The BNY Mellon US Municipal Infrastructure Debt Fund was recognised by the Monetary Authority of Singapore three weeks ago, and it is now being marketed to retail investors.
“Gaining authorisation to sell the product to retail investors in Singapore expands its distribution channels, and increases brand awareness to private banks and their clients,” Nicolas Kopitsis, BNY Mellon’s Singapore-based head of intermediary Asia Pacific ex Japan, told FSA.
US municipal bonds are debt securities issued by a state, municipality or county to finance its capital expenditures, including the construction of highways, bridges or schools. They are exempt from federal taxes and most state and local taxes, making them attractive to US investors in high income tax brackets.
Municipal bonds are further categorised based on the source of their interest and principal repayments, classed as either general obligation (GO) bonds or revenue bonds. GO bonds return cash flows generated from the project itself (for example, a toll road), while revenue bonds provide cash flows generated from collected taxes.
“From roads and schools to utility plants, bridges, hospitals and airports, the maintenance and development of these long-lived projects are essential to US citizens’ everyday living,” Jeff Burger, lead manager of the fund told FSA.
Risk-reward features
Yet, as the US contends with the largest number of confirmed Covid-19 deaths, disruption to its economy and with 24-hour TV coverage of chaos on the streets of cities across the country, it might seem an unfortunate time to promote investing in US municipalities.
“However, [although] the US municipal bond market has historically been an attractive asset class for US investors because of its tax-exempt status, taxable US municipal bonds have recently caught the interest of investors in Asia due to their potential ability to provide investors with a high-quality, income-generating asset class with a stable return profile,” said Burger.
For non-US investors, the coupon interest on taxable and non-taxable revenue bonds is paid gross, so they can often achieve a yield premium through buying taxable bonds.
The $491m fund, which is a sub-fund of BNY Mellon Global Funds umbrella, was first launched in April 2017 as a Ucits product available to investors across Europe, as well as to institutional and accredited individual investors in Hong Kong and the Lion City.
It has generated an 18% cumulative return since its inception to 30 April 2020, suffering a slump in value in March this year, but outperforming its composite benchmark over three years (15.6%), according to the most recent fund factsheet.
The fund is underweight utilities relative to its benchmark, neutral transport and education service, and with a large overweight to hospitals – but also an overweight to airports, which have obviously struggled during the coronavirus lockdown.
Source: Fund factsheet, 30 April 2020. Benchmark: 50% Bloomberg Barclays US Municipal Index and 50% of Bloomberg Barclays Taxable US Municipal Bond Index
The average credit rating of the fund is single-A and the distribution yield for its clean share class is currently 3.7%, according to the fund’s factsheet. In comparison, single-A US corporate bonds deliver a yield of just over 2%, but less-risk averse income-seekers can earn 8.2% on average from US high yield bonds, according to S&P data.
“Historically, the municipal bond market’s credit quality has been strong and provided investors with the benefit of low correlation versus other fixed income sectors and asset classes due to a lower sensitivity to interest rates,” said Burger.
In fact, the average five-year cumulative default rate between 1981 and 2015 is only 0.15% for municipal bonds, much lower than the 7.45% default rate for US corporate bonds, according to S&P.
There are no other dedicated US municipal bond funds out of the 57 US fixed income products available to Singapore retail investors, according to FE Fundinfo.
Burger insists that the pandemic is “not the root cause for systemic risk in municipal fixed income”, and is confident that a “prudent focus on sectors and securities with stable, investment grade credit characteristics should lead to relative outperformance as markets ultimately benefit from better liquidity and higher confidence”.
BNY Mellon has a long record of managing US municipal debt fund and now runs about $24bn of municipal bond assets from Boston, according to Kopitsis.
State breakdown (% of market value)
Source: Fund factsheet, 30 April 2020. Benchmark: 50% Bloomberg Barclays US Municipal Index and 50% of Bloomberg Barclays Taxable US Municipal Bond Index
BNY Mellon US Municipal Infrastructure Debt Fund vs benchmark*
