The key to the strategy is executing precisely in the muni world, given the fund’s higher weight in it.  Also, this very specialized asset class requires detailed credit analysis of municipal and project finances.  The beauty of most munis is that these jurisdictions have taxing power and they are careful to keep their credit ratings. 

In fact, fund’s holdings are 42% in AAA-rated bonds, making it 88% of the bond holdings rated single A or better.  In addition, it has a duration of 15 years, which will be beneficial to returns with a bond rally. 

But as many in the market learned painfully last year, "not all AAA bonds are made equal," and many went straight to default.  I have known this for a long time and have always done my own research on credit quality, never relying on rating agencies.  Because of this discipline, I was able to get out of Enron, Worldcomm, the toxic-waste-laden structured investment vehicles, and innumerable securities well before they were downgraded to junk.  

So why am I sending you to a muni-heavy fund, at a time that the US municipal and state finances are under such pressure?  Because I know the manager of the fund very, very well.  He is not just your typical fund manager.  He is someone that has been at the top of his class for decades.  He is extremely well known by his clients, issuers, and Wall Street, which grants him top-level access.

I used to work a few offices down the corridor from Vincent Giordano at Merrill Lynch Asset Management and cannot even begin to tell you how much I have learned from him over the years.  He was responsible for bringing the municipal bond management of the firm up to above $60 Billion from $2 Billion by the time he left to start this fund.  He did that on the basis of exemplary and disciplined performance, leveraging the superb distribution network that Merrill Lynch has.  "Vinnie," as all his friends call him, is the poster-child of discipline, never becoming complacent and always questioning his own assumptions.  This requires inordinate amounts of reading, research and consulting the best sources in the market.  He is a master of risk-reward analysis, which is the key in any investment.

But get this:  The fund is trading at a 12.46% discount to Net Asset Value.  That is, as a closed-end fund you are buying exposure to the securities it holds at such discount to what you would have to pay just to buy them yourself. 

In addition, the fund yield is an amazing 9.50%, most of which is tax free, since it is coming from munis.

Hence, on the back of a very supportive fixed-income environment and to keep a toe in high-dividend, strong large caps, we go for an expertly-managed and well diversified balanced muni-equities fund.

(By Horacio Marquez)

Recommendation: Buy the TS&W/Claymore Tax-Advantaged Balanced Fund (NYSE: TYW) at market (**)

(**) - Special Note of Disclosure: Horacio Marquez holds no interest in the TS&W/Claymore Tax-Advantaged Balanced Fund.