The municipal bond market is inefficient, fractured and constantly in flux, and active muni investors are much better equipped to navigate it than are passive ones—an advantage that we believe can improve outcomes.
In fact, we found that—historically—an astonishing 98% of active muni strategies have meaningfully outperformed passive approaches over rolling three-year periods, and 89% have outperformed passive strategies over two-year periods. Further, active strategies delivered better upside and downside capture through some very volatile markets. Here’s why.
Active strategies can proactively align with market shifts and dislocations, while passive approaches cannot. By continually adjusting a portfolio, active investors can flex with current conditions, better manage risks and capture opportunities as they arise.
As we see it, much of the active muni manager’s edge comes from three strategies: yield-curve and duration positioning, municipal credit selection, and dynamic sector rotation, especially into Treasuries.
Yield-Curve Positioning: Responding to Shifts and Shapes
The shape and slope of the yield curve frequently change in response to economic growth expectations, inflation expectations, central-bank policies and more.
Active managers may choose to own different combinations of maturities along the municipal yield curve to take advantage not only of relative yield levels but also of expectations for changes in the shape of the yield curve down the road. Whether a barbell, ladder or concentrated position, there’s no “all weather” maturity structure, because different environments call for different approaches.
For example, a barbell maturity structure invests in short- and longer-term muni bonds, while minimizing exposure to the middle of the curve. A barbell structure fared well in 2024 as the yield curve shifted (Display, left), providing higher returns relative to concentrated and ladder approaches (Display, right).
