Michael S. Hamilton
Job:
Manager of the Tax-Free Trust of Oregon, advised by the Aquila Group of Funds.
Employer:
FAF Advisors Inc.
Fund's SEC yield:
2.61 percent
Other duties:
Oversees First American Funds' Oregon Intermediate Tax Free, Ohio Tax Free and Arizona Tax Free fixed-income funds. He also oversees FAF's bond trading and portfolio management in the Northwest.
Education:
Bachelor's degree from Albertson College of Idaho; MBA from Western Washington University.
Residence:
Beaverton
Age:
46
It's a tough time to be a bond fund manager.
Interest rates are very low and expected to go higher. That makes bonds less attractive than in the past two decades. Municipal bonds provide tax-free returns to investors, but many fear the recession will cause cities and counties to default on their borrowing.
Michael Hamilton doesn't see that problem yet in Oregon. He manages the $470 million Tax-Free Trust of Oregon, a mutual fund that invests only in Oregon-issued municipal bonds. Muni bonds include those issued by counties, schools, utilities and hospitals.
The fund offers investors the chance to earn a return free of federal, state and local taxes while investing in airport, college, hospital and sewer-project expansions in the state.
Hamilton takes orders from the trust's board, chaired by James A. Gardner, on how to manage his 211-bond portfolio. Investors can buy in with as little as $1,000 and set up automatic investments of as little as $50 a month. Sales charges on Class A shares can run 4 percent, and $7.60 of every $1,000 invested goes to pay fund expenses.
Hamilton has managed the trust for 12 years, and its long-term performance has earned it four out of five stars from fund-rating company Morningstar. Although in recent years returns have lagged behind its peers slightly, it weathered last year's downturn better than most intermediate bond funds and has gained 9.78 percent year-to-date.
But it's just part of Hamilton's job. He also trades $1.2 billion of bonds each year for FAS Advisors, a division of U.S. Bancorp, and First American Funds. His views offer unique insights into both public finances in Oregon and in conservative investment options.
We caught up with Hamilton recently. Answers have been edited for brevity and clarity.
What are you doing to position the tax-free trust for the inevitable run-up in interest rates?
I'm holding tight to the good fortune I've had of investing in the last fourth quarter when the baby was being thrown out with the bath water. ... I know there will be an inevitable rise, but I'm not sure when. I'm not trying to time that a lot. If I'm a little bit late that's OK versus being a lot early. Especially with my asset class, which is municipal class, which also has supply issues.
We truly felt that in the fourth quarter through the first and second quarter of 2009 there was a buying opportunity in municipalities. The asset class was abandoned by nontraditional buyers. A lot of them were leveraged and they got in trouble in that process. That provided opportunities in the marketplace.
How have you been negotiating these treacherous waters? Have a lot of Oregon municipalities been facing downgrades?
We haven't seen a lot of downgrades to the underlying rating. Most of the downgrades have come as the insurance companies have been downgraded. The insurance companies all have dramatically gone from AAA to non-investment grade.
Two years ago more than 50 percent of the marketplace came insured. Now it's way below 5 percent. And it's costing A-rated school districts interest costs. (But) in all honesty, as an investor, it's a better opportunity.
Which entities are safe and which aren't?
We don't really have an issuer concern. Generically speaking, you've got to look at some of the counties that depend on federal timber money. Will Congress continue to renew those payments?
You've also got to watch the state's revenue. The state of Oregon's revenue is extremely volatile, and we've put the school distric's on the lottery system. So we've really added volatility since the property tax rollbacks.
But I don't think it's default level. We may get a ratings decrease, but the state's been an A-rated credit before. Now we're an Aa2 (according to Moody's Investors Service; AA according to Fitch, Inc. and Standard & Poor's Financial Services). Default? I don't have that in my vocabulary very much.
Why should investors invest in muni bonds if they have yet to feel the full effects of the recession?
They're still very high quality. If you look at the default history, it's extremely small. It's not school districts that default. It's not state-issued credit. It's revenue streams from museums or golf course bonds or local improvement districts.
I would argue that it's probably one of the highest quality assets out there. We buy municipal sewer and water system bonds. I know the city of Portland has had its issues with its water systems. But its cash flow is huge. People pay their water bills. People pay their sewer bills.
How much fun do you have as a muni bond fund manager?
I love what I do. I'm a trader. There's a comment in the muni fund market, "We're not here to make you rich, we're here to keep you rich."
Brent Hunsberger: 503-221-8359; www.oregonlive.com/itsonlymoney