Puerto Rico Insured Bond Portfolio Style - First Quarter 2015 Data through March 31, 2015
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Puerto Rico Insured Bond
Portfolio Style
First Quarter 2015
Data through March 31, 2015
©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission.
Company Profile
Managing client portfolios since 1973
Over $2 billion total assets under management
• Individuals
• Institutions
• Retirement plans
• Government entities
• Cash management portfolios
Team-based approach with an average of over 25 years of investment
experience
Clients located throughout the US and abroad
Offices
• Headquartered in Sarasota, Florida
• Branch office in Vineland, New Jersey
©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission. 2
Puerto Rico Insured Team
David R. Kotok cofounded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in economics from The
Wharton School of the University of Pennsylvania, an M.S. in organizational dynamics from The School of Arts and Sciences at the University of Pennsylvania,
and a masters in philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times,
The Wall Street Journal, Barron's, and other publications. He is a frequent contributor to Bloomberg TV and radio, Fox Business, and other media. Mr. Kotok
has served as Program Chairman of the Global Interdependence Center (GIC) (www.interdependence.org), whose mission is to encourage the expansion of
global dialogue and free trade in order to improve cooperation and understanding among nation states, with the goal of reducing international conflicts and
improving worldwide living standards. Mr. Kotok chaired its Central Banking Series and organized a five-continent dialogue held in Philadelphia, Paris, Zambia
(Livingstone), Hanoi, Singapore, Prague, Cape Town, Shanghai, Hong Kong, Rome, Milan, Tallinn, and Santiago, Chile. He has received the Global Citizen
Award from GIC for his efforts. Mr. Kotok is a member of the National Business Economics Issues Council (NBEIC), the National Association for Business
Economics (NABE) and served on the Research Advisory Board of BCA Research. Mr. Kotok has served as a Commissioner of the Delaware River Port
Authority (DRPA) and on the Treasury Transition Teams for New Jersey Governors Kean and Whitman. He has also served as a board member of the New
Jersey Economic Development Authority and as Chairman of the New Jersey Casino Reinvestment Development Authority. He has authored or co-authored four
books, including the best selling Second edition of “From Bear to Bull with ETFs,” now available at Amazon and the soon to be released “Adventures in
Muniland.”
John Mousseau, CFA joined Cumberland Advisors in September 2000. He is currently an Executive Vice President and the Director of Fixed Income, as well
as a portfolio manager for municipal bond investments. In this capacity, Mr. Mousseau and his team manage portfolio construction, management, analysis,
trading, and research for both tax-free and taxable bond accounts. Mr. Mousseau has over 30 years of investment management experience. Prior to Cumberland,
he was the Director of Municipal Bond Investments for Lord Abbett & Company. He also worked previously for Shearson Lehman Brothers and its predecessor
firm, E.F. Hutton. His comments and analyses have appeared in The Bond Buyer, Barron’s, the Wall Street Journal, Bloomberg, Forbes, the New York Times,
the San Francisco Chronicle, and the Newark Star-Ledger. In addition, he has appeared on Bloomberg Radio and Television, Reuters, and CNBC for
commentary on fixed-income markets. He has also been a speaker at various industry conferences, and a guest lecturer at Florida International University. Mr.
Mousseau holds an A.B. degree in economics from Georgetown University and a M.A. degree in economics from Brown University; and he is a holder of the
Chartered Financial Analyst (CFA) designation. He is a member of the Philadelphia Council for Business Economists (PCBE), the National Federation of
Municipal Analysts (NFMA), the National Association of Business Economics (NABE), the Washington Area Money Managers (WAMM), and the National
Economists Club (NEC). He is also a member of the New York Society of Securities Analysts, where he served on the Society’s High Net Worth Investors
Committee. He is a past chair of the Municipal Bond Buyers Conference and is still a current active member. In addition, he has served as an instructor at the
New York Institute of Finance and Bond Market Association. Mr. Mousseau resides in Sarasota, Florida. He is a member of the Tampa Bay CFA Society and the
Sarasota South Side Rotary Club. He is also active in alumni affairs at Georgetown University. Prior to moving to Sarasota, he was involved with the Rotary and
YMCA in Maplewood, New Jersey and still has ties to those associations.
©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission. 3Puerto Rico Insured Team
Michael Comes, CFA serves Cumberland Advisors as Vice President of Research and Portfolio Manager. He joined Cumberland Advisors in 2008 after
graduating with a B.A. in economics from Dickinson College. Michael earned the CFA Charter in 2012. His responsibilities include research of current and
prospective bond holdings, both tax-exempts and BABs, as well as trading of tax-exempts and BABs on Cumberland’s fixed income desk. In addition, Mr.
