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On August 26, 2013, Barron's trumpeted on its cover page, "Puerto Rico in Trouble". This article by Andrew Bary may be a loud timpani roll for those who own the debt of the Commonwealth either directly or indirectly. But I do not agree that it offers the thunderous crescendo that seems the intent of the author. In fact, I was tempted to reply with a response that likely was too shrill given my understanding of the realities of politics and economics on the island. However, I do echo the sentiments offered by Richard P. Larkin, Senior Vice President, Director of Credit Analysis at H.J. Sims, in his response to the Barron's article which I feel is appropriate to reflect here. With merit, here is how Mr. Larkin presented his views [italicized text below taken in its entirety from Mr. Larkin's piece]:
"Some points in the Barron's article that beg for a response:
The Barron's article also fails to point out some unique strengths of Puerto Rico, which do not exist for other states, like owning its own bank (the Government Development Bank, or GDB), which gives this island issuer more market flexibility than most states. Or the fact that the Commonwealth's electric, water and sewer utilities are legal monopolies.
Why do I remain bullish on Puerto Rico? Because under the previous Governor, as well as current Governor Padilla, they are not only "talking the talk", they are "walking the walk". Even Barron's notes these: major tax increases to curb deficits, tax and fee increases in utilities and the transportation sectors, and a commitment to jump-starting the economy as best it can given tight fiscal policies."
Yes, Puerto Rico is a significantly large issuer of triple tax-exempt debt and it has found its way into a good number of actively as well as passively managed municipal bond funds all across the country. And as redemptions from bond funds and other accounts have fueled selling pressures, the liquidity ascribed to Puerto Rico debt makes it an easy name for portfolio managers to put on their sell lists. The result has been a dramatic rise in yields for all these bonds and underperformance (-19.76% YTD as of September 9, 2013 based on the Barclays Puerto Rico Municipal Bond Index1. I am not yet convinced that it is a foregone conclusion that Puerto Rico will go down the same path as that of Detroit.
1The Barclays Puerto Rico Municipal Bond Index is considered representative of the broad market for investment-grade, tax-exempt bonds issued in Puerto Rico, with a maturity of at least one year.
The VanEck Vectors High-Yield, Long, Intermediate and Short Municipal Index ETFs invest assets in municipal bonds issued by Puerto Rico. (Click the preceding hyperlinks to view current geographic weightings.) This means the Funds are susceptible to additional risks including economic, political, regulatory or other factors adversely affecting issuers in Puerto Rico. Recent downgrades affecting these bonds may exacerbate Puerto Rico's current financial difficulties and the liquidity and risk profile of its outstanding bonds, which may affect these Funds.
The opinions expressed by Mr. Larkin are strictly his own and do not necessarily reflect those of Herbert J Sims & Co, Inc. or their affiliates. This is not a solicitation to buy or an offer to sell any particular investment. All investment involves risk and may result in a loss of principal. Investors should carefully consider their own circumstances before making any investment decision.
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All indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a fund. An index’s performance is not illustrative of a fund’s performance. Indices are not securities in which investments can be made.
Any discussion of specific securities mentioned in the commentary is neither an offer to sell nor a solicitation to buy these securities.
Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. Bonds and bond funds will decrease in value as interest rates rise. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds.
The income generated from some types of municipal bonds may be subject to state and local taxes as well as to federal taxes on capital gains and may also be subject to alternative minimum tax.
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Investing involves risk, including possible loss of principal. An investor should carefully consider investment objectives, risks, charges and expenses carefully before investing. This and other information can be found in the appropriate regulatory documents made available for a specified country as designated in this website.