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Sierra Mutual Funds CIO on why she's turning to municipal bonds amid market uncertainty

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Terri Spath, CIO of Sierra Mutual Funds, joined Yahoo Finance Live to discuss her outlook for the market and the sectors of the market she's turning to for safety amid market uncertainty.

Video Transcript

ADAM SHAPIRO: We invite into the stream Terri Spath. She's the CIO of Sierra Mutual Funds. It's good to have you here. And there's a lot to digest because we had on Capitol Hill the calls for more stimulus. We're going to be talking with Jessica Smith about that in just a second. But what are your takeaways right now, as we head into the closing bell, about how an investor should position themselves not only for the next day or two, but the next couple of months?

TERRI SPATH: Right. Thanks, Adam, great to be here. And you're talking about kind of the two topics that we've gotten the most questions on-- what's going on with this health crisis that we're having, and who's going to be inaugurated come January? And the reality is, we don't know any better than anyone else. I mean, I think we can make some bets at this point.

But what we've been doing is looking for, where can we put money to work, regardless of the outcomes from-- for both of those huge topics that you're talking about. And the first one that I'll put out there before I lose your audience is municipal bonds. Some people think they're very, very boring, and they can be.

But the reality is, taxes will not be going down. The Biden tax plan is for lots more taxes. And these apocalyptic budget shortfalls, which were hurting the muni-bond market, are simply not happening. And so right now, we're looking for some safety in the muni-bond asset class in particular.

SEANA SMITH: Terri, that's interesting what you're saying about how the budget shortfalls haven't come to fruition, at least just yet. But when you take a look at the rising coronavirus cases and what that could mean for state and local governments here going forward, how big of a concern is that for you?

TERRI SPATH: Well, I think it's something that is being considered, and it's a risk that is out there and that is being talked about. But again, the reality is that these budget shortfalls are not happening. We're seeing big increases, in fact, in revenues in the states of California, in New York. And so high-yield muni-bond funds in particular are yielding close to 5%, if you adjust for taxes, and we're not seeing a problem with defaults. And so we do think that this is an area where you can comfortably put some money to work.

I'll also point out, though, that we're a tactical shop. We're truly tactical, meaning that we have a sell discipline that we put under every single asset class. And so I think it's important-- everything takes the escalator up and the elevator down, and meaning it's a lot easier to lose money than to make money. And so we have a trailing stop that we put under every holding to make sure we get out of the way before that elevator goes down.

ADAM SHAPIRO: But there's something you point out that a lot of us-- a lot of investors need to pay attention to, and that's this discussion about where are interest rates headed. And you, I think, are saying that rates are not lower for longer but lower forever. That really changes the way a lot of us plan our investment strategies over a 5, 10-year horizon.

TERRI SPATH: Yes, thank you. That's exactly what we've been saying and saying for a while now. This lower-for-longer regime has really turned into lower forever. The Fed has said, we're going to do whatever it takes. We're going to keep interest rates low, and we're going to do that for a very long time.

We started the year on the 10-year Treasury at something like 1.8%, and now we're below 1%. And that's a huge move in a short amount of time in a year when most folks were predicting even higher interest rates. So I think this lower-forever regime is here to stay.

We've also talked about a little bit-- Seana was mentioning these deficits that are rising and rising rapidly. So the other asset class that we're recommending, away from muni bonds-- it's almost like a barbell strategy-- is emerging-market stocks. And the reasons are with interest rates staying really low, deficits going very high, that is a recipe for a weak dollar. And a weak dollar is great for emerging-market stocks. So in addition to muni bonds, which we think are a terrific place to invest right now, we also like emerging-market stocks.

SEANA SMITH: Terri, are there any specific funds or specific names that you like in that space?

TERRI SPATH: Yeah, there are. And I would suggest that for most folks, most people, most investors, it makes sense to buy an actively-managed fund. That's what we do for our clients, rather than try and pick specific muni bonds, which may or may not be priced properly, or emerging-market stocks, which can move around.

We do like South Korea as a country. It's been the gold standard in terms of how to manage the risks that are out there right now. You can buy an ETF that represents that country or buy an actively-managed fund. We'd like a JP Morgan emerging-market equity fund right now. We think that that one outperforms versus the ETFs that are out there.

ADAM SHAPIRO: Terri, there was the article-- it might have been in "The Journal" today about the fact that people are saving even more money with no interest rate. I think Marcus over at Goldman Sachs-- bupkis is what you're going to get if you park money over there. It's like, what? 0.6%.

But does that mean you should be looking for yield if you're not-- you know, if you're risk averse with something like a high-yield corporate bond? Is that-- is it time to stop being a chicken?

TERRI SPATH: You're not going to make any money with 80 basis points on your investments. I mean, there's always trade-offs between risk and return, and so what we're constantly doing is weighing those two things. I mean, I think just chasing return is a mistake, and just being completely risk averse is a mistake.

So high-yield corporate bonds are an asset class that can participate-- they move. They have a very high correlation to the S&P 500. So they move in the same direction on a day-to-day basis, but they fall less quickly.

So that tactical approach that we incorporate is very effective in every asset class. You want to have a sell discipline. And we're-- there's still so many risks out there that just sort of gambling on a pure stock play can be challenging.

But high-yield corporate bonds are giving a nice yield, a nice total return, and they also-- they fall more slowly, so it's easier to get out of the way. So we definitely like high-yield corporate bonds as well as muni bonds and emerging-market equities. Those are our top-three asset classes that we-- that we're putting money to work in, as of today.