At Breckinridge, our primary objective in managing municipal bond portfolios is to preserve capital and build a reliable stream of tax-exempt income. While total return is not our priority, we monitor it closely as one of many other reliable measures to ensure a portfolio remains aligned with its long-term objectives and risk profile.

That said, there are important limitations to relying solely on total return—primarily that not all returns are created equal.

• The most obvious shortcoming is that total return does not differentiate between taxable and tax-exempt income, a critical and fundamental distinction in municipal bond investing.
• Equally important, though more nuanced, is the insight from prospect theory (Tversky, 1979): losses tend to hurt more than gains help, yet unadjusted total return treats all outcomes symmetrically. Similarly, Antti Ilmanen has noted that returns earned during periods of market stress are more valuable, reflecting the law of diminishing marginal utility. Yet total return makes no distinction based on when returns occur or how meaningful they are to investors.
• Finally, municipal bonds, particularly high-quality strategies, are best understood as part of the “risk-free” or “risk-mitigating” allocation described in Tobin’s Separation Theorem (Rzepczynski, 2018). Their purpose is not to maximize return, but to stabilize portfolios and counterbalance risk in other asset classes. An overemphasis on total return undermines that purpose and may lead to excessive credit or duration risk in pursuit of yield, potentially compromising the defensive role of a core municipal bond allocation during periods of economic stress.

Our approach is intentionally balanced. We aim to incrementally enhance tax-exempt income while emphasizing high credit quality, disciplined duration management, and tax-sensitive trading.

Total Return Lens – A Useful but Incomplete Diagnostic Tool

Although not our objective, a total return lens offers a standardized, widely understood metric for evaluating performance, especially useful when comparing portfolios built at different points in the market cycle. It enables contemporaneous analysis of yield and price effects, even in markets where matrix-based pricing and limited liquidity can obscure individual security outcomes.

When interpreted correctly, relative total return can yield valuable insights about portfolio structure:

• Underperformance in stable or declining rate environments may suggest an overly short maturity profile or inadequate call protection, limiting long-term income potential.
• Underperformance in rising rate environments may reflect a duration profile that is too long, reducing flexibility to reposition at higher yields.
• Weak relative returns may also indicate underlying credit issues. While these risks may be diluted in broad composites, persistent underperformance can point to sector- or issuer-level concerns. Conversely, elevated returns may reflect thoughtful yield enhancement—or, alternatively, an aggressive risk posture that may erode the portfolio’s stabilizing role.

In all cases, a total return lens provides a partial diagnostic view, helping to assess whether portfolio construction and positioning are consistent with intended risk parameters and investment objectives.

Conclusion

In managing municipal bond portfolios, our core objectives are capital preservation and the delivery of a sustainable, tax-exempt income stream. Although total return is not our primary aim, it is a useful tool for evaluating the effectiveness of our decisions and the soundness of our judgment. Exceptionally high returns may signal imprudent risk-taking, while prolonged underperformance may point to excessive conservatism or emerging credit concerns. In either case, total return provides a meaningful lens for evaluating alignment and ensuring the portfolio remains on course through an entire market cycle

References

Ilmamen, A. (2011). Expected Returns: An Investor's Guide to Harvesting Market Rewards. Wiley.

Rzepczynski, M. (2018, June 27). Tobin’s Separation Theorem – It Can Be Applied Anywhere. Retrieved from IASG: https://www.iasg.com/blog/2018/06/27/tobins-separation-theorem-it-can-be-applied-anywhere

Tversky, D. K. (1979). Prospect Theory: An Analysis of Decision Under Risk. Econometrica, 263-291.

BCAI-05292025-a1inuj2b (5/20/2025)

DISCLAIMERS:

The content is intended for investment professionals and institutional investors.

All information and opinions are current as of the dates indicated and are subject to change. Breckinridge believes the data provided by unaffiliated third parties to be reliable but investors should conduct their own independent verification prior to use. Some economic and market conditions contained herein have been obtained from published sources and/or prepared by third parties, and in certain cases have not been updated through the date hereof. 

