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PGIM Fixed Income offers a range of Municipal Bond Strategies that utilize a bottom-up fundamental-research based approach which seeks to achieve return objectives while minimizing risk over a full market cycle.1,2 We believe the municipal bond asset class provides the following benefits: diversification away from corporate credit, lower default risk, and lack of merger and acquisition risk.
Each of PGIM Fixed Income’s Municipal Bond Strategies emphasize revenue vs. general obligation credits and focus on slightly different segments of the municipal bond market, including greater allocations to select ratings or duration buckets.
PGIM Fixed Income’s Municipal Bond investment process is as follows:
Step 1: Develop Top-Down Investment and Credit Outlook
Each quarter, PGIM Fixed Income’s senior investment management team formulates its Quarterly Market Outlook. The Quarterly Market Outlook is a PGIM Fixed Income-wide assessment of likely economic, interest rate, and fixed income sector scenarios for the coming quarter. The Outlook also includes a credit quality and sector bias for the credit-sensitive sectors of the market. The Outlook plays a central role in helping the senior portfolio manager and the team evaluate the appropriate levels and types of risk to assume across municipal bond portfolios. A municipal bond portfolio’s sector exposures and credit bias are also influenced by the macroeconomic views expressed in the Market Outlook.
Step 2: Construct a Portfolio Reflecting Risk Budget, Market and Credit Environment, and Outlook
The senior portfolio manager and the municipal bond team then construct the portfolio, seeking to achieve excess return through establishing risk exposures in sector allocations and other portfolio characteristics that reflect the current Outlook while remaining within the Strategy’s pre-established risk budget. The risk budget helps the team manage total tracking error within a municipal bond portfolio, as well as the allowable tracking error for each of the active components of the process. Of course, portfolio construction also reflects individual client guidelines and constraints.
The Team seeks to select securities that offer attractive relative value and to combine these issuers/exposures in such a way as to achieve the desired characteristics and risk profile of the portfolio. Their daily presence in the municipal bond market, and relationships with the broker/dealers supporting that market, make them well-positioned to buy and sell securities for client portfolios. The analysts’ research and opinions are key components in identifying attractive relative value opportunities.
Step 3. Portfolio Monitoring and Risk Management Done Daily
The next step of the process is portfolio monitoring and risk management. It is done continuously throughout each day. PGIM Fixed Income maintains an internal Investment Risk Management and Quantitative Research Team to precisely quantify and evaluate major risks in client portfolios.
1 There is no guarantee that these objectives will be met.
2 On average, over a full market cycle defined as three to five years.
No risk management technique can guarantee the mitigation of elimination of risk in any market environment.
Source: PGIM Fixed Income as of June 30, 2020.