The King of Risky Hometown Bonds Is Back
It seemed as though John Miller’s luck was running out.
Buying the riskiest bonds in the $4 trillion market for state and local debt had made Miller a power player in a corner of Wall Street often derided as staid and boring. But the 2022 bond rout drained billions from his flagship high-yield fund at Nuveen. Last year, on Miller’s 56th birthday, the trillion-dollar asset-management company abruptly announced plans for his departure.
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Now, Miller is on the rebound. He joined forces with a boutique firm, recruited a handful of analysts and traders and, earlier this year, started a fund from scratch. Money is pouring in: about $3 billion this year through August, according to Morningstar Direct.
The lanky fitness buff, whose latest hobby is riding an electric hydrofoiling surfboard, reflected on the changes on a recent Thursday from his new office at First Eagle Investments’ Chicago location. It’s just a few blocks south of Nuveen’s glass tower, where Miller used to supervise more money in municipal bonds than First Eagle manages in total. That fits with his new investing philosophy, he said: Bigger isn’t always better.
“I think that I could have the best team and best job in muni high-yield once again,” he said. “That’s very feasible.”
One big question is how Miller will fare in a shakier, higher-rate economy. The new First Eagle fund has trounced many other high-yield muni investments so far by leaning into risk. Morningstar data show that, as of June 30, more than 8% of the fund was invested in the Brightline, a private railroad running up the coast of car-centric Florida.
That kind of move helped Miller build Nuveen into the biggest manager of muni junk bonds—controlling about a fifth of high-yield mutual fund holdings—during a decade of cheap money and economic expansion. Investors frustrated by low rates on ultrasafe city and school debt warmed to munis backed by nursing homes, charter schools and casinos. But analysts say credit is weakening. According to Municipal Market Analytics, a 10th of outstanding nursing-home debt is currently in default.
“John Miller runs, and has historically run, a fairly high-octane muni strategy,” said Nicholos Venditti, head of munis at Allspring Global Investments. “If you believe ‘economic slowdown,’ if you believe ‘recession,’ if you believe that kind of thing, you may want a strategy that is less high-octane all the time.”
Miller said he has navigated treacherous credit environments before, including a flurry of municipal bankruptcies following the 2008 financial crisis, and is confident he can pick the borrowers who will make it.
John Miller grew up in the suburbs of Columbus, Ohio, one of three children of a lawyer and a homemaker. He learned muni bonds while working for a small Chicago wealth manager after dropping out of an economics doctoral program at Northwestern University (he got a master’s degree).
But like academia, investment-grade municipal bonds were too slow for Miller. He soon moved to Nuveen, where he became a student of the arcane market for muni junk bonds. He started Nuveen’s first high-yield muni mutual fund in 2000 and, by 2007, had taken over the firm’s entire muni portfolio.
In the financial crisis the following year, investment-grade munis lost only 2.5% while, according to FactSet, Nuveen’s high-yield fund fell by 40%, more than the S&P 500. But it recovered quickly and investors soon crowded in, fleeing ultralow interest rates. For someone in the top tax bracket, a 5% tax-exempt yield equates to about 8% after taxes, according to Nuveen’s calculations.
Investor demand fueled increasingly risky borrowing, and in the years that followed, muni junk bonds grew into a $400 billion market. Private ventures can sell muni bonds when public officials bestow their tax-exempt borrowing powers on nonprofits and long-shot economic development projects.
Examples from the past decade include a New Jersey mega mall with one of the Western Hemisphere’s largest indoor ski hills and an Arizona youth sports park with a 670-seat bar. Both are now in default.
The stiff competition for high-yield bonds exposed Miller’s cutthroat side. A Delaware judge found in 2020 that Nuveen had “used threats and lies in a successful attempt to damage” a competing firm, Dallas-based Preston Hollow Capital. Recorded phone calls revealed Miller’s team threatening to cut off Wall Street banks who didn’t boycott the Texas firm, with Miller telling Goldman Sachs, “You have to choose who you want to do business with.”
The Covid-19 pandemic also made for hard times. In March 2020’s cratering market, investors dumped billions in junk munis. Nuveen’s parent, TIAA, ended up bailing out the firm’s flagship high-yield fund. Nuveen disclosed in a 2022 Securities and Exchange Commission filing that the fund had received inquiries from regulators about pricing and trading during that period.
The high-yield fund hemorrhaged money again in 2022 after rising rates led to record losses for bonds of all kinds. Nuveen reported that year that hard-to-sell “illiquid investments” exceeded 15% of holdings in the high-yield fund, triggering a disclosure to the SEC.
Those particular illiquid investments are no longer John Miller’s problem. After a departure that both he and Nuveen declined to discuss, he called his contacts, weighed his options, and decided to start a new fund at a firm that owned no muni bonds. He said he is better prepared for future turbulence after studying outflow patterns from 2020 and 2022.
Miller started at New York City-based First Eagle the day after New Year’s. Longtime Citigroup high-yield trader Bryce Pickering is his No. 2. He still lives in the Chicago suburbs, but he bought an apartment on Manhattan’s Upper East Side to share with his daughter, a senior at New York University. (He also has two adult sons.)
First Eagle, with about $140 billion in assets, is best known for its four-decade-old global stock fund. It has also bought up firms that specialize in speculative debt and private markets in recent years. Hiring Miller, said chief executive Mehdi Mahmud, seemed like “one of the lowest-risk startup situations ever.”
Write to Heather Gillers at heather.gillers@wsj.com