With angst about the health of the economy rising, portfolio managers are focusing on sectors that are shielded from a broad market downturn.
(Bloomberg) — With angst about the health of the economy rising, portfolio managers are focusing on sectors that are shielded from a broad market downturn.
In general, municipal bonds tend to attract buyers in times of economic uncertainty as investors flock to haven assets. Still, some sectors within the $4 trillion market, like those tied to tourism, are more susceptible to slowdowns in spending. With that in mind, charter school and higher education debt should be near the top of investors’ lists for those willing to inch down the credit spectrum, according to portfolio managers.
“The predominant funding source for charter schools is state aid,” said Yaffa Rattner, head of municipal credit at Hilltop Securities Inc. “As long as the states remain relatively liquid and their budgets are stable, there isn’t significant pressure on them to reduce funding.”
One of the last things states cut is aid to schools, said Craig Brandon, co-director of municipal investments at Eaton Vance Management. Brandon also said larger private colleges should fare well.
In a research note Friday, Barclays Plc strategists led by Mikhail Foux said economic data last week, including a pick-up in jobless claims and weaker housing starts, “all point to a looming economic slowdown.”
“Our macro view, which we haven’t been very quiet about, is that we are entering a recessionary environment,” Jonathan Mondillo, head of North American fixed income at investment company abrdn, said in an interview.
Charter school bonds that abrdn holds in its portfolio have strong outlooks bolstered by enrollment that grew during the pandemic. The investment firm is overweight that sector while underweight bonds backed by risky construction projects as well as sales and income tax revenue as wage pressures rise.
“People don’t lose their job and pull their kids out of school, generally speaking,” Mondillo said.
Still, charter schools are publicly funded and privately run, so they are considered riskier investments than traditional public schools, in part because their charters are subject to renewal.
No Defaults
This year, charter schools have issued about $469 million of long-term debt, with highest issuance coming from Texas and Arizona, according to data compiled by Bloomberg. The sector saw no first-time payment defaults in 2022, and has yet to face any in 2023 so far, according to data from Municipal Market Analytics.
“A lot are low or non-rated, you have to be comfortable with that credit, but there are some great charter school credits out there that probably do OK during a recession,” said Brandon, who is also overweight airports, which are sensitive to any cutbacks in travel but stand to benefit from the rising price of airline tickets.
High yield education debt has returned 2.36% in 2023, roughly in line with the broader municipal bond market, which returned 2.43%. according to data compiled by Bloomberg.
“Charter schools have benefited post-Covid with increased waitlists, good profit margins, as well as strong outlooks, so I think it’s a space that offers value,” said Mondillo. “In some instances we see it as an investment grade sector, but it trades and is rated as a high yield sector in most instances.”
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