AAM Reminds Us of the Role of Bonds in a Portfolio


By John Berzellini

In the Barron’s “Income Investing” article below Michael Anerio interviews Tom Dalpiaz, muni portfolio manager at AAM, who reminds us of the role of bonds in a portfolio. In light of the expected income tax increase, munis may play a larger role in portfolios designed to produce income.

January 20, 2012,      5:43 P.M. ET

AAM Reminds Investors to Keep Muni Role in Perspective

By Michael Aneiro, Barrons Income Investing

After municipal bonds posted double-digit returns last year, there’s been some grousing that munis (like many types of bonds) are now overbought and that investors will have to settle for pedestrian returns this year. That may be the case, but the point of munis isn’t to expect stock-like returns from year to year, notes Tom Dalpiaz, muni portfolio manager at Advisors Asset Management.

“You have to set aside the notion of let me kind of chase whatever asset class looks good at the moment,” Dalpiaz says. “You really can’t, with any kind of consistency, nail that, and people often end up chasing the asset class that did well last year.”

Dalpiaz underscores the distinction between the roles of stocks and bonds, particularly muni bonds, in a portfolio, saying investors can lose sight of the purpose of each when they focus too much on year-to-year returns.

“I don’t think that your bonds really should be competing with stocks,” he says. “There are investors who do that and I think that’s a mistake. For most high net worth investors, don’t let your bonds get in a race with your stocks, or any other asset class, because they’re supposed to do different things. Bond money gives you a chance to draw some income if you need it or to deal with volatility risk.”

Even though muni yields have set new historic lows this month, Dalpiaz says munis still make a lot of sense, especially for people in high tax brackets. He also sees value in lower-rated muni bonds right now, particularly at a time when state and local government finances are slowly on the mend.

“If the economy is gradually improving, then muni credit quality should gradually improve,” he says. “All that may take another 18 to 24 months to work out, but if you’re careful and do your homework you can earn some spread over high-grade munis during that time.”

Dalpiaz favors keeping an intermediate-term approach to munis – focusing on bonds due to mature within 15 years – and sticking with it through the full credit cycle if possible. If anything, he says, the lesson to take from 2011 – a year that started in the midst of rout for the muni market – is that munis are resilient over the long term.

“To me the story of 2011, in addition to total returns, was that the historical resiliency of munis was really on full display,” he says. “Munis looked like a seasoned boxer taking punches from all angles, and managed to work their way through what started out as a tough year.”