Morningstar - Q2 2023 - 62

Investors
Complementing the Core
MacKay team plies the taxable
muni market.
UNDISCOVERED MANAGER
Tom Lauricella
Undiscovered Manager profiles noteworthy
strategies that aren't covered by Morningstar
Research Services' analyst team.
When investors think of municipal bonds, the
first thing that comes to mind is usually the phrase
tax-exempt.
The benefit of income free from federal-and
potentially state-taxes is obvious. But there are
other advantages. For the most part, issuers
of municipal bonds also have strong credit profiles,
lower default histories, and lower volatility
than issuers of corporate bonds. They add an edge
to a diversified strategy with their low correlations
to many other corners of the bond market.
Still, muni bonds' tax-exempt association
means most investors consider them in a separate
bucket than the rest of a traditional taxablebond
portfolio.
That's the kind of thinking that the managers
of the $582 million MainStay MacKay
US Infrastructure Bond Fund MGOIX are looking
to change. They have a good case: The
fund, which invests primarily in taxable muni
bonds and lands in the intermediate core bond
Morningstar Category, has come out ahead
of most of its category peers since the start of
its current strategy in February 2019. Run by
municipal-bond specialists at MacKay Shields, a
unit of New York Life, the fund has returned
an annualized 1.28% through March, well ahead
of the 0.23% average annual return for
the category.
62
Morningstar Q2 2023
A Complement to Core Bonds
" It is a very interesting strategy to complement
an investor's core bond allocation, " says
Morningstar analyst Paul Olmsted. " While the
taxable municipal-bond market is relatively
small, this fund's infrastructure investments may
appeal to a certain part of the market
and remain competitive on performance. "
Taxable municipal bonds are generally offered
by the same state and local governments,
agencies, and institutions that issue the
tax-exempt debt most investors associate with
munis. But the U.S. tax code limits the amount of
debt an issuer can come to market with and
imposes strict regulations on the use of those
bond proceeds. As a result, these issuers,
when looking to raise funds, will sometimes
come to market with taxable debt.
Taxable debt was a very small portion of the
muni-bond market until 2009, when in the wake
of the financial crisis, the Build America
Bonds program was launched to help lower
borrowing costs for state and local governments.
Although the program ended in 2010, it generated
interest in the market among institutional
investors. When the rules governing the
ability of issuers to refinance taxable debt were
tightened starting in 2018, the market saw
another jump in issuance. Today, taxable debt
represents $840 billion, or 21% of the $4 trillion
muni market.
The MacKay U.S. infrastructure bond fund is
team-managed by MacKay Municipal Managers,
a group that has its origins in the fixed-income
department at Merrill Lynch Investment Managers,
before it was acquired by BlackRock. The
co-chief investment officers of MacKay Municipal
Managers, John Loffredo and Robert DiMella,
have worked together since 1993.
At the helm of the infrastructure fund is
Scott Sprauer, who joined MacKay Shields in
2009, and Robert Burke, who came on
in 2017. Both have several decades of experience
in the capital markets. Portfolio manager
Sanjit Gill started with MacKay Shields in 2021.
Also on the team is Michael Denlinger,
a portfolio manager who focuses on strategies
that invest in both taxable and tax-exempt
municipal bonds.
Leveraging Tax-Exempt Research
The strategy focuses on taxable muni debt, but
because the issuers are largely the same as
in the tax-exempt market, the team has access
to the research done for the tax-exempt
portfolios at MacKay Municipal Managers, which
oversees $64 billion. The muni team has
eight full-time dedicated research personnel,
with six in Princeton, New Jersey, and two in
Los Angeles.
The MacKay Shields strategy invests at least
80% of its assets in debt related to municipal
infrastructure, with a minimum of 60% of
its assets in taxable muni bonds. The fund can also
hold up to 20% in tax-exempt debt, although
generally the allocation to tax-exempt bonds is
in the low single digits.
Even though the fund lands in the intermediate
core bond category-where many funds
have the Bloomberg U.S. Aggregate Bond Index
as a benchmark-the MacKay infrastructure
fund is managed against the Bloomberg
Taxable Municipal Index. The strategy is focused
on bonds in the five- to 10-year portion of
the market.
From an income standpoint, the MacKay Shields
portfolio carried an SEC yield of 4.3% at the
end of January compared with a 3.6% yield on
the average intermediate core bond fund.
" The fund delivers corelike performance,
generating reliable income and offering
diversification benefits to risk assets, " says
Morningstar's Olmsted.
https://www.morningstar.com/funds/xnas/mgoix/quote https://www.morningstar.com/funds/xnas/mgoix/quote
Morningstar - Q2 2023

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