The Pick of the
Muni-Short Category
by Chris Kelsch | Maybe you're looking for a
bond fund that can deliver exciting total returns. Or perhaps you're seeking
one with a first-rate yield. If so, I'm afraid you won't find anything of
that sort here. (Rather, you should check out
The Pick of the High-Yield Bond Category.)
What you will find in the short-term municipal-bond fund category is plenty
of funds that provide significantly more income than the typical
money-market offering without taking on much more risk.
These funds focus on bonds with durations of less than four-and-a-half
years; investing in short-term bonds lessens the funds' sensitivity to
fluctuations in interest rates. What's more, they invest across a variety of
states and sectors, and that diversification dampens volatility as well.
More importantly, the income generated from muni-short funds is exempt from
federal taxes. That increases their appeal, especially for investors in
higher tax brackets. However, as with all bond funds, it's important to look
for an offering with low expenses. This group traditionally has a narrow
range of returns, and a fund with a low expense ratio has a built-in
advantage over its competitors.
Vanguard Limited-Term Tax-Exempt
VMLTX
This fund shows how important low expenses are. Its expense ratio is 64
basis points below the group norm, which gives it a big edge, year in and
year out. Thus, its long-term returns rank in its group's top half. This is
a particularly impressive feat considering that this quality-conscious fund
pays less attention than most of its peers to low-rated credits, which have
outperformed in recent years. And it has consistently provided a generous
stream of income to boot.
Davis Tax-Free High Income B
VMPIX
The Davis fund family is known for the success of its equity funds, but this
offering proves it's no slouch on the bond side. Manager Clark Stamper
has shown a knack for finding smaller, underpriced gems, and the fund has
generated some of the best long-term returns in the muni-short group, as
well as a handsome payout. Although the fund's expense ratio looks high at
first glance, it is in line with other B shares in its category.
Strong Short-Term Municipal Bond
STSMX
This fund is a good choice for those who don't mind taking on additional
credit risk to capture more income. Since manager Steven Harrop took over in
1995, this fund has dusted its peers. Harrop has loaded up on BBB-rated
bonds and nonrateds, which have supplied generous income while boosting
returns, thanks to a prolonged rally in lower-rated credits. Meanwhile, he
keeps duration in a tight two- to three-year range, which has kept
volatility moderate. Investors should be careful, though. The fund will
likely lag its peers if there is a flight to quality.
T. Rowe Price Tax-Free Short-Intermediate
PRFSX
True to its family's legacy, this offering favors a cautious,
measured approach. Manager Charles Hill doesn't make big interest-rate bets,
and the fund is only allowed to invest 5% of assets in nonrated and
below-investment-grade bonds. Meanwhile, Hill has demonstrated a talent for
ferreting out higher-yielding winners, and the fund has gotten a boost from
its low expense ratio, which is 32 basis points below the group norm. As a
result, 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
Manager Clifford Gadsen has found a great formula for success. He is keen on
low- to mid-rated credits, which have rallied strongly in recent years, so
the fund's long-term returns are strong. At the same time, he keeps duration
short and fairly steady, which moderates volatility. And low expenses
sweeten the deal. So far, investors have been rewarded with a nice income
stream and good returns, but they should be aware that the fund is subject
to stumbles in lower-rated credits.
P o s t e d 1 2 - 2
9 - 1 9 9 9 |
