Wall Street Transcript interview with Founder & CEO John Ullman of John G. Ullman & Associates regarding Investment Strategy

1. A Proactive and Analytical Approach to Conservative Investing
JOHN G. ULLMAN is President, CEO and Founder of John G. Ullman &
Associates, Inc. Earlier, he was President of USGM Securities, Inc., and at
Corning Inc., worked in financial management. He received an MBA from the
University of Chicago, with a focus in financial management. He received a
bachelor’s degree in economics from Johns Hopkins University. He was named
the Corning Chamber of Commerce Small Business Person of the Year in 1997.
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SECTOR — GENERAL INVESTING
TWST: Could you please identify yourself?
Mr. Ullman: John G. Ullman in Corning, New York.
TWST: Could you tell me your firm?
Mr. Ullman: That’s John G. Ullman & Associates, Inc.
headquartered in Corning, New York. We start our 40th year of operations
on August 28 this summer.
TWST: And I understand that you are involved in a lot of
diverse financial activities, so maybe you can talk for a couple of
minutes about that.
Mr. Ullman: Our concept, which started in 1978, is to
provide essentially all financial-related matters under one roof with a
firm that has broad capabilities and most importantly, the highest of
ethical standards. Everything we do is fee-based. For accounts above
certain levels, we include tax preparation services. Outside of tax
preparation for smaller accounts, everything that we do is included
within our fee. We do not accept any commissions, and we avoid
conflicts of interest. We manage our clients’ assets, complete their tax
returns and restructure their estate plans.
We will shortly add our sixth attorney, but we do not prepare
wills or perform legal services, as we’re not a law firm. But we get a
complete plan developed, structured and written in detail. We handle
insurance reviews, general financial planning and essentially all financial-
related matters, upon request, in a busy family’s existence.
Corporate executive programs are often areas where we are
active. Non-directly managed assets such as 401(k), 403(b), risk analysis,
purchase and sales of properties are examples of projects for clients. Our
firm has a very long-term team that’s in place to work with client families.
We have our own Securities Research Department. Equities on our buy/
sell lists are followed directly by our highly experienced securities
research analysts.
We provide portfolio management and trading functions
within the company as well. To lead in the preparation of over 1,400
tax returns per year, we have a fully staffed tax department that also
provides tax planning and handles audits. Our advisers are skilled in
each of these areas as well and contribute in managing tax matters in
addition to the tax department.
TWST: And I understand among the things you work on
include municipal bonds?
Mr. Ullman: We have a balanced portfolio model. All accounts
with us for the assets we are managing should have a percentage, which is
50% or more, that would be in other than growth equities. These conservative
investments include cash and equivalents, taxable and tax-free bonds, utility
stocks, high-quality corporate and government issues including entities
overseas that have high-quality issues in foreign denominations.
Equities in clients’ accounts are very closely followed through
our securities research department. We do have a significant amount of
assets in municipal bonds, some are taxable, although most are tax-
exempt, at least for federal taxes. Exemptions from state income taxes
depend on the geography of the holder. We view our fixed income
strategies and management to be a very important part of our asset
management program.

2. MONEY MANAGER INTERVIEW ——————— A PROACTIVE AND ANALYTICAL APPROACH TO CONSERVATIVE INVESTING
TWST: And what’s been going on recently with municipal
bonds that investors may want to know about?
Mr. Ullman: There has been a lot of upheaval over the years,
although such has recently lessened with the economy improving
dramatically over the last nearly 10-year period. While problems and
defaults have settled down, we had periods where I think the expectations
of municipal bonds in terms of safety were
underestimated by the market. We have a highly
proactive and analytical approach to bonds. For
conservative investments our approach for both
corporate and municipal bonds has very much
insulated our clients’ accounts from adverse
impact from the significant numbers of
bankruptcies that have occurred.
