Stories serves many functions.
One of our favorites is about a prospect who did not ultimately become an Apollo client. The husband was a physician – the wife a corporate controller (so presumably financially astute). Given their high tax bracket they were adamant their portfolio skew towards muni bonds.
We explained a number of factors about bond investing and focused on two – first, make sure the issuer is creditworthy (plenty of cities/counties/states have filed for bankruptcy) and, second, focus on after-tax returns.
The example we provided is of a 5% corp bond. Assuming a 40% tax hit the after-tax return is 3%. All other things equal unless there’s a muni bond earning 3% or more then the corp bond is preferrable.
The prospects somewhat politely said, “Thanks but no thanks.” Logic and math be damned!
We’re reminded of this story as a recent article in The Wall Street Journal touched on precisely this issue. It referenced a study in a National Bureau of Economic Research working paper that found the yield on muni bonds averages fifteen basis points (0.15%) lower than what would be explained by their favorable tax status.
Put another way investors are willing to accept a lower return in exchange for the ‘pleasure’ of avoiding taxation.