| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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How Top Muni Funds Are Winning |
MarketWatch - April 12, 2011 - by Jonnelle Marte
With the municipal bond market still in a shambles, a few muni fund managers have managed to stay way ahead of their peers – all of them using the same little-known, complicated tactic known as "inflation swaps." But while it may be working for now, experts warn of risks that may sandbag muni bond investors once again.
This strategy, which uses complex derivatives to bet on rising inflation, is touted by four muni bond funds currently tracked by Morningstar. But three of those funds were also the top-performers in an otherwise sleepy category during the first quarter. The Pimco Tax Managed Real Return fund posted the best return of any intermediate term municipal bond fund, with 2.3%. Trailing closely was the AllianceBernstein Municipal Bond Inflation Strategy fund (AUNAX 10.11, -0.01, -0.10%) , with a 2.29% return, and the JPMorgan Tax Aware Real Return fund (TXRAX 10.08, 0.00, 0.00%) , at 1.97%. In comparison, the average return for intermediate term muni bond funds was 0.45%, according to Morningstar. A fourth fund, the Hartford Municipal Real Return (HTNAX 8.88, -0.02, -0.23%) fund, added an inflation strategy in March.
That recent outperformance has yet to draw many new investors. The three top-performing muni funds manage just $3.4 billion in assets, including $3 billion in the JPMorgan fund, of the $456 billion muni bond market. Total outflows for the three funds were about $10 million for the first quarter, according to Morningstar. At the same time, investors yanked $19.5 billion from all muni bond funds. "The strategy is intriguing," says Sarah Bush, a mutual fund analyst for Morningstar, adding: "But this is a very small corner of the municipal bond market."
While managers from Pimco, AllianceBernstein and JPMorgan declined to say exactly what percentage of their returns was due to trading so-called inflation swaps, they did say the strategy has paid off this year as inflation fears have spread. Such swaps, or derivatives, work like this: A fund manager pays a fixed rate for a swap from a brokerage house or financial services firm based on inflation expectations. If those expectations rise, that contract becomes more valuable; if they fall, the contract loses value. For example, a 5-year inflation swap based on the Consumer Price Index had a 1.8% fixed rate at the end of October, but is now at 2.7%, says Deepa Majmudar, a co-manager of JPMorgan's Tax Aware Real Return. Indeed, rising inflation expectations during the first quarter led 5-year CPI swaps to return 2%, while comparable municipal bonds gained less than 1%, says Guy Davidson, head of the municipal bond team for AllianceBernstein.
Critics of the strategy, however, say betting on inflation adds an additional layer of risk for investors. "It's a very volatile way of managing a municipal bond portfolio," says Jeff Tjornehoj, a senior research analyst at Lipper. For example, the JPMorgan fund lost 7% (compared to a 3% loss for intermediate muni bond funds) in 2008 – in part because of a massive sell-off of derivatives that caused inflation swaps to lose value, according to a Morningstar report. That fund's co-manager, Rick Taormina, said that's to be expected: "In deflationary periods [the fund is] going to underperform."
For the complete article.
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