Municipal Bond Account Management
About 16th Amendment Advisors
16th Amendment Advisors oversees the investment management decisions of a variety of separately managed account products and investment vehicles designed for outside clients and for the founding partners and their families using proprietary trading strategies. All of the strategies managed by the firm are dedicated to the municipal bond market. ... more
We are a boutique firm based in New York. The managing and founding partners own 100% of the firm. We invest a sizable portion of our net worth in our proprietary municipal strategies. We believe our edge comes from long established relationships with a large broker-dealer network which provides us access to high quality information and product. During 2018, the principals of the firm and its affiliates traded in excess of $4.4 billion of municipal securities with approximately 70 counterparties.
Our investment philosophy is based on being proactive and tactical as we believe the municipal market is inefficient and information flows are asymmetric. Generally speaking, we focus on owning liquid bonds in liquid sectors. Some of our client strategies are long only and others utilize margin leverage on an episodic or opportunistic basis. We can customize portfolios to be state specific, taxable or green/socially responsible. Our proprietary strategies use margin leverage, hedging and are actively traded.
The portfolio managers have significant experience in the municipal market encompassing cash, synthetic and derivative trading, sales and underwriting, hedging, portfolio management, research and strategy, and arbitrage.
The municipal market is a $3.8 trillion market and is the primary market through which states, cities, counties and their authorities raise capital to fund projects and their operations. The market is “over-the-counter,” making relationships a key factor for successful management. There are approximately 60,000 municipal issuers and more than 1.5 million distinct CUSIPs. Daily trading activity is approximately $20 billion of par value. ... less
Our portfolio managers have more than 60 years of combined experience in the municipal bond market encompassing the buy side, sell side, research, arbitrage, proprietary trading, high yield, research, underwriting and taxable municipals.
R. JED MCCARTHY
Founding Partner and Co-Portfolio Manager
Founding Partner of Prager, McCarthy & Sealy, a dealer specializing in the origination and secondary trading of municipal securities. Manager of the underwriting, sales, trading, and arbitrage department. Responsible for all risk management, bond department administration, and new issue syndication. Formerly a member of the Investor Advisory Board of the MSRB. Previously a Senior Vice President at L.F. Rothschild.
Received a AB in Economics from Brown University.
Founding Partner and Co-Portfolio Manager
Former Head of the Municipal Bond Group at Prudential, responsible for more than $5 billion in municipals. Municipal strategist with Goldman Sachs and Merrill Lynch, and a CMBS investment banker with Merrill Lynch. Top ranked in Institutional Investor for municipal strategy for 1995, 1996, and 1997.
Received a BS in Math from MIT and an MS in Management from the MIT Sloan School of Management.
JOHN J. LEE
Partner in charge of all non-portfolio management responsibilities. Former Director of Credit Suisse First Boston/Donaldson Lufkin & Jenrette in the mergers and acquisitions department. Advised on more than $100 billion of M&A volume.
Received a BA in History from Boston College and an MBA from Columbia University.
Portfolio Manager High Yield and Taxable Bonds
Joined the firm in April 2017 from Morgan Stanley where he was Executive Director and responsible for retail high yield and taxable bond trading. He has over 15 years of experience in the municipal bond market. Previously worked as a Vice President at Merrill Lynch.
Received a BS degree from the University of Scranton.
Joined the firm in 2007. With over 15 years of broad managerial experience in running operations, she is responsible for managing daily trade operations and support. Former Office Manager of the NYU Child Study Center, where she managed a staff of 80.
Received a BA in Psychology from New York University.
Investment Strategies and Services
16th Amendment Advisors is exclusively focused on municipal bonds. We are covered by more than 70 dealers nationwide which provides us excellent visibility into what’s going on in the municipal market. Consider us your outsourced municipal bond trading desk.
