The buy and hold approach for muni bonds typically generates the required cash flows you are expecting and requires little maintenance other than reinvesting the proceeds from maturing issues. More active management requires you to consider the same factors as with any other asset class, including: market outlook, systematic risk exposure, security and sector selection, and diversification.
In addition to active management, by constructing your portfolio with both premium and discount securities, you can take advantage of higher yields and enhanced risk/return characteristics. As rates rise, premium bonds priced to a call provide a cushion effect that moderates price declines. In a falling rate environment, discount bonds experience significant price appreciation as the de minimis level is pierced to the upside. It is also important to control portfolio risk through limiting the deviation in durations from benchmark levels.
Active management also positions you to take advantage of supply/demand imbalances. As an abundance of supply develops in one state, sector or maturity, that segment of the market will trade at relatively cheap levels. As the over-supply subsides, there is the potential for capital appreciation.
Effective investment management must be built on a disciplined process that is tracked, understood, and adhered to. SS&C's PortPro suite of products gives you powerful tools to help you manage and account for your municipal bond portfolios.