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Nuveen’s Miller dominated junk muni funds, then they crashed

When investors were flooding the market with cash, John Miller and his rivals kept buying, driving yields down further and further and allowing risky borrowers to easily raise money.
When investors were flooding the market with cash, John Miller and his rivals kept buying, driving yields down further and further and allowing risky borrowers to easily raise money.
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For more than two decades, John Miller helped to build the high-yield municipal bond market. In two weeks in early March, he watched it collapse.

The star fund manager at muni giant Nuveen is famous for the power he wields in the market — and for making bets that other investors shy away from. His fund made wildly successful wagers in the U.S., plunging into the riskiest crevices of state and local government debt as well as into companies and ventures that weren’t easily recognizable as municipal debt. Even when the market was climbing to records earlier this year, Miller’s risk appetite exceeded that of some of his peers.

Then the deadly new coronavirus shut down vast swaths of the country. Many of the projects he financed were hit. The American Dream megamall in New Jersey was shuttered just as it was about to open. Virgin Trains USA’s unprofitable high-speed Florida railroad curtailed service as tourists disappeared overnight. In just 10 trading days, yields on benchmark municipal bonds jumped more than 200 basis points, prompting the Fed to take unprecedented action to support the market.

Miller’s fund plunged, its assets diving to $19.3 billion on March 26, from $25 billion at the end of February. Having been one of the best performers in the industry, it became one of the very worst. Investors pulled $11.3 billion from high-yield municipal bond mutual funds in the three weeks ended March 25, according to Refinitiv Lipper US Fund Flows data. On March 19 — with prices plunging, tying a record for the biggest one-day rout in market history — Nuveen alone tried to unload more than $700 million in bonds.

Nonetheless, Miller seems prepared. “This has been a move without any concrete financial data because it’s happened so quickly,” he says, sitting on the near-empty trading floor of Nuveen’s downtown Chicago office. His phone has been ringing so incessantly that he has to pause when the battery in his headset dies.

It’s March 18, and he’s staying calm and optimistic, using cheery phrases like “V-shaped recovery” and “major snapback potential.” He says he’s still “gung-ho” about the mall and the train, convinced that such a rapid deterioration in the market — faster than the 2008 financial crisis — augurs an equally speedy rebound. “This is not going to be, I don’t think, a multiyear health crisis,” says Miller, who turns 53 in April. “This is going to be a multimonth health crisis. I don’t think it’s going to be a multiyear economic crisis either.”

But by the end of March, it was still unclear whether the pandemonium could be compared with that of previous downturns. Analysts at Municipal Market Analytics, an independent research firm that tracks municipal distress, said in a March 20 report that more municipal borrowers will default or otherwise fail to honor their agreements with bondholders. And they said those problems will be centered in the riskiest parts of the market — the areas in which Miller’s fund dominates. Then, in the last week of March, as Congress was on the verge of enacting a $2 trillion economic stimulus, the crash reversed as abruptly as it began, with even junk bonds joining in the rally.

If the $3.9 trillion municipal bond market were an ocean, the high-yield section would be the shadowy corner where the sharks gather. And there are only two great whites there: Nuveen, where Miller oversees the business, and Invesco, which bought OppenheimerFunds in 2018. The two companies comprise more than a third of the $111 billion high-yield municipal bond mutual fund universe tracked by Bloomberg. When they suffer, the rest of the market does, too. The high-yield municipal funds run by the two companies were among those seeing the steepest losses in March compared with their peers.

DOWN TOWNS
To some, it seemed like the high-yield municipal bond market was poised for a fall even before the COVID-19 outbreak. When investors were flooding the market with cash, Miller and his rivals kept buying, driving yields down further and further and allowing risky borrowers to easily raise money.

For much of the past year, muni bonds backed by government revenue were holding near their lowest yields since the 1950s, causing investors to plow into more exotic securities to get higher yields. Much of this low-rated and unrated tax-exempt debt is effectively corporate debt by another name: Government agencies issue it on behalf of real estate developers, museums, charter schools, or ventures such as Virgin Trains. Governments aren’t on the hook if the businesses don’t pay the money back; bondholders are.

“The muni high-yield space now is littered with things that most investors couldn’t even identify as municipal bonds,” says Nicholos Venditti, a portfolio manager at Thornburg Investment Management. He points to bonds issued for the American Dream mall and untested recycling facilities that seek to create ambitious new products, such as sustainable jet fuel. “Those are venture capital-like deals that were priced with muni-like yields, and ultimately what’s happening is that they’re reverting back to venture capital-like yields, where they should have been in the first place.”

This is going to be a multimonth health crisis. I don’t think it’s going to be a multiyear economic crisis either.

Miller started small. A Columbus, Ohio, native, he graduated from Duke University before going to Northwestern and completing a master’s degree in economics. Instead of continuing with a Ph.D., he worked first as an actuary, then joined the Chicago investment advisory firm C.W. Henderson & Associates. As an analyst there, he learned the foundations of the muni market. Craig Henderson, the firm’s president, recalls that even in those early days Miller was drawn to the quirky niches of the market that Henderson’s firm tended to avoid. “High-quality munis were just a little too boring for John,” Henderson says.

