Principles of Portfolio Construction: Lord Abbett Municipal Bond Strategy
Risks to Consider: The value of an investment in fixed-income securities will change as interest rates fluctuate in response to market movements. When interest rates rise, the prices of debt securities are likely to decline, and when interest rates fall, the prices of debt securities tend to rise. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. High-yielding non-investment-grade bonds involve higher risk than investment-grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on the securities. There is a risk that a bond issued as tax-exempt may be reclassified by the IRS as taxable, creating taxable rather than tax-exempt income. In addition, bonds are subject to other types of risks, such as call, credit, liquidity, interest-rate, and general market risks.
The Lord Abbett AMT Free Municipal Bond Fund does not invest in any AMT-triggering private activity bonds. Although the AMT Free Municipal Bond Fund seeks income that is federally tax-free, a portion of the Fund’s distribution may be subject to federal, state, and local taxes.
For all other Lord Abbett tax-free funds (tax-free funds), a portion of the income derived from the tax-free fund’s portfolio may be subject to the alternative minimum tax, and any capital gains realized may be subject to taxation; in addition, federal, state, and local taxes may apply. No investing strategy can overcome all market volatility or guarantee future results.
Municipal securities may include insured municipal securities that are covered by insurance policies that guarantee the timely payment of principal and interest. Insurance does not pertain to yield or market values, which will fluctuate over the life of the bonds.
Bonds carry the risk of default, which means that the issuer is unable to make further income and/or principal payments. In addition, bonds carry the risk of being downgraded by the rating agencies which could have implications on price. Most individual bonds are rated by a credit agency such as Moody’s or Standard & Poor’s to help describe the creditworthiness of the issuer or individual bond issue.
Neither diversification nor rebalancing can guarantee a profit or protect against a loss in declining markets. The process of rebalancing may carry tax consequences.
The credit quality ratings of the securities in a portfolio are assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s, or Fitch, as an indication of an issuer’s creditworthiness. Ratings range from AAA (highest) to D (lowest). Bonds rated BBB or above are considered investment grade. Credit ratings BB and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.
Separately managed accounts are not subject to certain investment limitations, diversification requirements, and other requirements under the Investment Company Act of 1940 and the Internal Revenue Code that mutual funds are subject to, which could impact the specific investments of each type of vehicle. In addition, separately managed accounts and mutual funds have different applicable fees and expenses, which would lead to differences in performance between the two types of investment vehicles.
Glossary of terms
Credit Spread is the spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating.
A yield curve is a measure at a given point in time of how interest rates change based on maturity terms.
Total return comprises price appreciation/depreciation and income as a percentage of the original investment.
The opinions in the preceding commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.