Best Opportunities in the Darkest Times

Sjoblom: Just to kind of end things on a more positive note, you noted in your last shareholder report that it's periods of adversity that often come with great opportunity. We certainly seem to be in one of those periods or have been for a while now. I think that's kind of a common, classic axiom for long-term, value-oriented investors. You talked a little bit about the types of opportunities you're seeing already. Do you have anything to elaborate on that or just words of advice for muni fund investors at this time?

Costas: Well, you just said you actually believe the more you work, and the more you build on your experience, and in fact you see these great periods of opportunity that look really, really scary while they're taking place. A lot of us, as you know, here in the muni department at Franklin have been here for more than 20 years. I think, on average, we each have been here about 16 years, so we've gone through a few recessions together. We have never seen anything, and nor do we want to see it again, like the end of last year, but in the middle of that darkness, there were deals that we had never seen before and bargains like we had never seen before in terms of yields relative to what else was out there in the markets.

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I'm talking now from a shareholder point of view that we're looking at Treasuries heading down to 2% or so on. You could find municipal bonds individually at 6-7%. You didn't have to be scraping the bottom of the barrel on the credit-quality side. These were some pretty good deals that were just suffering from a global panic.

So, the opportunities around then if you were in the lucky position that we were where we had pretty good amounts of cash going into it. We had net positive flows for most of the last two years coming into it. We were very fortunate to be able to take advantage of those.

Since then, things are slowly coming back to normal. The muni market, as you know, has had a pretty good first half of the year. I believe it's the best one we've had since 1995. That's taking away some of those opportunities.

At the same time, Treasuries have been starting to back up, and so the yield advantage is not as great as it was, but, historically speaking, it's still near 100% of Treasury yields, which, up until last year, that was when we always told people, you're talking about a great bargain in munis where you can pick them up at the same yield as Treasuries and keep it all. The tax exemption is free.

The opportunities were essentially everywhere in every market, and where we saw them, we took advantage of them, and we're still doing that. Again, that's one of the benefits of going through a fund that has a research ability to look around and look at all the different sectors. Just about in every sector, there was a good deal to be spotted and taken advantage of if you had the ability to spend the time doing the homework on it.

Sjoblom: Well, great. That does sound like a good note to end things on. Rafael, thank you for joining us today. We appreciate hearing your insights.

Costas: My pleasure, Miriam.