Logan Circle’s believes that opportunities exist for active managers within the municipal space to generate alpha relative to benchmark indices. Our philosophy is predicated on establishing a yield advantage over a benchmark which we believe is a key factor in seeking to repeatedly generate excess returns over the long term. Sector allocation, security selection (taxable and tax-exempt) and yield curve positioning play important roles in helping build and maintain this yield advantage throughout market cycles. We do not believe that making significant short-term tactical bets on the direction of interest rates (i.e., frequently re-positioning portfolio duration) is an effective way to consistently generate returns in fixed income portfolios.
Our municipal investment process is framed to address three objectives: safety of principal, maintenance of liquidity and maximizing total return. As shown in the flow chart below, our process starts with a top-down analysis of the economic landscape, growth projections, employment trends, fiscal policies and changes in the housing market. Themes (1) are developed from this analysis which helps us determine optimal sector and sub-sector allocations (2). Our security selection process (3) utilizes in-depth fundamental credit research, cash flow and bond structure analysis as well as sensitivity and break-even analysis. Our outlook for the economy, growth projections and fiscal policy along with interest rate levels determine our yield curve positioning (4). The duration (5) of our managed portfolios is maintained within a narrow range relative to a portfolio’s benchmark. The first five steps culminate in the portfolio construction process where our team assembles portfolios which are broadly diversified across various municipal sub-sectors (6). Our sell discipline is driven by macro theme changes. Portfolio risk (7) is continuously monitored and controlled using risk budgets that set limits on sector, sub-sector, issuer and geographic concentration, as well as duration, spread duration and yield curve exposures.
The Municipal team employs the following investment process:
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