When one reviews the municipal
market, over a reasonable number of years, we
have seen cities like Detroit, Michigan and
Harrisburg, Pennsylvania, a state capital, go
bankrupt. There were three regions in California:
Stockton, San Bernardino County and Mammoth
Lakes, essentially also go bankrupt in late 2012
and 2013. Earlier, there were other defaults such
as in 1994, which I believe include Orange County, California, and
Jefferson County, Alabama, financially failing.
Much more recently, a major effective bankruptcy in Puerto
Rico represented a very large and severe financial challenge. Other
problems have included Central Falls, Rhode Island. New York City was
in trouble in the early mid-1970s, and worked through substantial
financial strains through New York State assistance by issuance of bonds
issued under the Municipal Assistance Corporation of New York in New
York State. Philadelphia has had some very difficult times. Illinois, as a
more recent example, has been very close to junk bond ratings
throughout the state. I believe some of the Chicago school district bonds,
if they’re not general obligations, currently carry junk bond status. I
believe with the level and numbers of problems that have developed as
well as the disasters with the insurance agencies, MBIA and AMBAC
after the 2007, 2008, 2009 financial collapse, municipal bonds have had
more financial issues develop than would be indicated by the market.
There’s just an expectation that governments will pay.
Although probably problems are severely underestimated, I
think our political system has unfortunately evolved to a point where
it’s easier for a mayor or a governor to try to just “kick the can down
the proverbial road” than to raise taxes. For Illinois, recently, the
State Senate overrode a veto by a Republican governor for an income
tax increase, and I believe the governor was looking to see more
spending cuts than were included in the bill in Illinois. For decades,
Illinois has been under-taxing versus their spending levels placing
Chicago and the state in a really terrible position. I’m not sure if the
tax increase is large enough, moving from
3.75% to 5%. The outcome in Illinois, over
time, hopefully will lead to fiscal stability.
While states typically have balanced
budget requirements, very few states are willing
to increase taxes when there is another financial
crisis. I think municipalities are in a very
difficult position with all of the entitlements
that have been promised in terms of pensions
and health benefits. In the private sector,
pension benefits have been rapidly reduced and
Social Security has become much more primary
as a source of retirement income.
Depending on one’s political view, there
are different reactions about this major trend and
reality. The pension programs in some states
remain extremely generous compared to most corporation plans, placing
highly significant and often daunting long-term liabilities on individual
municipalities. Many municipalities have extremely large unfunded
pension and health care obligations. Eight or 10 years ago when we were
studying this underfunding, estimates that were being projected for state
and local government pensions were $3 trillion to $5 trillion underfunded.
The equity markets in recent years have certainly helped, although I
haven’t seen a very good recent estimate. I hope the imbalance is
presently considerably lower, but it almost certainly remains very
substantial. I think that there is a comfort level in the marketplace with
municipal bonds, which I believe is higher than is appropriate.
TWST: And do you think investors need to take a good
solid look when they’re looking at different municipalities that they
might want to invest in? What the municipality is doing about
pensions and about retirement benefits and about social programs?
And also, do they have a good working relationship to attract
business to the community? Are those all things that they should
look at to make sure it’s a solid investment?
Mr. Ullman: Absolutely. I couldn’t agree more and can give
you, I think, a more detailed example. Ratings from the major rating
We have a highly proactive and analytical approach to bonds. For conservative
investments our approach for both corporate and municipal bonds has very
much insulated our clients’ accounts from adverse impact from the significant
numbers of bankruptcies that have occurred.
Highlights
John Ullman discusses his
firm’s portfolio management
strategy. Mr. Ullman has a
balanced portfolio model, with
50% or more in conservative
investments. A significant
amount of the assets are in
municipal bonds, where Mr.
Ullman employs a highly
proactive and analytical
approach.

