In the first quarter of 2026, the Franklin Intermediate Municipal SMA Composite experienced a downturn compared to its benchmark, the Bloomberg Managed Money Intermediate Index, even after accounting for fees. This period was characterized by a surge in new municipal bond issuances, surpassing the average levels of previous years. Simultaneously, geopolitical instability in the Middle East continued, adding a layer of complexity to global financial markets.
A significant factor contributing to the composite's underperformance was its strategic allocation. The portfolio's higher allocation to AAA-rated municipal bonds, coupled with a reduced exposure to AA-rated municipal bonds, proved detrimental. During this quarter, lower-rated bonds demonstrated stronger performance relative to their higher-rated counterparts, leading to a negative impact on the composite's overall returns. The sustained conflict in the Middle East, which began in late February, also cast a shadow over market sentiments.
Despite the recent challenges, the municipal bond market presents compelling long-term opportunities. The current valuation, after a period of market corrections, is robust, and yields remain attractive, consistently exceeding their five-year averages. This environment offers investors a chance for tax-adjusted income, making municipal bonds a potentially valuable addition to diversified portfolios looking for stability and steady returns amidst evolving market conditions.
