Meredith Whitney has taken her share of flack for her call on municipal defaults in late 2010. Still, nearly two years later, after the defaults of San Bernardino and Stockton in California, one can’t help but have nagging questions about whether she was wrong or just early. Much attention has been given to the amount of defaults she predicted (and haven’t materialized — yet), but a less noticed part of her argument was that information and disclosure by municipalities was abysmal. Here’s the original Whitney Interview:
Now comes Gretchen Morgenson of the NYTimes with news about how the West Penn Allegheny Health System, whose finances are deteriorating, waited one month before disclosing that a prospective nonprofit insurer, Highmark, pulled out of deal that would have included a $475 million injection of cash. Highmark also advised West Penn to file for bankruptcy.
Moreover, Morgenson notes that West Penn failed to disclose the existence of a Justice Department inquiry into its proposed deal with Highmark, and she quotes a partner at the law firm that acts as a trustee for West Penn saying “‘getting any information out of West Penn, much less reliable information, has been a burden.”‘ Morgenson’s conclusion is that the SEC’s demand for disclosure from municipal borrowers continues to be toothless.
Many people, including municipal bond fund managers, who have to hold bonds regardless, have a vested interest in trying to discredit Whitney. It’s not clear to us yet, however, that her warning was simply incorrect rather than just being early.
Investors should remember that their bond money is supposed to be their safe money. Accordingly, we think investors should avoid revenue munis and stick to general obligation munis — preferably of those states that are relatively healthier, even if this means foregoing avoidance of state income tax. We also think pre-refunded munis, typically backed by US Treasuries, are safer.
One municipal bond mutual fund that has half its portfolio in pre-refunded munis is the Baird Intermediate Muni Fund (BMBSX). Its record lately, compared it its peers, isn’t stellar, placing it in the bottom quartile of the Morningstar Intermediate Muni Bond Category for the past year. But that’s because more risk-taking has paid off. The fund is in the top half of the category over the trailing 10-year period. Not a bad showing given its belt-and-suspenders approach. Don’t let the fund’s two-star rating from Morningstar fool you. This fund is for investors who are serious about having their bond money truly be their safe money.