The municipal bond market is in much better health than investors are aware of due to ‘broad carnage’ created by incidents of US local governments going bankrupt.
In an investor note, Molumphy said the municipal bond market had been ‘significantly beaten up’ over the past couple of quarters following major incidents such as Detroit’s bankruptcy.
Detroit was the biggest city in US history to file for bankruptcy when it sought Chapter Nine protection in July as it was facing $18 billion in outstanding debts.
‘When we step back from some of the individual situations, by and large, most cities and states have done a very solid job over the past several years getting their financial houses in order,’ said Molumphy.
‘Broadly speaking, the asset class looks fundamentally in pretty good shape to us. With the valuations in today’s market, given some of the media coverage and the broad carnage, we think municipal bonds represent good value as an asset class as we look ahead.’
The municipal bond market currently accounts for 3.99% of the duo’s fund on a sector basis. The largest allocations at present are high yield corporates (26.7%), an area which Molumphy sees increased opportunities.
He pointed to strong balance sheets and a more positive business climate.
‘Cash on corporate balance sheets, improving earnings and low expected default rates present a good investment case, particularly when combined with valuations, which to us seem very reasonable in many cases,’ he said.
In addition, Molumphy said he and Takaha could increase their non-US bond exposure, which stands at 25.3% of the fund. Molumphy said this is due to attractive opportunities emerging in global fixed income markets.
‘A number of countries have continued to have higher yields than we see in the US, with better economic growth prospects as well as superior financial conditions and prospects for currency appreciation,’ he said.
The Franklin Strategic Income fund has returned 15.69% in US dollar terms over the three years to the end of September 2013. This compares to an 8.83% rise by its Citywire benchmark, the Barclays US Aggregate Bond TR, over the same period.