There is no assurance that any estimate, target, projection or forward-looking statement (collectively, “estimates”) included in this material will be accurate or prove to be profitable; actual results may differ substantially. Breckinridge estimates are based on Breckinridge’s research, analysis and assumptions. Other events that were not considered in formulating such projections could occur and may significantly affect the outcome, returns or performance.

Not all securities or issuers mentioned represent holdings in client portfolios. Some securities have been provided for illustrative purposes only and should not be construed as investment recommendations. Any illustrative engagement or sustainability analysis examples are intended to demonstrate Breckinridge’s research and investment process.

Yields and other characteristics are metrics that can help investors in valuing a security, portfolio or composite. Yields do not represent performance results but they are one of several components that contribute to the return of a security, portfolio or composite. Yields and other characteristics are presented gross of advisory fees.

General Performance Disclosures  

All investments involve risk, including loss of principal. No investment or risk management strategy, including diversification, can guarantee positive results or risk elimination in any market. 

Past performance is not indicative of future results. Breckinridge makes no assurances, warranties or representations that any strategies described herein will meet their investment objectives or incur any profits. Performance results for Breckinridge’s investment strategies include the reinvestment of interest and any other earnings, but do not reflect any brokerage or trading costs a client would have paid. Results may not reflect the impact that any material market or economic factors would have had on the accounts during the time period. Due to differences in client restrictions, objectives, cash flows, and other such factors, individual client account performance may differ substantially from the performance presented.

 Actual client advisory fees may differ from the advisory fee used to calculate net performance results. Client returns will be reduced by the advisory fees and any other expenses incurred in the management of their accounts. For example, an advisory fee of 1 percent compounded over a 10-year period would reduce a 10 percent return to a 9 percent annual return. Additional information on fees can be found in Breckinridge’s Form ADV Part 2A.

Index results are shown for illustrative purposes and do not represent the performance of any specific investment. Indices are unmanaged and investors cannot directly invest in them. They do not reflect any management, custody, transaction or other expenses, and generally assume reinvestment of dividends, income and capital gains. Performance of indices may be more or less volatile than any investment strategy.

Investment Risk Considerations

There is no guarantee that the strategies or approaches discussed will achieve their objectives, lower volatility or be profitable. All investments involve risk, including loss of principal. Diversification cannot assure a profit or protect against loss. No investment or risk management strategy can guarantee positive results or risk elimination in any market. 

Fixed income investments have varying degrees of credit risk, interest rate risk, default risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. 

Equity investments are volatile and can decline significantly in response to investor reception of the issuer, market, eco-nomic, industry, political, regulatory or other conditions.

When integrating sustainability analysis with traditional financial analysis, Breckinridge’s investment team will consider material sustainability factors but may conclude that other attributes outweigh the sustainability considerations when making investment decisions. 

There is no guarantee that integrating sustainability analyses will improve risk-adjusted returns, lower portfolio volatility over any specific time period, or outperform the broader market or other strategies that do not utilize these analyses when selecting investments. The consideration of sustainability factors may limit investment opportunities available to a portfolio. In addition, data for sustainable factors often lacks standardization, consistency and transparency and for certain companies such data may not be available, complete or accurate.

Breckinridge’s sustainability analysis is based on third party data and Breckinridge analysts’ internal analysis. Analysts will review a variety of sources such as corporate sustainability reports, data subscriptions, and research reports to obtain available metrics for internally developed frameworks. A high sustainability rating does not mean it will be included in a portfolio, nor does it mean that a bond will provide profits or avoid losses.

Investments in thematic customizations will subject the portfolio to proportionately higher risk exposure of any sectors or regions in which the investments target. In addition, the investments held in thematic customizations may not meet the desired positive impact or become subject to negative publicity; these types of events may cause the customizations to have poor performance due to the concentration of assets. There is no assurance that the customizations or the strategies will meet their objectives.