AAM’s distinctive tax advantaged strategy seeks to generate higher tax-adjusted income with more consistent after-tax total returns for taxable clients by opportunistically shifting its exposure to tax-free municipal bonds. Typically the portfolio will own a mix of taxable bonds — including corporate bonds, mortgage-backed securities, government securities, taxable municipal bonds and cash equivalents — as well as an allocation of tax-exempt municipal bonds.
The taxable bond portfolio emphasizes quality, liquidity and cash flow predictability. At AAM, we pursue a disciplined, research-intensive approach to bond management. Our seasoned team of industry specialists continually evaluates opportunities in their sectors. We couple this with top-down research on macroeconomic factors that may drive performance in various parts of the corporate bond market. We closely manage sector and issue selection to enhance results.
In the tax-exempt municipal bond allocation, we emphasize securities rated AA or better, with particular focus on state general obligation credits for their high credit quality and liquidity. We also invest in revenue bonds tied to essential services such as water/sewer, electricity, schools and transportation systems. We look for noncallable structures to achieve attractive, stable income over time.
Tax-exempt municipal valuations do not fluctuate as frequently as Treasuries so they generally have relatively low correlations with Treasuries and other taxable equivalents. Because these low correlations create compelling periods of over- / undervaluation for tax-exempt municipals, we closely monitor yield spread relationships between taxable and tax-exempt securities across duration segments in an effort to increase overall after-tax portfolio yield. This process helps ensure that we are fully invested in the highest risk-adjusted after-tax sector for each duration segment.
The tax advantaged strategy is most appropriate for taxable insurers in the Property & Casualty, Health and Captive business lines. It can be customized to meet your company’s specific tax situation when used in conjunction with our Dynamic Tax Analysis service.