3. MONEY MANAGER INTERVIEW ——————— A PROACTIVE AND ANALYTICAL APPROACH TO CONSERVATIVE INVESTING
agencies are a part of our evaluations. It is not a major part, but at this
stage, and for many years now, we generally don’t buy municipal bonds
with less than AA to AA2 ratings by Moody’s and Standard and Poor’s.
We have a AA3/AA minimum for most universities. We believe that
these and other ratings are, in our opinion, overly confident in the
financials of many municipal issues.
About four or five years ago, we were looking at some work
that was done on some school districts in New York State outside of the
major metropolitan areas. The concern was that the demographics
because of manufacturing losses was effectively causing reductions in
the population base out of those school districts with the impact that the
residual amount of taxes that would be coming into the school district
would also be lower over time. There were several school districts that
had very high ratings that we decided to sell; as a result, it’s not just
about ratings, but other factors including unfunded liabilities and trends.
Seven or eight years ago, we had $40 million to $45 million
worth of bonds in Illinois, with the trends at that time looking quite
worrisome. Many of the bonds that we held for clients had AA or AA-
ratings at that time. Some were gradually being downgraded. We decided
to sell. It took us a couple of years to sell all of them. What has
subsequently happened is that there haven’t been defaults, but many
Illinois municipalities are in trouble. We were several years ahead of the
market when we saw a trend line. These issuers generally maintained
very high levels of government commitments to programs for employees
and welfare benefits in urban areas, without the necessary tax revenues
to support such obligations.
Detroit was a problem that was not short term. We were out of
any exposures well in advance. Harrisburg, Pennsylvania, was similar.
These were not just sudden developments. Orange County, I think, had
some things that occurred in the mid-1990s, but most of the time, these
are not surprises. Similarly, for Puerto Rico. This major issuer has not
been close to balancing their needs with revenues. As a result, they have
a huge amount of debt. And I think there has been an expectation that
there will be government bailouts in most cases and investors will be
protected and rewarded for taking on lower-grade credits. I think that it’s
not something that should be presumed or expected.
Additionally, we look at the specific collateral. We try to stay
away from sports arenas and performance halls, and revenue bonds that
are tied to activities. With very few exceptions, there are many types of
municipal bonds and revenue sources that we avoid.
TWST: Did you want to highlight a municipal bond or a
bond fund that you find interesting?
Mr. Ullman: We’ve stayed away from most funds. I remember,
over the years, we would have clients in the office, and they would have
a particular fund in their existing portfolios. As a very hypothetical
illustration, but similar to what we’ve seen, they could own a unit trust.
Such fund might have had 10 or 12 issues in it and in a given state. The
units held much of the same issuer, and most of them were very long-
term. As a result, there was essentially no diversification.
For our investments, we have focused strategy and have our
purchases reflect specific targeted parts of the market. For example,
there is a possibility of tax rate decreases being part of tax refund law.
We utilize ratios of municipals to comparable Treasuries of at least
77% of the Treasury rates for bonds with effective state exemptions in
high-tax-rate states. If there is no state tax benefit, our target is 80% of
comparable maturity versus Treasuries. While those rates are not near
market levels, but easy to illustrate for a hypothetical 10% U.S.
Treasury, we would be looking for the same maturity at the AA quality
municipal at 8% without state tax benefit and 7.7% if there is a high-
rate state income tax associated.
In May and June, for short to short intermediate issues, we
were seeing 82% to 92% for municipals as a percentage of the same
Treasury maturities, which was elevated versus normal. The market
adjusted downward with the percentages now closer to the upper
70%. Part of this change in relative rates may reflect lower likelihood
of tax rate decreases, with all of the challenges the administration
now has facing it.
We look very specifically at the mathematics of it. Also with
interest rates at present levels, the downside risk from potentially higher
interest rates of long-term bonds, both corporate and municipal, is
elevated. The upside potential of rates dropping materially from here
would appear to be moderate or low, and the potential for rates moving
up being more considerably less, we are basically not going out more
than about five years for fixed rate bonds. While there are a few issues a
bit longer, our average maturity is running between two to three years at
present. So we are looking for high-grade municipal bonds diversified by
state and by sector, with the ratios that were mentioned.