Comes works with Cumberland’s IT department and assists Cumberland’s Vice Chairman and Chief Monetary Economist, Robert Eisenbeis, in developing
Cumberland’s proprietary rating and forecasting models. Mr. Comes was born in Paris, France and grew up in Millburn, New Jersey. He is a member of GIC
(Global Interdependence Center), whose mission is to improve the lives of people throughout the world through dialogue. He is involved with the Sarasota,
Florida Young Professionals Group, working with volunteer organizations and participating in community outreach activities. He is also an active member of
the Tampa Bay chapter of the CFA Institute.
Amy Raymond joined Cumberland Advisors in 2000. She started out processing trades in the trading department; and over the years, her duties have expanded
to include monitoring bond markets, executing fixed-income trades, generating sample portfolios, and writing portfolio analysis. As a Portfolio/Trading
Assistant, Amy assists in the day-to-day management of our tax-free fixed-income portfolios.
©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission. 4Puerto Rico Insured Team
Shaun Burgess joined Cumberland Advisors in 2013 after graduating with a B.A. in Finance from the University of South Florida. At USF he was a multiple
time Dean’s List recipient and was awarded a Dean’s Certificate of Recognition for outstanding performance on the ETS Major Field Test in business. His
responsibilities include analysis of prospective tax exempt and taxable portfolios, trading of tax exempt securities on Cumberland’s fixed income desk, and
assisting in department operations. Additionally, he is responsible for updating research material for Cumberland’s fixed income and equity trading desks and
also assists Cumberland’s Vice President of Research, Michael Comes, with credit research relating to current and prospective tax exempt bond holdings. Mr.
Burgess was born and raised in Sarasota, Florida. Prior to joining Cumberland Advisors, he worked for his small family owned construction company while
attending college.
Anne G. Ross joined Cumberland Advisors in a consulting capacity in 2014. In that role, Ms. Ross assists Cumberland Advisors with municipal audit analysis
and special projects. Until January 2014, Anne G. Ross was Manager of Roosevelt & Cross, Inc.’s Research Department where she was responsible for all
aspects of research related to trading; underwriting and public finance activities. Additionally, Ms. Ross had responsibilities as a member of the firm’s
Compliance Committee. A veteran of both credit research and investment banking, Ms. Ross’s experience led to the creation of the first fee-based, computerized
credit analysis data base on Wall Street, a pre-cursor of several of today’s financial service industry products. Her investment banking experiences structuring
high yield offerings and in default workouts led to publications within the fields of housing, healthcare and high yield credits. Ms. Ross received a BA in
Economics, from the College of the Holy Cross in Worcester, Massachusetts and an MBA in Banking and Finance, with distinction, from Pace University in
New York City.
©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission. 5Investment Thesis
Puerto Rico bonds have come under severe pressure
because of retail selling due to headline risk.
Press coverage of Puerto Rico’s financial difficulties has
heightened direct selling of Puerto Rico debt.
Overall Yields on Puerto Rico debt have risen
significantly, creating opportunity in select Puerto Rico
issues.
©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission. 6Retail Selling has Eroded PR Debt Market
July poor Economic Data
Released
9
8
Detroit Bankruptcy
Filing
7
6
5
Barron’s Article Published on bond
fund holdings of Puerto Rico debt.
4
PR S-Tax Snr 5% '46 PR GO 5% '41 BBG MUNI BBB Curve
Source: Cumberland Advisors and Standard and Poor’s
©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission. 7Portfolio Strategy
Look for attractive entry-points into Puerto Rico debt during
periods of idiosyncratic and systematic selling pressure.
Selectively purchase securities with heightened legal
protections, strong cash flows and credit enhancements.
Perform continual surveillance on the Puerto Rico financial
situation utilizing proprietary credit monitoring tools.
Monitor forward-looking economic indicators:
• Cement Production
• Light vehicle Sales
• BLS Employment Statistics
• GDB Economic Activity Index
©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission. 8PR Main Fiscal Challenges
Retirement
System’s
Unfunded Liability
Strained Public Budgetary
Corporations Deficit
Source: Standard & Poor’s
©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission. 9Commonwealth’s Structural Problems
Commonwealth economy has been in recession since phase-out of IRS
Section 936 tax incentives in 2006.
40% of Commonwealth’s general revenues come from annual subsidies and
general aid from the U.S. Federal government.
