Morningstar Advisor - October/November 2013 - (Page 21)

Investment Briefs Five Compelling Muni-Bond Funds 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 emergency-spending kitty. Russel Kinnel is Morningstar’s director of mutual fund research. 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 21

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
Investment Briefs
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