As the Puerto Rican debt crisis continues to unfold, mutual fund managers have been busy trimming their sails to reduce exposure to the commonwealth's crisis.
Over the past year, the number of funds with exposure to Puerto Rico has been pared to 29 — out of a pool of 562 municipal bond funds — from as many as 48 in June 2015, according to data from Morningstar and a study by Markov Processes International. Total dollar exposure has been cut as well, from about $9.9 billion last summer to $6.3 billion now.
The exposure issue is central to the debate now over what happens next. Island officials have been negotiating with Washington lawmakers for a bailout package, though that hasn't stopped the first wave of defaults from happening.
Puerto Rico missed a $367 million payment May 2 on its Government Development Bank notes, but municipal bond investors in general remain hopeful that there will be limited contagion.
"The majority of municipal bond mutual funds don't show exposure to Puerto Rico debt," Sean Ryan, a senior MPI research analyst, said in an interview. "It isn't really a systemic issue, which is one thing that investors should always be worried about. In this case, only a few are exposed versus the entire category."
The retreat from Puerto Rican debt positions has been strong:
The next important deadline is July 1, with an $800 million general obligation payment due as part of $2 billion in debt service payments ahead. In total, the default on GO debt could end up as a record $13 billion without any legislative help.
Though the commonwealth is poised to continue to default, the broader muni market remains unshaken.
The S&P municipal bond index was last up up 2.7 percent year to date. Even the Puerto Rico muni index is down just 0.5 percent in 2016, though it has fallen 5 percent over the past 12 months.
"The missed GDB payment represents the largest default by Puerto Rico to date, underscoring the need for federal legislation to provide some level of stability to an increasingly unstable situation," money manager BlackRock said in a report for clients.
For investors, the key is to know how their own funds are positioned.
MPI pointed out that there remain a handful of funds out of the 29 that have significant exposure, with a couple in excess of 40 percent. The biggest fund families with exposure are Franklin Templeton and Oppenheimer.
"We always advocate for investors to be fully aware of what their funds are doing and to understand the risks that their mangers are taking and how their portfolio risks are in general," Ryan said.
Correction: The July 1 payment is $800 million. An incorrect amount appeared in an earlier version.