Many aspects of opportunistic management are included in those listed under restructuring management.  Opportunistic management often involves reacting quickly to market anomalies/events.  A key aspect to opportunistic management is having sufficiently broad/flexible investment parameters that allow advisors to use their experience and expertise to capitalize on such events.

It is often desirable to accomplish more than one objective when adjusting a portfolio.  For example, investors may potentially achieve economic advantage from both a capital and an income perspective by selling bond positions where market value is less than adjusted cost, realizing a loss for tax purposes and extending maturities a few years, potentially increasing market yield and related income.  

Economic advantage may also be achieved by restructuring a portfolio of corporate bonds, held in a fully taxable account, into tax-exempt municipals, potentially increasing after-tax yield and related cash flow, as well as upgrading credit quality.  Economic value may also be achieved by selling short-duration municipal bonds and buying short-duration corporate bonds.

When considering a portfolio restructuring, SCM is mindful of:

• Capital gains taxes that must be paid;
• Capital losses that can be applied against gains or income in current or future years;
• Federal taxation of the various interest-based cash flows;
• Potential future federal taxation;
• State taxation on out-of-state municipal bond interest or interest from corporate or state taxable U.S. agency issues;
• Whether the investor has enough taxable income to gain the full benefit of tax-exempt interest or to maximize other tax deductions when swapping from taxable to tax-exempt issues; and
• The potential for “wash sales.”*
  
  

  *While there are no specific IRS rules on bond swapping, if buying and selling bonds from the same issuer, there should be material differences of both coupon and maturity of the two securities in question. The coupon should change approximately 50 basis points (0.50%) and the maturity five years. Investors should not purchase a bond that too closely resembles a previous bond sold for 30 days from that first liquidation. If buying and selling bonds from different issuers, it is not crucial to materially change the coupon and/or maturity as the underlying security for the bonds has changed.

Diversification does not ensure a profit or protect against loss. Stifel Capital Management, LLC does not provide tax advice. You should consult with your tax advisor regarding your particular situation.

When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. Laddering and diversification strategies do not ensure a profit or protect against loss. High-yield bonds are subject to greater risk than bonds that are rated investment grade. Tax-exempt bonds may be subject to state and alternative minimum taxes. Bonds sold prior to maturity may be worth more or less than the amount paid and may be subject to capital gains tax.