Breckinridge Intermediate Municipal Strategy

A separately managed account focused on investment-grade municipal bonds in an effort to limit risk to principal while generating federal tax-exempt interest income.

Investment strategy: Seeks to limit risk to principal while generating federally tax-exempt interest income. Both national and select state-preference options are offered (state-preference increases exposure within that state but exposure varies and generally is less than 100%.)

Types of investments: Primarily high-quality investment-grade1 municipal bonds at time of purchase

Investment minimum: $350,000

Gross annual advisory fee: 0.35% – 0.40%2 (varies based on total assets invested)

Focus on high-quality bonds

Graphic is meant to illustrate our focus on high-quality bonds in managing the Breckinridge Intermediate Municipal Strategy. While we seek to maintain an average credit quality of AA, we may hold bonds rated anywhere from A- to AAA at the time of purchase.We work to balance your desire to reduce the effect of interest rate changes with your income goals by investing in high quality bonds. The average credit quality of the bonds in your SMA will be at least AA at the time of purchase, with nothing rated below A–. High quality, or investment grade bonds, tend to be more reliable sources of interest income and are generally a lower risk of default than low-quality, or non-investment grade bonds. It's part of our effort to generate the income you're seeking without taking on unnecessary risk.


Predictable tax-exempt income

Depending on your tax bracket, the after-tax return on municipal bonds may be more beneficial than those offered by taxable bonds. A key benefit of municipal bonds, particularly for investors in high tax brackets, is their ability to offer federally tax-exempt interest income. Interest income from some municipal bonds may also be free from state income tax, depending on your state of residency.

This graphic seeks to explain the equivalent yields across US Treasuries and AAA-rated municipal bonds for maturities of 30, 10, and 2 years. In this hypothetical example, a municipal bond has both a tax-equivalent yield and a tax-exempt yield, which, when added together, are higher than the yield of the US Treasury. The purpose of this is to demonstrate that even with a higher coupon, a municipal bond’s tax-exempt yield may be higher, depending on your tax bracket.

Sources: Bloomberg, Thomson Reuters, Fidelity Investments, as of 9/30/2019.

Based on 2018 federal income tax rates. Tax equivalent yields do not reflect tax credits, exemptions, and itemized deduction phaseouts, or the impact of federal and/or state alternative minimum taxes. The two highest tax brackets of 38.8% and 40.8% include a Medicare surtax of 3.8% imposed by the Patient Protection and Affordable Care Act of 2010. Please consult your tax advisor for further details.

Tax-equivalent yield: The interest rate that must be received on a taxable security to provide the holder the same after-tax return as that earned on a tax-exempt security.

Note: The yields and calculated tax-equivalent yields in the chart do not reflect the potential effects of the federal alternative minimum tax or state/local taxes, either of which could have a significant impact on the values shown.

Balance income vs. risk

Municipal bonds historically have had a lower level of default risk relative to other types of bonds. By maintaining a portfolio of investment-grade municipal bonds, with a significant portion having a credit rating of AA– or higher, Breckinridge Intermediate Municipal Strategy is built to help limit risk to your investment and to seek a steady, reliable stream of income over the long term. The strategy has a philosophy centered on a research-based approach that balances the opportunity to generate income and capital appreciation with a focus on risk management.

This table compares the relative default rates of municipal and corporate bonds over a 48-year period, between 1970 and 2018. The data shows two trends. First, the municipal bonds have defaulted at lower rates than similarly corporate bonds. Second, that a higher credit rating has, over the time period shown, been associated with a lower default rate.

*Source: Moody's Investors Service, "US Municipal Bond Defaults and Recoveries, 1970–2018," August 6, 2019.

To also help manage risk, the strategy targets an average duration3 similar to the duration of the Bloomberg Barclays Managed Money Short/Intermediate (1–10 years) Municipal Bond Index.5 A duration in this mid-range helps reduce the impact from interest rate changes in comparison to strategies that have longer duration.

Tapping Breckinridge's Fixed Income expertise

Breckinridge Capital Advisors, Inc. has an investment philosophy that seeks to carefully analyze and manage risk, while investing opportunistically in an effort to improve incremental returns. Breckinridge strives to add value through efficient trading, bottom-up credit research, and proactive portfolio management, while avoiding what it views as excessive speculation. These strategies are balanced with a commonsense approach based on the seasoned judgment of its investment team.

This graphic describes the 3 elements Breckinridge uses to strike the right balance between managing risk and pursuing returns. This approach is based on the firm's mandate to preserve capital and to seek to maximize after-tax returns. Breckinridge applies a rigorous bottom-up approach that researches both potential and current holdings, employs specialized trading expertise and technology, and relies on the experience of a seasoned portfolio management team.

Breckinridge's proprietary technology and broad network of over 140 dealers allows the firm to trade municipal bonds efficiently by providing:

  • The flexibility to find value in both the primary and secondary markets.
  • The ability to take advantage of opportunities in both large and smaller lot sizes.
  • The capacity to seek lower transaction costs relative to the broader market.

This graphic helps explain the Breckinridge investment team's approach to portfolio construction. This approach is comprised of two elements: Top Down activities, which consist of an investment committee assessing market conditions and determining investment themes, and Bottom Up activities, which consist of research and trading-driven security selection. These are then combined. Here's how it works: a. From the top down, the investment committee evaluates the macroeconomic environment, determines the outlook and assesses the implications, then sets strategy positioning. b. From the bottom up, the team conducts research by evaluating securities and produces proprietary targets and ratings. All trading is driven by dynamic technology, utilizing a broad dealer network in search of the best execution and fit for individual client portfolios. c. The portfolio construction team then utilizes their seasoned judgment to implement the strategy determined by the investment committee, analyzes existing portfolios to decide whether need to be adjusted to align to current strategy targets. This work is backed by proprietary technology that fully integrates Breckinridge's top down and bottom up approaches, combines client objectives with strategy targets.