Long Relative Value
The objective of this strategy is for high after-tax current income and modest capital appreciation through proactive trading and tactical portfolio positioning. The portfolio will be proactively managed to account for the ever-changing nature of the municipal market. 100% of its holdings will be rated A- or better at time of purchase. This strategy’s trading is more macro positioning-based (i.e. certain coupon structures, states, or parts of the yield curve may be rich or cheap). It has an average maturity limitation of 19 years.
Internally, we consider this similar to most classic buy-and-hold strategies but given the firm’s bias towards holding liquid bonds and proactive portfolio management, its holdings may see more turnover than typical managed account portfolios.
The objective of this strategy is to receive a high proportion of tax-exempt interest income plus capital appreciation through proactive and opportunistic trading (i.e. alpha). Investors in Long Performance will be investors in Long Relative Value which seeks to provide a base return of after-tax income plus modest capital appreciation through proactive trading and tactical portfolio positioning. In addition, at the discretion of the investment manager, up to 15% of the equity may use margin leverage (current maximum margin borrowing is 3x equity) to be invested in thematic and opportunistic trades. The timing and amount of the thematic and opportunistic trading will be unpredictable throughout the course of a year. As a general matter, the investment manager may utilize the margin capacity in an effort to take advantage of market, dislocations, arbitrage trading, legislative events and/or seasonal factors as a means to add alpha to the portfolio's return.
To the extent the strategy is at full margin borrowing, the Long Relative Value portion of the account could be at 0.85 times exposure and the margin leverage component could be at 0.60 times for total municipal exposure of 1.45 times account equity. 100% of the portfolio will be investment grade (BBB- or higher) at the time of purchase, with the Long Relative Value portion of the portfolio (varying from 85% to 100% of equity) at an A- or higher rating on purchase. The strategy will have average maturity limitations defined by its relative exposures to Long Relative Value (less than 19 years) and to its exposure to alpha based opportunities which currently has no maturity limitation.
Internally, we look at this strategy as a way to earn a “sleeve” of trading alpha on top of a significantly invested municipal portfolio generating tax-exempt income. We also would expect that, over time, it will be less market directional than a classic buy-and-hold strategy due to its alpha component.
Custom Portfolio - Intermediate and Income
The objective of this strategy is for high after-tax current income. In conjunction with the client, we will structure the portfolio to meet individual guidelines for income, state exposure (i.e. NY or California), duration, and other variables of concern to the client. It resembles more of a buy-and-hold strategy, but without the proactive overlay of Long Relative Value. This strategy is likely designed for the investor who seeks a certain amount of income and is willing to absorb some price volatility.
One way to get to know our thinking and the value we can add is to evaluate, at no cost, a prospective client’s portfolio and provide meaningful analysis. Typically, we are sent a copy of the portfolio, in excel, including cusips, par amounts, and if possible, acquisition date. Our portfolio managers will then schedule a conference call with the prospect or the financial advisor and discuss the qualitative and quantitative aspects of the portfolio. We have found this to be enormously educational as it is often the case the advisor and clients are not familiar with the credits. We typically limit this service to portfolios of at least $500,000.
One of the key investment mantras at 16th Amendment is know what you own. In a market with more than 1.5 million cusips, we rely on the following in constructing portfolios:
Keep Focus on Market Fundamentals
The municipal market is a supply and demand driven market. Paying constant attention to fund flows, issuance patterns, redemption cycles and tax policy are some of the critical components to decision making
Know the Structure
Understanding the structural features of a bond is essential
Unlike traditional corporate bonds, municipal bonds generally trade on a price to worst basis (not option adjusted duration)
Call features, market discount taxation, coupon and tranche size can all affect liquidity and performance
Do not Sacrifice Liquidity for Diversification
Unlike equity investing where diversification is critical to portfolio construction, in municipals, we believe that you are better off owning fewer more liquid credits in institutional block sizes than many smaller odd lots
Do not Stretch for Yield
The market is large enough to find opportunities without “stretching” for yield or alpha
Monitor portfolios regularly
The municipal market is affected by exogenous and non-exogenous factors which can impact portfolio values