At Nuveen’s office just blocks away, Paul Williams, who headed the firm’s municipal research group, was looking for a new credit analyst. He recruited Miller, impressed by his knack for evaluating muni credits that involved corporate and nonprofit borrowers. Miller’s first big test came in the late 1990s. CanFibre of Riverside was as risky as it gets in the municipal bond market, a speculative project based on untested technology — turning discarded wood into fiberboard for kitchen cabinets. Miller loved it. “I just thought it was a fantastic idea,” he says. He persuaded Nuveen’s portfolio managers to buy it. At first it traded well.

Then CanFibre’s corporate backer, Enron, collapsed, and California energy prices skyrocketed. CanFibre’s bonds plummeted to 2¢ on the dollar. When other investors cut their losses and sold, Miller bought all the bonds, betting that even if the company failed, the highly specialized equipment and the warehouse could be sold. He was right. The equipment was sold twice, in fact: once to a Mexican company that never collected it, and then auctioned off piecemeal. Along with the plant manager, the only employee left at the company, Miller orchestrated the sale of the property in a booming California real estate market. “So we almost broke even on the whole thing,” he says.

The new millennium was robust for Miller — and the market he would come to dominate. After attending night classes to complete an MBA at the University of Chicago in 2000, Miller was named a co-manager of Nuveen’s high-yield fund, which he would manage soon after, overseeing its growth from $50 million in seed capital to $5.1 billion in 2007.

When financial markets collapsed in 2008, so did some high-yield municipal debt funds. Ronald Fielding, a veteran investment manager for OppenheimerFunds, had delivered hefty returns on debt backed by airport terminals, tobacco settlement payments, and housing developments. During the crisis, investors pulled out en masse. His fund was forced to sell securities at fire-sale prices to raise cash. His main fund’s shares tumbled by more than 50%. “I felt like I was destroying the whole market,” he remembers.

Miller’s fund was pummeled too, losing 40%. But unlike Fielding, who retired the following year, he was able to hold on for the subsequent rebound and grow the fund tenfold. “I just had more longer-dated, nonrated bonds than anyone else,” he says. “Maybe I maintained too aggressive a positioning going into ’08, no question. But the bonds themselves virtually all came back.”

Miller became known for his mastery of the technical details buried in bond documents. It’s a skill that stems from his early years as a research analyst tasked with explaining the intricacies of tangled credits to portfolio managers. He speaks a language that only those investors who’ve spent years poring through prospectuses are fluent in. He’s methodical, with an uncanny recall of the details of decades-old bond issues.

The funds are also some of the lowest-duration products in the market.
April 1

In 2011 he was named co-head of fixed income, leaving him with oversight of the firm’s state and local government bond investments — now amounting to almost $200 billion overall. But it was the high-yield corner of the market that for all of 2019 was attracting hundreds of millions of dollars each month. Even long-term debt issued by still-bankrupt Puerto Rico had rallied, cutting the yields to around 3.5% in late February, akin to what virtually risk-free borrowers such as California once paid.

By the start of 2020, more than half of the $231 billion in high-yield bonds held by institutional holders was managed by just four firms, according to data compiled by Bloomberg: Nuveen, Invesco, Goldman Sachs and BlackRock. Miller’s funds alone received about a third of the new high-yield money that had come into the market since the start of 2019.

He was accused of abusing Nuveen’s market power to quash competition. A Dallas-based upstart, Preston Hollow Capital, sued Nuveen, alleging the company and Miller used its market power to strong-arm the biggest banks on Wall Street to stop doing business with the smaller rival. Last July at the trial, in Delaware Chancery Court, Miller said he was only blustering when he boasted of persuading the banks to spurn Preston Hollow. “Sometimes you have to exaggerate to get people’s attention, especially on Wall Street trading desks,” he said in court.

At the start of 2020, Miller’s fund continued to draw new cash. Some of his biggest wagers were paying off. After he expanded his holdings of debt Puerto Rico had issued as part of its bankruptcy, the securities continued to rise. Chicago’s junk-rated school system debt rallied. The Virgin Train-backed bonds ticked up, too.

In the second week of March, as investors began to come to grips with the dramatic impact the coronavirus would have on the economy, the market turned on a dime. The bonds backing the American Dream mall dropped to as low as 97.25¢ on the dollar in late March, down from 120¢ when they last changed hands in September.

In 2008, Miller weathered his fund’s 40% drop, bouncing back to return 42% in 2009. In 2013 his fund lost nearly 5% when the taper tantrum roiled fixed-income markets, only to come storming back with a gain of almost 20% the following year. When Donald Trump’s surprise victory in the 2016 presidential election threw the markets into a frenzy, Miller’s fund saw outflows. Again, he rebounded, posting 12% returns in 2017.

High-yield munis would need another recovery to make up for the losses seen in March alone—a 10% drop as of March 26. Miller’s fund could face further pressure as more investors see the negative returns and pull their money, a dynamic that has affected municipal mutual funds during prior periods of stress.

“I do have a lot of experience handling stressful environments under periods of uncertainty,” Miller says. It was March 18, and his fund would go on to drop 14% in a week. “Munis have always come back strong,” he says, “Muni high-yield has always come back strong.” — Additional reporting by Martin Z. Braun

Bloomberg News