For an explanation of the "company town" phenomenon, see my first post in this series, here.
As would be expected of a company town, all elements of Puerto Rico resident’s total wealth have been highly correlated. While this has proven difficult for Puerto Rico residents, it has been devastating for residents who also had their financial assets concentrated in Puerto Rico municipal bonds and funds that invested in them.
Correlations between Puerto Rico total wealth asset classes included:
- Home Prices to Real GDP: 0.82;
- Real GDP to Total Payroll Employment: 0.78;
- Within Municipal Bond Types: 0.76 to 0.98;
- Uninsured PREPA Bonds to Home Prices: 0.49.
In sum, these numbers show that as the Puerto Rico economy declined, employment dropped, as did home prices and municipal bonds, and local pensions became increasingly underfunded, putting their future cash flows to pensioners in jeopardy.
To download these visualizations, click here.
Chart 1. Puerto Rico Home Prices to Real GDP

Chart 2. Puerto Rico Real GDP to Total Payroll Employment
Chart 3. PRTRS Pension Funded Ratio and Puerto Rico Real GDP

Chart 4. Selected Puerto Rico Municipal Bond Prices

Table 1. Correlations of Selected Puerto Rico Municipal Bonds
|
Uninsured University
|
Insured Highway/Trans
|
Insured PREPA
|
Uninsured PREPA
|
Uninsured University
|
-
|
0.76
|
0.88
|
0.98
|
Insured Highway/Trans
|
0.76
|
-
|
0.88
|
0.77
|
Insured PREPA
|
0.88
|
0.88
|
-
|
0.96
|
Uninsured PREPA
|
0.98
|
0.77
|
0.96
|
-
|
Chart 5. Uninsured PREPA Bond Price to Puerto Rico Home Prices

Investing for Company Town Residents
A critical question for those living in company towns is how to invest, given common exposures across all elements of their total wealth.
If the investor is retired, they have no human capital (in the sense of future cash flows), pension income streams are out of their control, and residences are unlikely to be sold for diversification purposes for a variety of economic and psychological reasons.
Which leaves financial assets.
For most investors, their financial assets are their most liquid and can be used as a “completion portfolio” to balance non-diversifiable risks that exist throughout their total wealth. That is, investors living in company towns should invest their financial assets last, after having evaluated their company town specific risks.
After having identified their company town risks, these investors can use their financial assets to diversify away from their exposure to the “company” in whatever form it takes.
In the case of most Puerto Rico residents, this would mean owning very little or no Puerto Rico municipal bonds or funds that invest in them, preferred stocks from local banks, and any other investments with significant exposures to the island economy.
Needless to say, this would preclude using leverage to invest in any Puerto Rico-related assets.
Financial assets that could be utilized in a Puerto Rico resident’s completion portfolio include:
- Money market funds;
- High quality U.S. municipal bonds;
- High quality U.S. corporate bonds;
- Blue chip U.S. and international equities;
- Commodities.
For all investors, the exact composition of their completion portfolio would depend on their individual facts and circumstances, investment objectives, risk tolerance, and cash flow needs, among other considerations.
Conclusion
The company town is a real phenomenon that exists across the globe today. It is likely to persist because of the natural tendency of certain locations to become a hub of commerce in a particular area due to geographic, industrial, or human capital considerations. It is obvious that these hubs lead to economies of scale and higher returns to human capital (a lone genius in the woods is not going to be very productive, but drop her into MIT and she will flourish, along with those she interacts with).
However, the company town environment also contains systematic risks that are non-diversifiable, an individual living there has exposure to them just from living there. These risks must be addressed by investors and their financial advisors.
The easiest method of addressing company town risks is through the investment of an investor’s financial assets. These should serve as a completion portfolio, that is, they should be invested last, and used to diversify away from company town risks.
In the hundreds of litigation claims involving Puerto Rico residents, it appears that their financial assets were concentrated in company town risks, sometimes in leveraged format. If true, these investments needlessly increased their already concentrated exposures and exposed them to ruin, as all aspects of their total wealth declined suddenly, and simultaneously.
For our previous coverage of the Puerto Rico municipal bond crisis, see this.
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For information about Jack Duval, click here.

Notes: