18
Uh oh. Municipal bonds are the whipping boys again.
Meredith Whitney is back on
TV
pronouncing doom,
investors are redeeming muni funds, and the muni
market is down
3%
–
10%
depending on the category.
The reason is Detroit’s bankruptcy filing. It’s gotten a
lot of attention, but in the muni world, the reaction
has been more of a shrug. Muni managers saw this
coming a long way off, and odds are that your muni
fund doesn’t have any exposure to Detroit. More muni
issuers are under strain, but a growing economy
makes a wave of defaults unlikely.
The last time Whitney predicted doom, the market
sold off, and fund investors redeemed their funds.
Only, her prediction was off by roughly
50
times.
When Armageddon didn’t visit munis, the market
rallied sharply.
With hindsight, that was a great buying opportunity.
Is it possible that we’re coming up on another one?
So far the sell-off hasn’t been as dramatic, but muni
yields are trading well above Treasuries, whereas
historically they’ve traded at lower yields because
of their tax benefits.
T. Rowe Price Tax-Free High Yield
PRFHX
has
outlegged its peers by a decent margin since we
made it a pick in
2005
. We rate it Gold today because
we like manager Jim Murphy’s cautious stance in
a high-risk space. T. Rowe has the analyst breadth to
do thorough analysis on each of its holdings. That’s
crucial for a high-yield muni fund, as you really have
to tread carefully. The fund is down
6
.
4%
for the
year to date, which is better than most of its peers.
Fidelity Municipal Income
FHIGX
has less credit
risk than the T. Rowe fund, but it does have interest-
rate risk as you’d expect from any muni-national long
fund. Low costs and skilled management have led this
fund to outgun its peers since we made it a pick in
2002
. Jamie Pagliocco is focused on downside protec-
tion, as is apparent from the fund’s top-quartile
returns this year and in
2008
. Fidelity aims to have
better technology for modeling risks in a bond as
well as an entire portfolio, and that’s helped its muni
funds to perform well.
Silver-rated
Vanguard High-Yield Tax-Exempt
VWAHX
is so cautious on credit risk that it doesn’t
qualify for our muni high-yield category. So, its credit
risk sits somewhere between the typical high-yield
and national-intermediate category. With Vanguard’s
low costs, you still get a decent yield. The fund’s
4
.
1%
loss this year looks pedestrian compared with
its intermediate peers, but that’s still much better
than
99%
of the muni high-yield group. It’s a good
option if you want to trade a little risk for more yield,
but only a little.
If you want to get really cautious, consider short
or intermediate muni funds. These will pack less
interest-rate risk, though you lose some yield
in exchange.
Vanguard Limited-Term Tax-Exempt
VMLTX
is
only a small step from a money market fund, but it’s
an important step. The fund has a high-quality port-
folio with a
2
.
4
-year duration. Its low
0
.
20%
expense
ratio ensures you get most of the small yield gen-
erated by the portfolio. However, that duration does
mean the fund can lose a small amount. In fact,
it is down
0
.
70%
for the year to date. So, you get a
little risk for that added return, but it’s still useful for
a lot of people.
Vanguard Short-Term Tax-Exempt
VWSTX
is even
closer to a money market with its
1
.
2
-year duration.
The fund is up
0
.
02%
for the year as its more-modest
interest-rate risk has protected it from losses. The
fund’s
SEC
yield is just
0
.
41%
, so you can use this as
a place to invest money you expect to spend in a
year or two or for your emergency-spending kitty.
œ
Municipal Funds on the
Conservative Side
Tracking Morningstar Analyst Ratings
|
Russel Kinnel
What Are Morningstar
Analyst Ratings?
Our ratings are chosen for long-
term success. Analysts assess
a fund’s competitive advantages
by analyzing people, process,
parent, performance, and price.
They do rigorous analysis and
then submit their ratings to a
committee that vets their work
for thoroughness and consistency.
