2Q 2020 — Tax-Free Fixed Income

Jamie Mullen
Senior Portfolio Manager
Neal DeBonte, CFA®
Portfolio Manager

Clark Capital’s Tax-Free Fixed Income strategy focuses on reducing risk, increasing liquidity, and maintaining long-term income as we continue to navigate a challenging environment resulting from the uncertainty caused by Coronavirus pandemic. To do so, we continue to allocate to high quality bonds focused on essential services and to local bonds backed by stable property tax bases. We feel the coupons attached to these types of high-quality bonds are less susceptible to a downturn in economic activity and therefore the credits tied to these holdings will likely experience minimal impact during a credit downgrade cycle. The essential service sector is comprised mainly of water and sewer bonds, which we feel offer excellent liquidity, provide stable operations, and offer sound debt service coverage. We generally look for high quality issuers that maintain large reserved funds that will help fund debt service coverage over the short to intermediate term.

In addition to essential service bonds, we continue to purchase local school district bonds. We view local school district bonds in a favorable lens since these bonds tend to be backed by stable property taxes rather than variable income tax or sale taxes, which tend to be cyclically oriented. We generally allocate to geographic areas that we believe are home to stable businesses with steady economic activity and growing property tax bases. We believe these local bonds with strong fundamentals should experience modest credit deterioration during a credit down grade cycle.

Municipal Outlook

Moving forward, we believe fund flows are likely to remain positive as net supply continues to increase over the summer months, keeping yields stable. Relative valuations of municipal bonds versus Treasuries have come down from recent extreme highs in March, but with the 5-year Bloomberg AAA ratio finishing the quarter at 139%, municipal bonds still provide attractive relative value compared to U.S. Treasuries, which should help keep demand elevated as we move through the summer.

State and local governments will continue to experience revenue shortfalls as social distancing guidelines are enforced during this challenging time period. As result, we anticipate credit downgrades as we move through the next phase of the coronavirus cycle, particularly for municipalities with high debt burdens, lower debt service ratios, and lower credit ratings. In this environment, we are focusing on investments that represent high-quality, liquid names. Credit selection and active portfolio management, in our opinion, should continue to drive returns as we move through the summer and into the autumn season.

The views expressed are those of the author(s) and do not necessarily reflect the views of Clark Capital Management Group. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. There is no guarantee of the future performance of any Clark Capital investments portfolio. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, other investments or to adopt any investment strategy or strategies. For educational use only. This information is not intended to serve as investment advice. This material is not intended to be relied upon as a forecast or research. The investment or strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Past performance does not guarantee future results.

The S&P 500 measures the performance of the 500 leading companies in leading industries of the U.S. economy, capturing 75% of U.S. equities.

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in market value of an investment), credit, payment, call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase)

Bloomberg Barclays U.S. Aggregate Bond Index: The index is unmanaged and measures the performance of the investment grade, U.S. dollar denominated, fixed-rate taxable bond market, including Treasuries and government-related and corporate securities that have a remaining maturity of at least one year.

The Bloomberg Barclays 5 Year Municipal Bond Index is a capitalization weighted bond index created by Bloomberg Barclays intended to be representative of major municipal bonds of all quality ratings with an average maturity of approximately five years.

The Bloomberg Barclays Municipal AAA Index is the AAA component of the Bloomberg Barclays U.S. Municipal Bond Index

The CBOE Volatility Index, known by its ticker symbol VIX, is a popular measure of the stock market’s expectation of volatility implied by S&P 500 index options.

The Dow Jones Industrial Average Index is a price-weighted average of 30 actively traded blue chip stocks as selected by the editors of the Wall Street Journal.

S&P Global Ratings issue credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects S&P Global Ratings’ view of the obligor’s capacity and willingness to meet its financial commitment as they come due, and this opinion may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.

Refinitiv Lipper makes meaningful like-for-like comparisons across funds that share characteristics. It provides impartial fund performance data in a precise, granular fund classification system. With over 500 Lipper classifications, fund comparision is simple with similar investment mandates to benchmark fund performance.

This document may contain certain information that constitutes forward-looking statements which can be identified by the use of forward-looking terminology such as “may,” “expect,” “will,” “hope,” “forecast,” “intend,” “target,” “believe,”
and/or comparable terminology (or the negative thereof). Forward looking statements cannot be guaranteed. No assurance, representation, or warranty is made by any person that any of Clark Capital’s assumptions, expectations,
objectives, and/or goals will be achieved. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future.

Clark Capital Management Group, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security, sector or industry. There is no assurance that any securities, sectors or industries discussed herein will be included in an account’s portfolio. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

Clark Capital Management Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Clark Capital’s advisory services and fees can be found in its Form ADV which is available upon request. CCM-1129