The municipal bond market is inefficient when compared to other markets, particularly equities. This inefficiency creates an opportunity for active management to provide significant value in municipal bond funds.
The muni market is around $4 trillion in size. However, the muni market still primarily trades over the counter, unlike many other segments in the fixed income market. This underscores the importance of active management in the muni market, Timothy O’Reilly, senior portfolio manager and head of institutional municipal portfolio management at Invesco, said during VettaFi’s Q1 2025 Fixed Income Symposium.
“There’s also a great deal of idiosyncratic risk in our market. There’s around 50,000 issuers in the muni space right now,” O’Reilly added. “To navigate those waters and have an understanding about what each of those issuers is doing is something really where you need a deep and experienced research staff, and you need to have that active component to it.”
Lauren Spalten, portfolio manager at Victory Income Investors, said an active approach allows managers to dig deep in terms of research available, and then leverage that to find good opportunities.
Victory’s research team has been able to identify some good opportunities in what might have previously been thought of to be a riskier space. However, because of the experience of the research team, fund management was able to get comfortable and capitalize on those opportunities, Spalten said.
“If you have the ability and you have the strong credit research team to do the work, we really think that you can add some real upside to your investors” Spalten said. “Without this active approach, we really think that there are opportunities that are missed on both ends.”
Active Management to Navigate Credit Risk
O’Reilly said active management becomes increasingly important as you move lower in the credit quality spectrum.
Especially in the high yield space, where around 75% of the index is nonrated, O’Reilly thinks active management is critical.
“We feel very strongly that given some of those idiosyncratic risks and the fact that the market is really an over the counter market, that people in process really are an important factor and the way to unlock value in this $4 trillion asset class,” O’Reilly said
Funds for Active Exposure to the Municipal Bond Market
Invesco offers the Invesco Rochester Municipal Opportunities Fund (ORNYX), the Invesco Intermediate Term Municipal Income Fund (VKLIX), and the Invesco Short Duration High Yield Municipal Fund (ISHYX) for active municipal bond exposure.
Meanwhile, Victory Capital’s lineup of actively managed municipal bond funds includes the Victory High Income Municipal Bond Fund (RHMYX) and the Victory Tax Exempt Intermediate-Term Fund (USATX).
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