High levels of government debt relative to U.S. states and Latin American
countries.
7% peak-to-trough population decline starting in 2008 has reversed 2
decades of population growth.
Deficit reduction measures such as reduced headcount likely to worsen
recession due to high concentration of government employment (25% of
total employment) in labor force.
©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission. 10What are we watching?
Private sector employment and other trends
Prospects for widening structural budget gap and greater need for deficit
financing
GDB net liquidity position (net of restricted funds and short term external
debt of GDB, Commonwealth, and Authorities)
Pension Liabilities
Future usage of debt-financing to pay annual operating expenses.
©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission. 11Eligible PR Bond Investments
Purchase Insured Obligations of the following Obligors:
Puerto Rico COFINA Sales & Use Tax
– Senior, 2nd, Subordinated and 3rd lien (if issued)
Puerto Rico General Obligation
– “Plain Vanilla” GO ULT bonds
Puerto Rico Public Corporations
– Electric Power Authority (PREPA)
– Aqueduct and Sewer Authority (PRASA)
– Government Development Bank (GDB)
– Highway and Transportation Authority (PRHTA)
– Infrastructure Financing Authority
– And others…
©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission. 12Risks Unique to This Strategy
Investing in Puerto Rico securities involves a risk of loss that investors should be
prepared to bear. This strategy will have the following risks:
• Credit Risk
– Puerto Rico debt is widely considered to bear substantial credit risk. Poor financial performance will
likely lead to downgrades by ratings agencies, which will reduce the market’s perceived value of these
securities. A downgrade on any classes of debt will reduce the number of eligible buyers for these
securities, resulting in loss of liquidity.
• Default
– Puerto Rico’s high indebtedness and cash flow difficulties could result in nonpayment on its debt
securities. Some market analysts have predicted that the Commonwealth will be insolvent within the
next two years. A missed payment will reduce the market value and cash flows generated by the
securities purchased in this strategy. A downgrade to below-investment grade on any classes of debt
will trigger termination payments on the Commonwealth’s outstanding derivative instruments, which
could lead to nonpayment on its outstanding debt.
• Interest Rate
– Rising inflation erodes the real value of all bonds. Puerto Rico bonds are no exception; however we
expect the values of these securities to largely be based on the market’s perception of the
Commonwealth’s creditworthiness
©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission. 13Risks Unique to This Strategy (cont’d)
There is also a significant risk due to liquidity, possible bankruptcy and
risk of market access due to downgrades of Puerto Rico – the
Commonwealth as well as its agencies.
Because of the concentration of credit risk in a single area, overall risk
is increased. There is also significant risk of what we call “headline
risk”. That is, risk from unfavorable press coverage of the
Commonwealth and its finances. Headline risk has contributed to the
volatility in PR bond prices
©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission. 14Strong Legal Framework of PR Debt
Bond financings governed by Puerto Rico law and US Constitution
• Precedents exist for hearing contractual and constitutional disputes in Federal Court
• Puerto Rico Supreme Court decisions can be appealed directly to US Supreme Court
PR Constitution provides first priority lien on “available resources” of the Treasury
for the benefit of General Obligation debt service
• Known as “GO claw-back” from perspective of non-GO bonds
• COFINA sales tax property not part of available resources, per opinions of Secretary of
Justice and bond counsel
PR constitutional amendments (none since 1970) require approval by 2/3 of House
and Senate plus a special referendum to the electorate
• Contracts clauses of both PR and US constitutions protect bondholders
Puerto Rico, like US states, is prohibited from filing under US bankruptcy law
• PR municipalities and public corporations also prohibited from filing under Chapter 9
Puerto Rico 8% due 2035 are U.S.-domiciled for legal purposes, heavily
disincentivizing attempts to restructure under New York Law.
Source: Moody’s and Cumberland Advisors
©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission. 15Noteworthy Developments
Significant spread-tightening in insured Puerto Rico paper relative to
uninsured paper.
Padilla Administration commitment to balanced budgeting practices and
righting the wrongs of previous administrations has improved the island’s
finances as well as those of its public corporations.
Strong political and economic links to the US; benefits from US legal and
regulatory systems with congressional tie-ins.
Enacted pension reforms have significantly reduced the island’s pension
underfunding.
©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission. 16Disclosure
All material presented is compiled from sources believed to be reliable. However,
accuracy cannot be guaranteed. Past performance is no guarantee of future results. All
investments involve risk including loss of principal. Fixed income investments are
subject to interest rate and credit risk.
©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission. 17You can also read