TWST: Did you want to mention an example of one you
find promising?
Mr. Ullman: Bonds are different than equities as you earn
interest and then principal at maturity, it’s not like a stock. As long as an
issuer remains stable, such is the primary decision about a particular
municipality. Targeting maturities is normally different than decisions
about issuers. We prefer general obligation issues when possible. Also,
as a generality, we often find some of the Midwestern states, counties
and cities to be more stable.
We are concerned about certain changes in government and
outcome for the municipalities. For example, in New Jersey they cut
taxes very significantly and cut spending, but not equally. The municipal
situation in New Jersey has deteriorated in the last few years. So there
are areas where we might sell bonds or at least not make additional
purchases. For New Jersey, we are not making additional purchases but
are retaining some holdings there.
Pennsylvania has gotten into some problems, and we’ve
been limiting purchases. There are some places, such as Louisiana
and Mississippi, where we have current concerns. We have stayed
away from Nevada even though Las Vegas, in particular, has
recovered significantly from the 2008 near U.S. financial collapse.
Because of the volatile situation, we have stayed away from
California municipal bonds for a very long time because things can
change quickly and radically in California.
New York and California were in poor financial condition in
2008. Both states have made surprisingly strong recoveries; however,
when we look at the high-speed rail program that the California governor

4. MONEY MANAGER INTERVIEW ——————— A PROACTIVE AND ANALYTICAL APPROACH TO CONSERVATIVE INVESTING
has put through at $100-plus billion and all their needs in terms of water
and a lot of other potentially higher government costs, it makes us
uncomfortable with certain California exposures. There are other areas
that we tend to avoid.
To your question, there isn’t a particular bond that we really
like versus others. For some of us who had the privilege of attending
various schools, there are bonds for example for Johns Hopkins and
University of Chicago that are personally attractive for me, with other
institutions appealing to their alumni. These preferences are separate
from economic considerations for a given issuer. Such issues can be both
very high-quality with little concern about defaults. It is nice to get the
prospectuses with the details of such institutions including data which
might list students’ average SAT scores.
The same thing is true in certain other municipalities where
you have an attachment whether because of the sporting team or because
of having grown up in that community, but that’s not an economic
decision as long as the bonds meet certain criterion. They’re fun to get
as a separate matter, but it’s not about any one particular issue. What is
most important is being confident of specific issuers including
geographies to avoid.
TWST: Do you think, too, one of the things you want to
look for is cities that don’t realize that the state government and the
federal government, now under the Trump administration, may not
be ascending as much in revenues — maybe it was the case before,
and that they have to make some tough decisions?
Mr. Ullman: That’s a very good point. And I think that when
you have municipal governments that have been highly responsible and
are not just trying to please the constituents with the most services at the
lowest cost. Great managers have long-term plans, which when they
exist are a real plus.
It’s our belief that over the next couple of decades in this
country, the amount of money that will be spent on infrastructure will be
more than most people are contemplating. This expectation significantly
affects our equity investment strategy. Roads, bridges, tunnels, water are
a major part, but not the only piece of infrastructure needs. We have
major concerns with municipalities that they will spend the money but
they aren’t going to properly fund those large programs. I think for
anything that’s being spent there ought to be a viable plan to pay for it,
not to just defer dealing with the costs.
Politically, that’s an extremely hard thing to accomplish,
similar to in Illinois’ challenge in raising taxes. Gasoline taxes haven’t
gone up in decades, and the amount of money that’s needed for roads and
bridges and tunnels from the highway program is astonishingly high.
