abrdn National Municipal Income Fund (VFL) - May 2025 Update

Mike Taggart interviews Miguel Laranjeiro, Portfolio Manager for VFL, about the current marketplace and outlook for municipal bonds. 

Transcript

Aberdeen National Municipal Income Fund

Podcast Transcript

May 2025

Mike Taggart: Welcome to the latest podcast for the Aberdeen National Municipal Income Fund, ticker symbol VFL. I'm Mike Taggart, Aberdeen's Head of Closed-end Fund Investor Relations. With me is Miguel Laranjeiro, a Portfolio Manager for VFL. Miguel, thank you for joining us today. 

Miguel Laranjeiro: Thanks, Mike. Always happy to talk munis with our investors.

Mike Taggart: Well, we're recording this in May. Markets were obviously driven by news of tariffs in April - Still are here. In May the municipal yield curve has been pretty volatile. How are you navigating the current market? 

Miguel Laranjeiro: Yeah. Mike, obviously, it's been a, volatile year. Particularly volatile April. I mean, in April alone, we saw a week where treasuries were off 30, the 35 basis points in a week. We saw munis off 60 to 70 basis points in a week. That volatility is reminiscent to me of of Covid. So, with that volatility really, for an active portfolio manager, it presents an opportunity and an opportunity for income generation to buy, high quality, double a, a rated paper at eight and a half to 9% tax equivalent yields. So we welcome that volatility as an active manager. It gives us an opportunity to reset book yields and to deliver higher income levels to those investors who remain active in the market. 

Mike Taggart: So basically you're focused on the fundamentals markets going crazy. What about you know, holdings that are in the portfolio. What are you selling in order to to raise the cash to make these additional purchases? 

Miguel Laranjeiro: Well, we credit spreads were very tight in the high yield market, particularly in the lower end of the high yield market. So some of the non rated parts of the of the high yield market, you really weren't getting paid worth the risk. On the lower end spectrum of the high yield market. So what we were doing and we started doing this at the beginning of the year is reposition some of our high yield exposure into higher grade high yield. So non rated into Double B's, maybe some higher rated Double B's into Triple B's. We still like high yield. Fundamentally from a credit perspective. But in terms of relative value, we think the juice is not worth the squeeze on the lower end of the credit quality spectrum. 

Mike Taggart: Gotcha. And you know, given what you just said, have you seen a rise in municipal delinquencies or defaults?

Miguel Laranjeiro:  We have seen, rise in defaults slightly. But we've seen a decrease in distress. So that really kind of sends conflicting signals. 

Mike Taggart: Just to be clear, is this in the portfolio? Or in the market?

Miguel Laranjeiro:  This is just in market. But from a fundamental perspective, we've seen a stability in the labor market. You know, unemployment rate has really leveled off from taking up in, in, August and September of 2024. So that that's really led to a stability and credit markets as a whole. Tax collections are up, 3 to 4% year over year. As as I said, defaults have slightly ticked up, but the stress has gone down. So we think the the high yield market is relatively stable and, a good position from a credit point of view.

It's important to highlight that the volatility that we saw in April, we view that as a liquidity event, not a credit event. And we saw that because, really we saw ETF outflows which put pressure on the market as a whole. Those outflows led to more, more selling pressure in the market. And that exacerbated what is a technically weak time of the year for municipals. April is maybe the weakest time of the year for municipals. That's tax season. A lot of the investors that are invested in market wind up selling down their bonds in order to pay tax bills. So we see a lot of selling pressure even without, you know, volatility in treasuries. So so when we saw that Treasury sell off that that really impacted, the municipal market more severely. But from a credit perspective, things are relatively sanguine in terms of default rates and the credit story overall. 

Mike Taggart: Excellent. And just to be clear. I mean, you've mentioned high yield a couple of times, but that's because that's where you're finding opportunities now. And also that's just part of the market where the defaults happened. But you know, I see like 30% of the portfolios in double A's. I mean, this isn't a high yield muni fund. So are you seeing any dislocations in the investment grade or. Yeah, I presume is the, you know, the bigger chunk of the portfolio? 

