Top Muni Funds

6 Top Muni Funds

Top Muni Funds Published on Mar 7, 2016

Top Muni Funds – Morningstar’s Beth Foos shares some of our top picks for tax-sensitive investors seeking short-term, longer-term, or high-yield muni funds.

Top Muni Funds

Top Muni Funds

 

0:03I’m Christian bands for morningstar.com its tax relief we can morningstar.com
0:08joining me to discuss some of Morningstar’s favorite municipal bond
0:11funds is senior analyst better for us but thank you so much for being here
0:15thanks for having me before we get into some of the specific funds that you in
0:20the team like I’d like to talk about the case for holding municipal bonds inside
0:24of a text book out what are the tax advantages of doing that
0:28sure well muni bonds are most attractive for folks that are looking to manage the
0:32tax consequences of their investments primarily because the interest earned on
0:38muni bonds is generally free from federal income taxes depending on where
0:43that investor Liz they can also be free from state income taxes and local income
0:50taxes as well
0:51ok so if I live in California and I’m buying California bonds I may get the
0:57ball I will get the national tax break and then I may also get the state and
1:00local tax break to absolutely ok so let’s get into performance of Muni is
1:06before we get into the to the specific funds that you want to talk about
1:08performance has been really good when I look across year-to-date through mid
1:14February or the one year trailing returns every single Muni categories in
1:19the black so what has been driving that that’s better than is the case for text
1:24the text will bond categories were you have various categories that have
1:27absolutely unions actually fared relatively allowed through the rocky
1:32markets of of 2015 and and that has also pleased you in 2016 as well I think it
1:38was actually one of the top-performing fixed-income asset classes for 2015 and
1:45is doing again as you said very well in 2016 and I think that’s primarily
1:49because we’ve seen some of the larger issues that were weighing down the
1:57taxable bond
1:58equity issuers such as the decline in oil prices of the general concern over
2:06slower economic growth primarily in emerging markets just don’t impact Muni
2:12issuers as directly as significantly immediately as they do some of those
2:18other issuers so we saw a lot of that market volatility in the corporate bond
2:23and equity space cause some flight to quality for investors especially in the
2:29second half of 2015 and unions have always been regarded as a higher quality
2:34lower volatility sector so we saw a lot of inflows into muni funds at the same
2:40time
2:41issuance was was kind of flat or lower than historic levels so so how does
2:48issuance help you knees performance low issuance will when you see a high demand
2:55and you don’t see a lot of new issue and obviously the bonds that are currently
3:01out there are going to have prices higher price point yet okay so it’s
3:06interesting that even though maybe municipal finances haven’t been on the
3:11front burner these other things have been concerning the market
3:14municipal finances troubles haven’t gone away we live in Chicago Illinois we’re
3:19certainly there are plenty of issues so let’s talk about that and and talk about
3:24kind of the state of municipal finances and and how investors are thinking about
3:29that today

Top Muni Funds

Top Muni Funds
3:30sure I think we have seen and will continue to see some very stress
3:36situations grab the headlines over 2015 and that continued to 2016 as you
3:42mentioned the city of Chicago has quite a significant budget struggle on the
3:47state of Illinois we’re seeing the Commonwealth of Puerto Rico declare that
3:53it that it can’t pay all of its obligations so those those things are
3:58they’re stressed in the continued to weigh on some potentially some of the
4:04funds that they currently reside in but overall the credit quality of the Muni
4:10market continues to grow its strong and defaults remain very low so overall I
4:16think there you know we’re continuing a very strong trend ok let’s talk about
4:23what you in the team look at when you are evaluating various firms in the
4:27quality of their municipal bond fund lineups what are some of the key things
4:31that you home in on well because the Muni market is so large in in diverse
4:37and quite fragmented we want to make sure that we look for funds that have
4:42very strong robust research capabilities we look for teams that have experienced
4:48managers a robust too crowded in quant staff and then pretty sophisticated
4:55tools that support them that can help them analyze the certain user creditor
5:00interest rate risk that they know take on in their portfolios and expenses of
5:05course her factor for six months or so you brought some of the the team’s
5:11favorite funds and you kind of segmented them by type so let’s start with the
5:16same as short-term high quality Muni fund that you like for the person who
5:20maybe has money that they expect to spend within the next five years what’s
5:25a good option for someone like that you know it all back up and say that the
5:29funds that generally check all the boxes that were looking for
5:33particularly in the Muni space those firms are fidelity and T rowe Price we
5:41really like them you need teams we like their unique offering specifically the
5:45National Union offerings there because they have invested in their teams
5:50invested in their tools they offer pretty consistent returns a usually a
5:56lower price point
5:57Vanguard also obviously known for its very low fees are it have a pretty as a
6:02pretty straightforward
6:03strategy when it looks at me as well so but specifically for those with a little
6:09interested in a little less interest rate risk
6:12fidelity’s gold traded limited term income fund is something to take a look
6:18at Tea Rose tax-free short intermediate fund or their summit Muni intermediate
6:24find is also a really good choice
6:26ok and how bout for an investor who has a slightly longer time horizon again I
6:33would look towards the gold traded funds 0 price tax-free income infidelities
6:37tax-free bond funds are very good choices because again over the longer
6:41term they’re providing a consistent results with lower volatility and lower
6:46fees ok it’s interesting within the Muni space a lot of the issuance is long
6:52maturity correct and a lot of the funds are set up to focus on the long maturity
6:57bonds so let’s talk about a funder to that you like in that area because that
7:02is where a lot of the assets are where the longer maturity bonds we really like
7:07the T rowe Price tax-free bond again it consistently takes a limited amount of
7:16credit risk it really manages that and its interest rate risk but at the same
7:22time again offers you know lower fees and and not a tremendous amount of
7:27volatility which i think people are really looking for in there longer me
7:30portfolios like to talk a little bit about high-yield Muni is it’s been
7:35interesting to see that even as high-yield taxable bonds have had a
7:39rough go of it recently high-yield Muni have been doing ok why is that
7:43sure well again I think it’s because some of the salient issues that have
7:48affected the
7:49high-yield corporate bond issuers equity issuers just aren’t the same as we see
7:56in the high-yield Muni market and they’re not affecting the issuer is in a
8:00similar manner so the steep drop in oil prices again or the concern over slower
8:08growth in the emerging market sector really don’t directly impact some of the
8:13factors that we are traditionally seen the high-yield space such as tobacco or
8:19some of the lower credit quality hospital factors for instance which is
8:26why they performed relatively well so you gotta find that you like in this
8:30area but let’s talk about in addition to this fine let’s talk about the role that
8:36high-yield Muni could serve in a portfolio should you think about it as
8:39kind of the aggressive kicker when you’ve got your core high quality piece
8:42built out let you know the specific fun though that we do Lake in the Hills
8:48basis T rowe Price’s tax-free high yield fund we give that a gold rating and
8:53again I think because it takes a certain amount of calculated rescue down and it
8:57delivers consistent results especially in down markets but I think how people
9:03should look at that high yield bond you know that role in their portfolio you’re
9:09gonna get a little bit more you know yielded they are so that you’re looking
9:13for
9:14that’s good but in in the same sense we still have to take a bit of caution with
9:21that because again it’s there’s risk associated with those higher yields we
9:25want to make sure that the manager in the investor can know what those
9:29calculated risks are and how to manage it thank you so much for being here to
9:34share your insights as part of our tax relief week thanks for having me thanks
9:38for watching i’m Christine Benz for morningstar.com

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