The Touchstone Core Municipal Bond Fund demonstrated notable resilience in a complex financial landscape during the fourth quarter of 2025. Despite a challenging macroeconomic environment and record-setting municipal bond issuance, the fund maintained strong demand. This report outlines the fund's strategies for identifying market inefficiencies, constructing diversified portfolios for tax-free income, and managing price sensitivity. It also highlights the fund's forward-looking approach, including its defensive positioning for 2026 and its focus on environmental, social, and governance (ESG) criteria.
Detailed Commentary on the Touchstone Core Municipal Bond Fund's 2025 Performance and Future Outlook
In the fourth quarter of 2025, the municipal bond market, despite facing significant headwinds, showcased remarkable strength. The year saw an unprecedented total municipal issuance of $565 billion, with tax-exempt bonds accounting for $517 billion. Despite this substantial supply, investor demand remained robust, underscoring the enduring appeal of municipal bonds. The Touchstone Core Municipal Bond Fund (TOHAX) employs a sophisticated investment approach designed to capitalize on market inefficiencies. This is achieved through a proprietary framework that meticulously analyzes income, price dynamics, and volatility. The fund's primary objective is to construct portfolios that consistently deliver tax-free income by diversifying across various sources of credit, liquidity, and term premiums.
A key element of the fund's strategy involves actively managing duration and yield curve positioning to control price sensitivity at the portfolio level. By identifying and acquiring bonds that are attractively priced relative to their historical averages, the fund adds positions in a risk-controlled manner. Furthermore, the fund rigorously evaluates municipal issues using a proprietary environmental, social, and governance (ESG) criteria, integrating responsible investing principles into its selection process.
Looking ahead to 2026, the fund is strategically positioned with a defensive and selective barbell structure. This involves a strong focus on high-grade credits and dynamic sector rotation. Opportunistic exposures are also taken in BBB-rated bonds, housing, prepaid gas, and specific transportation bonds. This positioning aims to navigate an anticipated elevated municipal supply environment. While moderate economic growth, persistent policy uncertainties, interest rate volatility, and climate-related risks may introduce episodic market volatility, strong investor demand coupled with the fund's disciplined management approach is expected to support solid risk-adjusted returns.
From an investor's perspective, the fund's commitment to exploiting market inefficiencies through a multi-faceted analytical framework is a compelling advantage. The emphasis on generating consistent tax-free income, coupled with stringent risk management and a forward-looking defensive posture, provides a reassuring investment proposition. The integration of ESG criteria also resonates with a growing segment of investors seeking both financial returns and sustainable impact. The fund's proactive management in anticipation of market shifts, particularly the expected increase in municipal supply, demonstrates a prudent and adaptive strategy, aiming to deliver consistent performance even in challenging market conditions. This approach fosters confidence in its ability to navigate complexities and achieve its investment objectives.