VFL Fund Update - August 15, 2023

In this episode we are focusing on municipal bonds investing with Jon Mondillo of the abrdn National Municipal Income Fund - ticker VFL.

Transcript

Paul: Hi all and welcome to the latest in the abrdn Closed-end Fund podcast series where we catch up with our portfolio managers from around the globe to gain some perspective on the current state of the markets and the abrdn closed-end funds. I'm Paul Blaine, Senior Director with the National Accounts team, and today we're focusing on the abrdn National Municipal Income Fund, ticker VFL. It's my pleasure to welcome Jonathan Mondillo, Head of US Fixed Income and Lead Portfolio Manager on the abrdn National Municipal Income Fund. Hi, John, and welcome. It's great to see you.

Jonathan: Paul, thanks a lot. Thanks for having me.

Paul: John, if we could, it would be great to start with a general overview of the municipal markets, in particular in the closed-end fund space.

Jonathan: Yeah, thanks. You know, I think it's been a difficult couple of weeks, certainly with the backup in treasury rates that we've seen, and this has largely been driven by an economy that's proving rather resilient. You've got strong consumer numbers obviously coming out, and then a FED that's very much focused still on taming what appears to be sticky inflation. That being said, I think munis, relative to both investment grade corporate bonds as well as treasuries, have done really well and have outperformed those two asset classes. So, you know, while we do expect things to remain a bit choppy within munis, we do expect municipal bonds to continue to outperform other fixed income asset classes. And at abrdn in particular, I think our focus is mainly on bottom-up security selection being a key driver of alpha during these periods of volatility like we've seen over the last month, let's say. Again, buying the winners and staying away from the losers. To your point on closed-end funds in particular, we think municipal closed-end funds at the moment appear extremely attractive.

Paul: Great, John, thanks for that overview. If I could, would you please share the overall strategy of VFL, the abrdn National Municipal Income Fund? 

Jonathan: Yeah, as a lot of you might know, we took over the fund on July 10th. I think since then, our primary focus has been on increasing that yield, which is the primary objective of the strategy - high tax exempt, distributable income. And I think that's been a little bit difficult given where short term rates are, and ie. leverage cost is high at the moment. But there are a number of other changes to the portfolio that we've been doing in order to improve that performance and increase that distribution yield that were able to pay investors. One area of focus is certainly the duration composition within the portfolio. So, when we look at the municipal bond curve, it's experiencing what at abrdn we're calling a teacup inversion, where there's a steep inversion out to 10 years, ie. yields much higher in short term maturities versus the belly of the curve, and then you see a renormalization, or an upward sloping curve, as we get past 10 years. We recently put out a thought piece where we warned to ‘beware the belly of the curve’ and we've been doing just that within this strategy. So, moving duration positioning away from the belly of the curve where yields at the moment appear to be very low, to more of a barbell approach at the very short end of the curve and the long end. This a all should be very supportive of both our yield as well as an overall total return of the strategy on a go forward basis, at least that's our expectations.

Paul: In terms of sectors that you're investing, or maybe not investing, where are you finding opportunities that you feel are most relevant to VFL?

Jonathan: I'd say we're generally constructive on credit fundamentals within munis. We think that, trading down in credit, investors are being well compensated or appropriately compensated at the moment. So again, going from triple A to double A, we think makes sense, going from double A to single A, and so on and so forth. You know, that being said, VFL is really a high-grade investment strategy, so it's not a strategy where we will be able to add too much in lower credit quality names and your high-risk high beta sectors, if you will. However, I think we've done a really good job at shifting the portfolio away from those high-grade general obligation bonds in ultra-high-grade states such as Minnesota and Colorado. Obviously, there's reasons why the fund as we took over had high concentrations within those states. But we've been filtering that over into more high growth and maybe high tax states like Texas, Florida, and then again, high tax New York, where we think there's more compelling income opportunities within individual issuers. I think sectors where we've been more focused on adding yield has been within transportation, healthcare - in particular hospitals, which we think have really gone undervalued, faced a number of different headwinds over the last, let's say, three years in a post COVID world, starting to come out of that and we think look attractive, both from a yield perspective, as well as a total return perspective on a go forward basis. I'd say another area where we're starting to turn more cautious on would really be sales tax back bonds. The consumer has been strong, yes., but as that strength wanes, we would certainly expect these bonds to be adversely impacted both in terms of revenues that are coming in from sales tax, as well as overall credit quality of those issuance. So, just a couple different sectors that I think we're focused on at the moment. And maybe, maybe a sector or two that we're becoming a little bit more cautious on.

Paul: John, thank you for that. So, my last question sort of has two parts. First, can you share your thoughts on why investors listening should consider allocating into the municipal space and where appropriate to the abrdn National Municipal Income Fund?

Jonathan: I think munis in general, is extremely compelling at the moment for a number of different things. Number one, you're looking at tax exempt yields close to probably close to 4%, taxable equivalent gets you to six and a quarter, if not above that, for investment grade municipals. Certainly, VFL in and around that, in terms of its distributable income, and on a taxable equivalent basis, north of six and a quarter. I think it's compelling and something that investors have not seen in certainly a number of years. I think another reason why municipals look attractive at the moment is that it's a high-quality asset class. It benefits from extremely strong fundamentals that we expect to continue as we get into 2024. And then if we get into an economic slowdown should insulate investors to some of the broader credit cracks that we might see in say, the high yield space, certainly the corporate space and the broader credit market, so insulates investors to there. There's also considerable diversification benefits versus let's say, corporates and equities, given that we're looking at an issuance of 40,000 different issuers across a number of different sectors. And on top of that, several million different individual CUSIP. So significant diversification, high and compelling yield both in tax exempt terms as well as taxable equivalent basis terms., and a really good entry point, just given where yields have gone from to where we are today.

Paul: John, thank you very much. It's, really, it's been great speaking with you today and we appreciate your time and insights. 

Jonathan: Absolutely. Thanks, Paul. 

Paul: So, for anyone interested in learning more about the abrdn National Municipal Income Fund, ticker VFL, please visit us at www.abrdn.com That's abrdn.com or call 1-800-522-5465 1-800-522-5465. Thanks again John.

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