That number might need to be at least double in order to pay for
increased programs. One of the concerns that I have is a form of
infrastructure banks being set up with off-balance-sheet financing, as a
different method of funding. Infrastructure banks with full and proper
collateral could work, but if it used off-balance-sheet financing, such
could rival unfunded pension obligations. When there is direct or indirect
responsibility for a municipality which does not have adequate funding,
such will put even more stress on a municipality.
In Harrisburg, Pennsylvania, this was a bit different. They had,
if I remember, a trash-recovery recycling center and spent a few hundred
million dollars on it. The project was very poorly managed and it went
well over plan. Harrisburg didn’t have the resources to cover this
investment. I believe that some other things can and will happen if
creative financing is used for future infrastructure programs.
Flint, Michigan, and their problems with water, they tried to
cut corners on the expenses with Detroit and, to save funds, people can
make some really bad mistakes. There are tunnels, one in Baltimore, I
think for Amtrak, that I believe is 100-plus years old. I believe the cost
to replace this aged facility may be over a billion dollars. I don’t know
where the funds are going to come from, but the trains are running at
lower speeds because of safety. There was an episode a couple of years
ago in a tunnel for freight lines that actually had a collapse in parts,
which they fortunately were able to repair. The tunnels going across from
New York to New Jersey are in dire need of upgrade. I haven’t seen
recent estimates, but I’m sure it’s many billions of dollars.
How are these much-needed repairs and upgrades going to get
funded? It’s really important that when you’re looking at municipal bonds
to avoid entities that may have taken explicit or implicit obligations
presently or in the future for some of these vast programs. There is a desire
to invest, but the difficulty is getting funding to pay for it.
I think that’s another major concern, especially with the level
of needs that exist in this country for infrastructure. We’re a very large
country. Much of Western Europe has much, much better infrastructure
at lower cost than the U.S. So there is a tremendous amount of catching
up to do in the United States. Some of these programs may be funded
through industrial development authorities and utilization of tax-exempt
bonds which may be separate from municipalities, but may also directly
or indirectly affect these government entities. Toll roads might be pretty
clear, but there’s some really high-ticket items that will be astonishing in
It’s our belief that over the next couple of decades in this country, the amount of
money that will be spent on infrastructure will be more than most people are
contemplating. This expectation significantly affects our equity investment strategy.

5. MONEY MANAGER INTERVIEW ——————— A PROACTIVE AND ANALYTICAL APPROACH TO CONSERVATIVE INVESTING
cost levels which I believe will be very much larger than the initial
trillion dollars that the Democratic and Republican parties have proposed.
We expect that this is a very low number of what’s going to be committed
over the next couple of decades.
TWST: And when you speak with investors who are trying
to put together a portfolio, how do you explain to them why they
might want to have a presence of municipal bonds, whether it’s from
this country or another country in their portfolio along with equities
and other types of strategies?
Mr. Ullman: Well, to the extent there is fixed income in a
portfolio, municipals are a form of diversification. At 77% to 80%
depending on the state ratios with Treasuries, they would be more
attractive for those clients’ holdings than normal corporate bonds. I
should point out even though we’re talking about municipals, we have
rating minimums for corporates of BAA1, BBB+ generally, and there
are very few exceptions. The vast majority of bonds are in sectors of
preferences with limited amounts of bonds in financial companies. We
want to be extremely careful with the amount of exposure to financial
industry issues.
To reiterate, we are much more comfortable with certain
corporations on a diversified basis at good but lower credit ratings than
we are with any municipalities. While we have a lower threshold, the
overwhelming majorities having ratings at BBB+ or BAA1 for
corporate issues are ones that we would not buy. We have very similar
types of requirements for corporate issuers, but we have a higher level
of concern on the ratings of municipalities. Again, these factors include
pension and health care retiree programs that are being maintained and
the difficulty of raising funds.
I really was pleased personally to see that the amount of
damage to pensions for long-term employees in Detroit was less than
what might have been expected. Any adverse impact for someone who
worked there 20, 25, 30, 35 years is a tragedy, because they were
promised those amounts. But I think that this bankruptcy was well-
handled, as it could have been much harder on retirees. From
bondholders’ perspectives, they certainly took large losses, which is
part of the risk with bonds.
