McDonnell Investment Management
Stable market conditions and credit-driven opportunity give Grabovac a “generally positive” outlook for municipal bonds in 2013. “We think the main theme of 2013 will be the continued relative stability of interest rates,” Grabovac said. And while recognizing that low rates will limit further price increases, he also doesn’t expect a resurgence of inflation to trigger price declines.
Credit opportunity is a second theme for 2013 – with credit improvement the year’s bright spot, thanks to ongoing economic growth. “Typically, there’s an 18–24 month lag between a weakening economy and declining fiscal balances with state and local issuers,” Grabovac said. “Now, with the recovery in its fourth year, issuers have had a chance to heal fiscal imbalances and adjust budgets.”
Uneven credit improvement could present challenges, though – and if credit opportunity is a bright spot, its flip side – credit selection – may be 2013’s biggest market challenge. “The rising tide has lifted all credits, including a lot of unworthy ones,” Gravobac said, referring to the tremendous demand for municipals in the past 12 to 13 months. Further, valuations have become tight. Grabovac emphasizes the importance of differentiating between stronger and weaker credits; he says security selection is critical for both maximizing returns and avoiding pitfalls.
Gravobac believes demand could remain strong, and he’s hopeful that supply will be ample. “There are huge infrastructure and capital needs for state and local governments,” he notes. Gravobac is optimistic the supply will bring new opportunity – which means high-quality credits with long-term attractive value.
James Grabovac is Managing Director and Senior Portfolio Manager at McDonnell Investment Management, LLC. He is responsible for executing tax-exempt investment strategies for the firm’s client portfolios. He has 30 years of investment industry experience. Prior to joining McDonnell, Mr. Grabovac was an independent futures trader. He also managed tax-exempt mutual funds at INVESCO Funds Group in Denver, and managed a high yield municipal bond fund for Stein Roe & Farnham in Chicago. Mr. Grabovac has an MBA in finance from the University of Michigan and a BA in economics from Lawrence University. He holds the Chartered Financial Analyst designation and is a member of the CFA Institute, as well as the CFA Society of Chicago.