We are avoiding broad-based international fund allocations until we get an all clear. The one except...
Muni Fund Favorites
04/09/2014 9:00 am EST
In 2013, municipals had their worst year in almost two as investors withdrew some $58 billion last year; nevertheless, the $4 trillion US muni bond market has rebounded so far in 2014, observes Philip Springer in Personal Finance.
For one thing, yields of bonds generally have declined (with rising prices) amid signs of slowing economic growth. What's more, the finances of state and local governments, overall, have improved since the financial crisis.
We recommend intermediate-term funds, with average maturities of five to eight years. They carry less interest-rate risk than long-term vehicles, while offering a significant yield advantage over short maturities.
We favor the funds from three leading no-load companies: Fidelity Investments, T. Rowe Price, and Vanguard Group. The three funds below have solid long-term records, with reasonable expenses.
In general, these funds have reduced their stake in general-obligation bonds compared with several years ago, while emphasizing revenue bonds that are backed primarily by educational, healthcare, and transportation operations. Here are our favorites:
Fidelity Intermediate Municipal Income (US:FLTMX) takes a moderate approach, avoiding big interest-rate and sector bets.
It tends to outperform its peers in tough markets and to lag in strong markets as credit-sensitive and longer-term bonds do well. The fund lost just 1.5% in 2013.
Credit quality is high, with 91% of the portfolio in bonds rated AAA, or AA, or A. The fund carries a yield of 2.9%, with an expense ratio of 0.37%. It has returned an annual average of 4.2% over three years, 4.3% over five, and 3.8% over ten.
T. Rowe Price Summit Municipal Intermediate (US:PRSMX) is more likely to make changes in credit quality, depending on market conditions, than shifts based on interest-rate outlook. The fund has an 88% stake in AAA-AA-A issues, tilted heavily toward the latter.
These are the historical returns: 4.8% over three years, 4.8% over five years, and 3.9% over ten years. Current yield is 2.9%, with 0.5% of expenses.
Vanguard Intermediate-Term Tax-Exempt (US:VWITX) weathered 2013 well, losing only 1.5%. Aided by rock-bottom expenses of just 0.2%, the fund can deliver good long-term returns with less risk.
The fund plays it cautiously with interest-rate bets. Some 92% of the portfolio is in bonds rated A or higher.
The Vanguard fund has delivered annualized returns of 5%, 4.8%, and 3.9% over three, five, and ten years, respectively. Current yield: 3.1%.
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