The municipal bond market is a vast and diverse landscape with various opportunities for investors to explore. According to Nuveen, there is a small but significant part of this market that could provide a big opportunity for investors – charter school municipal bonds. While charter schools make up only a fraction of the education muni bond sector, the increasing demand for these schools has resulted in a strong supply of bonds. Dan Close, the head of municipals and lead portfolio manager for high-yield municipal strategies at Nuveen, believes that charter school bonds can provide a tax-equivalent yield of nearly 8% for investors in the highest tax bracket. This presents a unique opportunity for investors looking to diversify their portfolios and generate attractive returns.
Charter schools are not a new concept, but there has been a recent surge in demand for these schools due to various factors such as the COVID-19 pandemic and legislation in states that support school choice. Currently, there are approximately 8,000 charter schools in the United States, serving 3.7 million students. Despite accounting for less than 10% of the overall public student body, charter schools have seen significant growth in enrollment, gaining more than 300,000 students since the 2019-2020 school year. In contrast, traditional K-12 public schools have experienced a decline in enrollment, losing over 1.5 million students during the same period.
Within the $580 billion K-12 education muni bond sector, charter schools make up approximately $33 billion. While issuance of charter school bonds declined in 2023 and 2024 due to rising interest rates, it is predicted to turn around with an estimated $4 billion to $5 billion in new issuances expected in 2025. Despite the higher risk profile of charter school bonds, they offer a much higher yield compared to traditional K-12 education munis. This presents a unique opportunity for investors seeking higher returns in the municipal bond market.
Investors interested in charter school municipal bonds should conduct thorough due diligence before making investment decisions. Nuveen employs four charter school analysts who assess the viability and success potential of schools over time. Factors such as location, academic performance, curriculum uniqueness, fiscal management, and legal provisions are considered when evaluating charter school bonds. It is essential for investors to understand the risks and benefits associated with investing in charter school bonds and ensure that they align with their investment goals and risk tolerance.
Some of the charter schools held in Nuveen’s High Yield Municipal Bond Fund include The Academy Charter School in Hempstead, New York; Norton Science and Language Academy in San Bernardino, California; and Community of Peace Academy in St. Paul, Minnesota. These schools exemplify the criteria set by Nuveen for investing in charter school bonds, including strong academic performance, unique curriculum offerings, and solid financial management.
Charter school municipal bonds offer a compelling investment opportunity for investors looking to diversify their portfolios and capitalize on the growth potential of the education sector. By conducting proper research and due diligence, investors can identify high-quality charter school bonds that align with their investment objectives and risk tolerance. With the support of experienced analysts like those at Nuveen, investors can navigate the complexities of the municipal bond market and potentially earn attractive returns from charter school bonds.