Morningstar Magazine - April/May 2018 - 24

Dispatches

While the final version of the legislation ultimately
spared PABs from significant change, it did
eliminate the tax exemption for advance refunding
bonds. Municipalities issue advance refunding
bonds when interest rates on their existing debt
are higher than those available in the market, yet
their outstanding bonds aren't currently callable.
To realize savings, issuers sell new bonds and use
the proceeds to make coupon payments on
the original bonds until the call can be exercised.
The debate over the tax changes alone spurred a
flurry of activity in the muni market during the final
weeks of 2017, the impact of which will be felt
throughout the next year. The result was record
bond issuance in December, which totaled more
than $69 billion (more than triple the new muni
issuance in December 2016) as issuers rushed their
deals to market before Jan. 1. That, together with
the spike in issuance, has prompted many to
predict a dearth of issuance in 2018. Muni-bond
issuance in January dropped to $20 billion, down
roughly 45% from the first month of 2017.
That should bode well for current muni-bond
investors if demand holds up. While the
muni market did see some outflows in December,
net flows into open-end muni funds turned
positive for the month in January to the tune of
$7.9 billion. Yet certain aspects of the tax-reform
package could dampen demand, at least
from corporate buyers. The new legislation cuts
the corporate tax rate to 21% from 35%, which

could mean a drop in demand for muni bonds from
large buyers such as banks, property and
casualty insurance, and life insurance companies.
According to Sifma, these firms owned about
$1.1 trillion of muni bonds (roughly 30% of
the market) as of mid-2017, so the impact of lower
tax rates could be meaningful.
That said, muni market participants aren't
predicting disaster. Hugh McGuirk, head of the
municipal-bond group at T. Rowe Price-which
manages T. Rowe Price Tax-Free High Yield PRFHX,
T. Rowe Price Tax-Free Income PRTAX, and
T. Rowe Price Summit Municipal PRSMX, all with
Morningstar Analyst Ratings of Gold-argues
that although lower corporate tax rates
could present less incentives to hold muni debt,
he expects the immediate impact to be limited
because these companies' involvement in
the market has been steady over time. While there
is potential for decline in muni appetite from
corporate buyers, the firm expects solid demand
for munis from retail investors, especially in
high-tax states. That's because the tax-reform
package also introduced new limits on income and
property tax deductions for individuals who itemize.
Retail buyers in high-tax states such as California,
New York, and New Jersey could see their tax bills
go up as a result of the new law, making
investment in muni bonds more attractive.
Beth Foos is a senior analyst with Morningstar
Research Services.

Amazon's
Transformational 2017
Amazon.com AMZN is the most disruptive force
to emerge in retail in several decades. Its
operational efficiency, network effect, and a brand
intangible asset built on customer service
provide it with sustainable competitive advantages
that few, if any, traditional retailers can match.
Our key takeaway from wide-moat Amazon's
fourth-quarter update wasn't that the core
building blocks of our longer-margin cash flow
assumptions are intact. They are-but
more important, new sources are also contributing
sooner than anticipated.
The pillars that we've highlighted in the past
all contributed to fourth-quarter results.
Those include Amazon Web Services (where
revenue growth accelerated to 45% from 42%
last quarter), Amazon Prime memberships
(according to management, more new paid
members joined Prime in 2017 than any previous
year), and third-party units (which grew 28%
and represent 51% of total units).
Digging deeper, we believe that advertising
(signified by the 62% increase in other revenue
growth) and third-party seller services (which grew
41%) were key contributors to the 140-basis-point
jump in North American retail segment margins to
4.5%. We also believe Alexa technology (which

TRENDS

Gender Does Not Determine Investment Performance
Morningstar has been formally studying
fund managers by gender since 2015 and noting
a persistent underrepresentation of women in
the field. Our latest research, presented in "Fund
Managers by Gender - Through the Performance
Lens," explores whether performance is a
driver behind this trend. We created two data sets:
One to track fund performance and one to track
individual manager performance across different
funds. For both data sets, we applied the same
industry-standard performance tests: regression,
portfolio-based tests, and event study.

24

The charts at right show the results of the event
study analysis of fund performance. The analysis
runs from January 2003 through September
2017 and includes funds domiciled in the United
States. We sorted funds into team structure-
all male, all female, and mixed-gender-each
month and looked at subsequent performance over
time periods ranging from one month to
60 months. An investor who picked a fund based
solely on the manager's gender would have
seen better results with all-female teams in both
equity and fixed-income. Over 60 months,

this would result in returns 2.08% and 1.91% above
the category average, respectively.
We don't conclude that female managers
are better. Rather, the six tests taken together
provide significant evidence that manager
gender is not a likely contributor to differences in
performance. We continue to call for the
industry to embrace increased gender diversity.
Madison Sargis is a quantitative analyst
with Morningstar.
http://www.Amazon.com
Table of Contents for the Digital Edition of Morningstar Magazine - April/May 2018
