeks of consecutive inflows into high yield municipal bond funds as of September 28 (according to Lipper). Year-to-date inflows into high yield municipal bond funds have totaled $10.1 billion, with a four-week average of $179 million. New issues in the high yield municipal market are well over-subscribed, with demand typically six to eight times greater than the amount of bonds being offered. This allows underwriters to lower the yield and then selectively allocate bonds to buyers (typically high yield municipal bond funds). The new issue calendar remains robust through year-end.
We remain highly selective in the bonds we are buying for the City National Rochdale Municipal High Income Fund. Our team utilizes a bottom-up analytical approach that involves due diligence meetings with management of the borrower, site visits, surveillance of the competitive service area, and a credit committee approval process that involves the entire high yield municipal team.
The City National Rochdale Municipal High Income Fund holdings remain diverse, with the life care sector being the largest exposure, at 16.62%. The second largest exposure, at 13.42%, is the hospital sector. The new issue calendar for both of these sectors through the end of 2016 is robust. We anticipate that the Fund’s charter school exposure, at 9.80%, will continue to decline, as we have been on the sidelines for most new issuance in this sector due to lack of yield for the inherent risk.
As anticipated, Puerto Rico defaulted on its July 1 bond payment. An oversight board appointed by the U.S. government will determine the best way to restructure Puerto Rico debt, as the commonwealth is not legally allowed to declare bankruptcy. Without the structure and orderliness of a bankruptcy court proceeding, this restructuring process will likely last for several years. As of June 30, the Municipal High Income Fund did not have any exposure to Puerto Rico general obligation bonds. The Fund does hold Puerto Rico water and sewer senior bonds backed by a pledged revenue stream. The senior water and sewer bonds made their July 1 bond payment in full. The other Puerto Rico holding is a securitized tobacco bond whose revenue stream cannot be intercepted by the commonwealth.
Investing involves risk including loss of principal. Bonds and bond funds are subject to interest rate risks and will decline in value as interest rates rise. Investing in securities that are not investment grade offers a higher yield but also carries a greater degree of risk of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.
Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.
Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.
There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems, than developed markets.
Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible. Investments in below-investment-grade debt securities which are usually called “high yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securitiesof a higher-quality rating.
Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging markets bonds can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk. Past performance is no guarantee of future performance.
An investor should consider carefully the fund’s investment objectives, risks, charges and expenses. The Fund’s summary and full prospectus contains this and other important information about the investment company, and it may be obtained by calling 800-245-9888. Please read it carefully before investing.
City National Rochdale Funds are distributed by SEI Investments Distribution Co., which is not affiliated with City National Bank or any subsidiary or affiliate.
No investment strategy can guarantee a profit or protect against loss in periods of declining values. There is no guarantee that the Fund’s income will be exempt from federal or state income taxes. Capital gains, if any, are subject to capital gains tax. Income from municipal bonds may be subject to the alternative minimum tax. Diversification does not protect against market loss.This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results.
The Standard & Poor’s (S&P) 500 Index represents 500 large U.S. companies. The comparative market index is not directly investable and is not adjusted to reflect expenses that the SEC requires to be reflected in the fund’s performance.
The U.S. Treasury 10-year note is a debt obligation issued by the United States government that matures in 10 years. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.
Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.
The Barclays U.S. Corporate High-Yield Index covers the U.S.-dollar-denominated, non-investment-grade, fixed-rate, taxable corporate bond market and includes securities with ratings by Moody’s, Fitch, and S&P of Ba1/BB+/BB+ or below.
The Barclays Emerging Markets USD Aggregate Bond Index is a flagship hard currency emerging markets debt benchmark that includes fixed- and floating-rate U.S. -dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers.
MSCI EM Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. Net total return indexes reinvest dividends after the deduction of withholding taxes, using (for international indexes) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties.
MSCI EM Asia Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the Asian emerging markets. Net total return indexes reinvest dividends after the deduction of withholding taxes, using (for international indexes) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties.
The MSCI EM EMEA (Europe, Middle East, and Africa) Index is a free-float‐adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of Europe, the Middle East, & Africa. The MSCI EM EMEA Index consists of the following 10 emerging market country indexes: Czech Republic, Greece, Hungary, Poland, Russia, Turkey, Egypt, South Africa, Qatar, and United Arab Emirates.
The MSCI Emerging Markets Latin America Index is a free-float‐adjusted market capitalization weighted index that is designed to measure the equity market performance of emerging markets in Latin America. The MSCI EM Latin America Index consists of the following five emerging market country indexes: Brazil, Chile, Colombia, Mexico, and Peru.
Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses
Non-deposit Investment Products: are not FDIC insured, are not Bank guaranteed, and may lose value