Morningstar Advisor - February/March 2013 - (Page 22)

Investment Briefs An Introduction to State Credit Programs With the dissolution of most major municipalbond insurance in recent years, the importance of state credit enhancement programs is on the rise. These programs provide additional security to investors in the event that the local borrower does not or cannot pay debt service on its own. Importantly, they offer an alternative to the scarce private municipalbond insurance that exists in the market today, allowing local governments to access capital markets at more affordable rates. Cerulli Says: A Good Website Is a Must-Have A website has become the table stakes necessary for client acquisition. Investors perceive a web presence as a sign of legitimacy. Though advisors who develop their own site project autonomy and sophistication, many opt for the default choice provided by their broker/ dealer or service agent. “Web presence is huge,” a RIA says. “None of our existing clients [go] to our website, but every potential client has been there.” Advisors with compliance approval, especially those in the independent space, should consider investing more in their web presence. If an advisor doesn’t have an association with a known brand name, a good website adds credibility and establishes trust with prospective clients. Advisor Website Presence This is significant because local governments remain stressed. In recent years, many have faced some of their most difficult operating conditions in decades. Service demands and operating costs continue to rise while major revenues have declined. Many have delayed capital spending, yet their needs persist and finding affordable financing is essential. Many investors are not familiar with how enhancement programs operate even though they are widely available. The amount of supplementary security can vary quite dramatically because of differences in the state’s obligation to the program and the structure and procedures of the program itself. It’s important for investors to understand exactly what the state promise is and how it is executed to determine how secure their bonds are. State credit enhancement programs are designed to deliver timely debt service payments on qualifying bonds when the actual borrower cannot or does not make the payments on its own. They’re an additional layer of security to bondholders that states offer as a low-risk and low-cost way to provide support to their local municipalities. With added security, local municipalities gain greater access to the capital markets at lower interest rates than they would have otherwise achieved. 22 Morningstar Advisor February/March 2013 Insurance/ Dually Registered/ IBD (%) RIA (%) All Advisors (%) Used a template from my broker/dealer or service provider to create a website for my practice. 44 42 42 42 My broker/dealer maintains a standardized profile for me. 15 27 4 20 7 17 33 16 Do not have a website or profile for my practice. 13 9 10 11 Customized my profile on my broker/dealer’s or service provider’s website. 21 4 10 11 Created a website for my practice using a web developer or template from a third party. Sources: Cerulli Associates, in partnership with the Investment Management Consultants Association, the Financial Planning Association,, Morningstar, and Bill Good Marketing Because historically these programs are rarely called upon, states provide this benefit with little risk to their own financial health. Are all programs the same? What are state credit enhancement programs? Wirehouse/ Regional (%) Not all programs operate the same way, which results in different levels of security for bondholders. For the most part, state credit enhancement programs fall into the following categories: State Permanent Fund Programs State Permanent Funds are dedicated funds supporting a specific purpose, usually education. They’re capitalized through the sale or licensing of state land or other resources and are designed to draw on these funds when the actual borrower fails to pay debt service in full and in a timely manner. The credit quality here is not correlated to the state’s general obligation pledge but is based on the specific features of the individual funds themselves. State Guarantee Programs Under State Guarantee Programs, a sponsoring state pledges its full faith and credit to pay debt service required for qualifying bonds if the actual borrower fails to pay bondholders in full and in a timely manner. States forward any available funds including general fund reserves or, in some cases pledge to issue general obligation debt, to make up debt service deficiencies. The credit quality

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2013

Morningstar Advisor - February/March 2013
Letter From the Editor
Social Media, the Old- Fashioned Way
Do You Use Active Strategies?
Youth Appeal
How to Buy the Unloved 2013
Morningstar Managers of the Year
Investments á la Carte
Investment Briefs
Approaches to Absolute-Return Investing
In Agriculture, It’s Good to Be Strong
Yes, There Are Good Active Funds
The Decoupling
Where It Could Pay to Be Active
The Active Fund That Defies Obsolescence
The Epitome of an Active Manager
Lines of Communication
The Existence of Market Timing ‘Intelligence’
A Route to Commodities that Bypasses the Futures Market
Best Positioned for Health-Care Reform
Diversified Stock Funds That Earn Their Stars
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
A Twisted Debate

Morningstar Advisor - February/March 2013