In thinking back possibly more than 20 years ago, Washington
Public Power issued municipal issues of size for nuclear plants. They
halted the project with huge losses. I think some of their exposures
were pretty obvious at that time, but a lot of investors unfortunately
had large holdings.
We are generally, at present, more comfortable with certain
well-managed corporations, highly diversified, but in terms of your
question, municipals that meet the ratings and the percentages are at
least marginally advantageous for people with high tax brackets and
taxable accounts. We do find the spreads on costs of municipals to
generally be wider than corporations. If you want to have a bond that
is expected to be kept for a relatively shorter period of time, we would
more often opt to purchase U.S. Treasuries, a taxable bond, or an
actively traded corporate than a municipal because of the spreads. But
the reason we buy municipals is our net return with such investors
expecting net higher rate of return in that maturity than they would
with the comparable corporate issues.
TWST: And one last question. What about the risk that is
out there with bonds from foreign countries? Is that a concern?
Ullman: Yes. Our focus has been in very few countries in
terms of foreign denominations. We’re a U.S.-based firm. We have
analysts who have an overseas background, but we have been
interested at times in foreign bond issuers. In the mid-1980s, we
purchased many overseas issues.
At present, holdings are limited with a focus on Canada and
Australia where there are natural resources. We’re confident in the
provinces in Canada and the Canadian government and the Australian
government, Canada being financially stronger than Australia at present.
Both have lots of natural resources and could have currency appreciation.
In the 1980s, bonds were bought in Europe, including Swiss bonds and
in Asia in Japanese yen. Overseas, we’re buying extremely strong credits
where there is not much concern about default. The issue is going to be
exchange rate at maturity.
During the last few months, we’ve been adding some
holdings in Canada and Australia. The dollar has recently weakened
and those currencies have changed. As a result, we’ve slowed down
in our purchases. Our activities there are much more exchange-rate-
related, and they are a very small percentage of the total account. If
one is considering Chinese currency and bonds issued in that region,
one needs to be in that market and know those companies very well.
Our foreign bond holdings are presently quite small, currently less
than 2% of the assets that we’re managing, and probably between
3.0%, 3.5% of conservative investments.
We believe that our highly proactive and analytical approach
to bonds have been extremely effective in protecting clients’ accounts.
With the many bankruptcies that have occurred including the
To the extent there is fixed income in a portfolio, municipals are a form of
diversification. At 77% to 80% depending on the state ratios with Treasuries, they
would be more attractive for those clients’ holdings than normal corporate bonds.

6. MONEY MANAGER INTERVIEW ——————— A PROACTIVE AND ANALYTICAL APPROACH TO CONSERVATIVE INVESTING
municipalities that were previously mentioned and issues from
corporations such as Bear Stearns, Chrysler, Circuit City, Enron, General
Motors and Lehman, we avoided financial exposure to any of these
companies. Additionally, the vast amounts of defaults in subprime
mortgages and risks from insurers such as AMBAC and MBIA were also
of no impact on our clients’ accounts.
Our strategy, which did have one issue temporarily defer a
payment that was subsequently paid, has almost entirely insulated
clients’accounts for the impact of the severe problem of the municipalities
and corporations listed in this note. We believe that during future
business cycles, the very large commitments of municipalities will
unfortunately place more issuers in vulnerable situations. In our view,
current ratings by agencies understate the potential risks. Thus, we have
and are maintaining extra vigilance of municipal issues, keeping higher
standards for purchases and retention than for many corporate issues.
TWST: Thank you. (ES)
JOHN G. ULLMAN
President, CEO & Founder
John G. Ullman & Associates, Inc.
51 E. Market St.
Corning, NY 14830
(607) 936-3785
www.jgua.com
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