Miguel Laranjeiro:  Yeah. Particularly in April. That was a great opportunity to add exposure. At yields that are basically like high yield type of yields. We didn't see credit spreads widen much in the high yield space. So what that tells me is especially during the April time frame, during the sell off, you're getting better value for high quality paper. So we saw a lot of names come to market with insurance wraps. The insurance wrap was you were paying maybe 5 to 10 basis points for additional added layers of protection. So you're getting a paper for eight and a half, 9% tax equivalent yields. We thought that was extremely attractive. Especially when you compare it to other asset classes. On the long end of the curve, we saw long end yields at the second highest in the last decade. So we think on the long end that presented a really attractive point of entry for investors to to get invested and really lock in these elevated yields for a long period of time.

Mike Taggart: So the VFL’s investment objective is to provide current income exempt from regular federal income tax while preserving the capital, right. So it sounds like you're focused on both. But a two part question, here to keep things fair and balanced. First, where is the portfolio been facing the strongest headwinds? And then second, where are you finding the most attractive opportunities? Is there a certain sector? I mean, you've already talked about credit quality rating area, but maybe you can rate that a little as well. 

Miguel Laranjeiro:  Yeah. So I would say the the biggest headwind on the sector overall, it also presents an opportunity which is tax policy legislation that's really kept a lot of capital and investors on the sideline. Really, because there's so many unknowns that can affect the value of municipals and there's taxability of the exemption itself. There's impact on potentially higher education endowment funds. There's corporate tax, there's personal income tax, rates that might be affected by tax policies, legislation. 

So that's affected the market in two ways. And the first way is it's led to an influx of supply. We've seen supply up 12% so far. That number was a lot higher before the volatility in April. We think that continues really until tax policy legislation is finalized. 

And then the second part is it's really kept what looks like an attractive relative value when you compare to other asset classes, in terms of what you're picking up for high quality paper and in income generation. It's kept the money on the sidelines for investors, that would normally be invested in this market. So it's created a technically weak environment for municipal investors and the municipal asset class. But we think in the medium to long term investors that are invested now will be rewarded in realizing, you know, a total return in the medium to long term. 

Mike Taggart: And I mean, that should go away when that overhang from the tax issues is that the July issue is that August issue.

Miguel Laranjeiro: They are working out bill details. These things usually take a while to work out, especially a left as as broad as this tax policy legislation. Our thinking is maybe Q3 into possibly Q4. They finalized tax policy legislation. And at that point, you know, I think we'll find some stability in the market.

Mike Taggart: Okay, so buckle up until then, so finally, what are your views as to where the municipal market goes from here? In other words, you know why? Why invest in municipals now? Why VFL now? And, you know, if we were sitting here a year from now and doing a retrospective on the past 12 months, you know, what do you think 2025 for the second half of 2025, is going to be remembered for?

Miguel Laranjeiro: Yeah, I think in terms of volatility or at least the magnitude of volatility, I think the worst is behind us. Fingers crossed they're famous last words there. I do think, in terms of the rest of the year, we will continue to deal with bouts of volatility at least until tax policy legislation is finalized. I think for active managers, that presents an opportunity right.

As I said, during April, we were able to capture, you know, eight and a half, 9% tax equivalent yields for a paper within a insurance wrap. That's a seldom found opportunity in the municipal market. So for active managers, I think this is a good a good market, really to realize long term, high quality paper and earn your dividend.

Really? I think, you know, the longer a short term rates remain elevated, the more important prudent capital management becomes. I think in the medium term, you know, prudent capital management and stability and income will be rewarded, over time. So that's how we're navigating the market. That's kind of our our focus is, at the beginning of the year was really focus on income, and income generation. I maintain that throughout the year. I think, you know, perhaps next year will be a total return year inmunicipals this year. I think a focus on income generation, prudent capital management will be rewarded in the medium to long term 

Mike Taggart: And given your long experience in municipal - I suspect your feelings have been validated through time, by sticking with those fundamentals. Well, thank you, Miguel, for that informative update. 

Miguel Laranjeiro: No no problem. Like happy to talk about it. 

Mike Taggart: So there are three convenient ways to learn more about VFL. Visit our website Aberdeen investments.com. Second, you can email us at investor Dot Relations at Aberdeen plc.com, or give us a call at 1-800-522-5465. I'm Mike Taggart of Aberdeen. Thank you for listening.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for informational purposes only, but should not be considered as an offer, investment, recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication, and do not necessarily reflect those of Aberdeen.

The company's discussed in this podcast have been selected for illustrative purposes only, or to demonstrate our investment management style, and not as an investment, recommendation or indication of their future performance. The value of investments and the income from them can go down as well as up, and investors make it back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates, and provide no guarantee of future results.