Morningstar Advisor - October/November 2013 - (Page 21)
aggressive of those I’ve highlighted, but it does
its job well. Many investors would be more
comfortable with the funds below.
by Russel Kinnel
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% this year depending on the category.
The reason for the sell-off and doomsaying
is Detroit’s bankruptcy filing. It’s gotten a lot of
attention, but at muni funds, 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 much
exposure to Detroit. More muni issuers are
under strain, but a slowly 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 of $100 billion
in defaults 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 as the previous time,
but muni yields are well above those
of comparable Treasuries, whereas historically
they’ve traded at lower yields because of
their tax benefits. With that in mind, here are
some ways to bet on a rebound.
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 protection, 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 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 5.9% 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 take less interest-rate risk, though you lose
some yield in exchange.
Vanguard Limited-Term Tax-Exempt VMLTX
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 7.5% for the year to date, which is better
than most of its peers. This fund is the most
is only a small step from a money market fund,
but it’s an important step. The fund has
a high-quality portfolio with a 2.4-year duration.
Its low 0.20% expense ratio ensures you get
most of the small yield generated 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. It’s even short
for a short-term muni fund, so it tends to
lag in rallies. The fund’s SEC yield is just 0.41%.
You can use this as a place to invest money you
expect to spend in a year or two or for your
Russel Kinnel is Morningstar’s director of mutual
Is It Better to Stick With
the Home-State 529 Plan
or Go Outside?
by Kailin Liu
Investing in a 529 college-savings plan allows
you a significant break on your federal
taxes: tax-free compounding and withdrawals,
provided the money is used for qualified
college expenses. Most 529 plans also offer
some sort of a state tax break on contributions
by in-state residents, usually a deduction
but sometimes a credit.
There are no one-size-fits-all answers about
whether to stay with your home state’s
plan or pursue one of the best plans available
nationally. To reach a good decision, you’ll
need to weigh how much you’re saving in taxes
by staying in-state alongside the potential
costs you’ll incur if you invest in a subpar plan.
Understanding Your State Tax Break
To reach a sound decision, the starting point
is to find out just what kind of a tax break your
state offers 529 savers—or doesn’t.
Usually, investors in 529 plans can deduct at
least a portion of their contribution amount
from their state income taxes if they invest in
their own state’s plan. Naturally, state tax
Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2013
Morningstar Advisor - October/November 2013
Letter From the Editor
How to Make Social Media Work for You
Do Mutual Funds Still Have a Role?
More Personal Than Finance
How to Handle Your TIPS Positions
A Real Estate Veteran Starts From Scratch
Investments á la Carte
When to Say No
Take a Guarded Approach to Homebuilders
Fund Distribution Has Been Turned on Its Head. Now What?
Winning the Distribution Battle
Active ETFs Wait for Their Heyday
A Fund Firm Defies Indexing Trend
Piloting New Channels
A Good Fit
The Predictive Power of Fair Value Estimates
Does Being Prudent Pay Off?
Utilizing Utilities’ Total Return
Stuck in the Middle Is Not a Bad Place to Be
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
The Good Guys Win
Morningstar Advisor - October/November 2013