Nuveen maintains share of marketplace, says 'worst is over' in municipal market disruption

By Paul Deckelman

New York, May 12 - The worst of the disruptions seen in the marketplace for municipal bonds would appear to be over. At least that's the hope expressed Thursday by executives of Nuveen Investments, Inc., who also said that the Chicago-based financial services and wealth-management company - long a major presence in the municipal mutual fund world - had managed to hold its share of the marketplace.

"When you're in this business, you kind of live concerned on all fronts - but we think and we believe and we hope that we're through the worst," Tom Schreier, Nuveen's vice chairman for wealth management, told investors and analysts at a company strategy presentation in New York on Thursday.

Schreier said that the company saw "the flow part of the marketplace begin to really level off nicely as we entered into the end of the first quarter and April and that trend continues, and we've begun to see some appreciation in the marketplace."

He said that "one of the things we do is we look at the [S&P] Municipal index broadly - and we've just seen a return to health across the Municipal. Our view is that like anything, when it gets in the headlines, it tends to over-react. The marketplace tends to over-react and you have a combination of both some degree of fundamentals, or at least a highlight on fundamentals, with flow characteristics that just tend to bring valuations down."

He also said that another encouraging factor was that "very sophisticated investors on the institutional side began to participate in the municipal marketplace once that marketplace really began to hit certain levels."

He opined that recently, "demand has returned, in part from these larger, institutional, sophisticated investors - in fact, a lot of crossover investors have moved from taxable into tax-exempt, which has helped to restore the values on that side."

He said that was combined with the fact that "people's concerns have been allayed as they've developed a better understanding of the fundamental, underlying characteristics of that market."

Back to school

Schreier said that when market conditions deteriorated, Nuveen sent out the chief investment officer of its tax-exempt business, John Miller, to "get out in front of the marketplace and talk about and really help investors to understand and dissect the risks that do affect the municipal marketplace." He said that at least some investors had gotten used to viewing munis almost as a relatively simple and easy, "consistent marketplace, as opposed to a marketplace that really does have a fair bit of complexity."

The reality, he said, was that while sophisticated investors knew the complexities and appreciated the wide differences between, say, general obligation bonds issued by state and local governments and revenue bonds tied to specific projects, "I think a lot of the marketplace didn't understand that there's a very different risk profile to both of those."

So Miller's task, he said - and in the larger sense, Nuveen's itself - involved "educating the marketplace" and reassuring investors about the fundamental soundness of the market. For instance, he said, one of the points the company stressed was that "through the worst of the market, default rates remained at very low levels."

It also hammered home the point that "with the kind of disruption that occurred in the marketplace, there's opportunity."

As a result of these efforts, he said, "I think that's why we've seen our share in the marketplace, at least as far as we can dissect it, having held up very nicely.

"It gives you comfort that the education that you're doing is resonating with audiences that understand the business."

Diversifying pays off

Nuveen's chief operating officer and executive vice president, Glenn Richter, noted during the company's presentation "the value and the diversification of our model."

In 2006, just a year before Nuveen was bought out by a private equity group led by Madison Dearborn Partners LLC for $5.4 billion and taken private, the company operated 46 mutual funds, which were split 80% municipals versus 20% equity. As of the end of this year's first quarter, it was operating 108 mutual funds, with munis making up 43% of that - still the company's biggest concentration - versus 37% equity, 12% other fixed income and 8% real estate and specialty funds.

Of the nearly $200 billion of assets under management the company had at the end of the quarter, 35% was in munis, 11% in taxable fixed-income, 31% in equity - classified either as growth equity (14%) or value and other equity (17%) - and 21% was classified as international. In contrast, munis had accounted for 43% of assets under management in 2006.

"Having seen very significant muni outflows both in the fourth quarter of last year and the first quarter of this year, we still, even with those outflows, achieved $3.5 billion of [total] flows in the fourth quarter and $5 billion in the first quarter. So despite pressure on the municipal market, we more than offset that with upside in our equity products as well as our taxable products," Richter said.

Investors doing their homework

Schreier added that "all of the headlines regarding municipals have really made everyone very aware of the need and the value for research in the municipal area."

He noted that at one time, much if not most of the market was insured, but now, "the insurance companies have all faded away and all of a sudden, everyone is having to rely on fundamental, bottoms-up research on tens of thousands of issuers. So we're seeing strong demand for our research and surveillance.

"We hope that bodes well for managed municipals going forward."

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