The relative stability offered by short-term municipal
bond funds has been on full display in recent months.With interest
rates spiking in October, California issuing a mountain of new debt in
November, and United Airlines UAL filing for bankruptcy protection in
December, the municipal bond market has faced rough sledding of late.
But while the average short-term muni fund dropped 0.80% in October
alone, it has held up quite well compared with its intermediate- and
long-term rivals. In fact, for the trailing three months ended Dec. 13,
2002, the short-term muni-bond category as a whole managed a small gain
(0.07%), while every other municipal bond category tracked by
Morningstar lost money.
In general, less-interest-rate sensitive funds have performed a bit
better than longer-duration offerings. Calvert Tax-Free Reserve
Limited-Term Portfolio CTFLX, for example, has gained 0.59% over the
trailing three months, while Strong Ultra Short-Term Muncipal Income
SMUAX has gained 0.34%. Both funds are typically among the category's
least rate-sensitive. On the other hand, Bernstein Diversified Municipal
Bond SNDPX and Nuveen Limited Term Municipal Bond FLTDX, which both
straddle the line between the short-term and intermediate-term national
municipal bond categories, have posted small losses.
Among our Fund Analyst Picks, Evergeen High Income Municipal Bond
VMPAX stood out. Manager Clark Stamper has recently concentrated
on short-term high-quality issues, and his caution has paid off, as the
fund has gained 0.33% over the trailing three-month period. T. Rowe
Price Tax-Free Short-Intermediate PRFSX and USAA Tax-Exempt Short-Term
USSTX have also performed well, due in part to their relatively low
expenses.
This category doesn't pack a big punch, but it does offer some
protection against rising interest rates. We think conservative
municipal bond investors and those looking to balance the risks of a
long-term bond portfolio will find it to their liking.
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Analyst Picks: Muni Short Category |
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YTD
Return
( % ) |
3-Year
Return
( % ) |
5-Year
Return
( % ) |
Expense
Ratio
( % ) |
|
|
| Evergreen High
Income Municipal Bd A VMPAX |
4.59 |
5.88 |
4.23 |
0.83 |
|
|
| Strong Short-Term
Municipal Bond Inv STSMX |
4.58 |
4.84 |
4.38 |
0.6 |
|
|
| T. Rowe Price Tax-Free
Short-Interm PRFSX |
5.04 |
5.74 |
4.74 |
0.52 |
|
|
| USAA Tax Exempt
Short-Term USSTX |
4.41 |
5.16 |
4.52 |
0.46 |
|
|
| Vanguard Ltd-Term
Tax-Ex VMLTX |
5.34 |
5.69 |
4.8 |
0.19 |
|
|
| Muni Short Average |
4.65 |
5.08 |
4.23 |
0.81 |
|
|
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|
Returns through 12/13/2002. |
Evergreen
High Income Municipal Bond
VMPAX
This fund has more flexibility than most. Manager
Clark Stamper actively managed the fund's interest-rate
sensitivity and is not shy about venturing into lower-rated bonds. The
fund stumbled a bit in 1999, but it bounced back strongly in 2000 and
earned topnotch returns in 2001. In recent months, Stamper has been
decidedly defensive, sticking with high-quality short-term bonds. His
caution has paid off thus far, as the fund has weathered the
market's volatility better than most.
Strong
Short-Term Municipal Bond
STSMX
This fund takes on more credit risk than many
rivals, as manager Lyle Fitterer typically holds a large stash of BB and
BBB rated issues. He does, however, keep the fund's duration in a tight
two- to three-year range, which has helped moderate the fund's
volatility. The portfolio can struggle to keep pace with its average
peer during flights to quality. However, it remains a good choice for
those who don't mind taking on additional credit risk to capture more
income.
T.
Rowe Price Tax-Free Short-Intermediate
PRFSX
This fund is a solid all-around offering. It
boasts a below-average expense ratio, sticks mainly with high-quality
bonds, and has delivered strong long-term returns. The fund's
risk/reward profile is impressive, and it has consistently delivered a
better-than-average income payout.
USAA
Tax-Exempt Short-Term
USSTX
This fund also takes advantage of its low expense
ratio. Manager Clifford Gladson is keen on low- to mid-quality
credits, and keeps duration short and fairly steady, which moderates
volatility.
Vanguard
Limited-Term Tax-Exempt
VMLTX
Ultra-low expenses are the key here. This
category's winners and losers are often separated by less than 1%, so
the importance of this fund's expense advantage can not be stressed
enough. And because of that advantage, the fund doesn't need to take on
lots of extra credit risk to keep up with the group's more-aggressive
members. Quite simply, it is a terrific choice.
