Robert R. Godfrey, executive vice president at Municipal Bond Investors Assurance Corp., wrote this of Wilson White's book, The Municipal Bond Investment Advisor, reviewed in this space on Sept. 16:

"To dismiss the importance of credit quality, especially during the present recession, does a disservice to retail investors. There are sufficient examples of bondholders suffering from the results of credit deterioration (WPPSS, Philadelphia, and Bridgeport) to demonstrate convincingly that credit quality makes differnce.

"While the marketplace accounts for that difference in yield spreads, I cannot recall where there has ever been enough yield spread in an issue to ever compensate for a default. Emphasis on credit quality is well placed in both good times and bad

"Mr. White is correct in encouraging investors to do their homework. The investment in time well spent will produce rewards in yield pickup. However, dismissing money mangers as venal and self-serving deprives particularly the small investor of the benefit of hearing a diversity of opinion in making his or her decision. Moreover, a good unit investment trust or managed fund gives the small investor access to a balanced portfolio.

"Municipal bond insurers also provide a great service to the market. With a default rate as low as the tax-exempt market, it is easy to question the value of insurance. By not resisting the flip comment to 'skip the insurance and take the extra income,' he appears cavalier and contradicts his own advice to do one's homework.

"Investors in insured bonds gain more that a guarantee of timely interest and principal payments, although that is all the insurer promises. Investors can buy a security backed by a very sound financial institution which is rated triple-A by the premier rating agencies, Moody's Investors Service and Standard & Poor's Corp.

"Investors have a bond which earns at least 10 basis points more than a 'natural' triple-A for a typical 20-year maturity. In addition, for a slight 5 to 10 basis points give up (from uninsured bonds), experience has shown that insured bondholders also receive price protection.

"Holders of insured Philadelphia bonds in the late summer of 1990 got market protection that was worth over 200 basis points. Investors in Bridgeport insured bonds were saved from a drop in market value that translated into 175 basis points of yield spread during the summer of 1991.

"Most retail investors are not traders. They are counting on a reliable and predictable income from their investments. Sometimes plans go awry and the investor has to sell and that is where quality pays off in price protection. Retail investors have long known the high quality issues are less affected by interest rate swings and that this comes at the price of slightly less yield. Once again, investors who have done their homework tend to find insured bonds a good buy."

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