Comments on how one would transition out of Muni funds as interest rate reverse

bee

I hold USATX in a taxable account and I have been pleasantly rewarded with price appreciation (the fund price has steadily risen over the past year from $12.30/share to $13.46/share = 10%) as well as a nice monthly dividend (4.14% yearly).

Is the muni market exposed to the same risks/rewards as IT/LT treasuries? If so, I would like to transition over the next year or so away from USATX into fund(s) that would:

1. Be appropriate for a taxable account and,
2. Respond positively to a rising rate environment.

Any thoughts would be appreciated.

Related Link:

Whitney’s Armageddon Belied by ’11 Returns...Bloomberg's Article:
From the article:

"For 2011 at least, the 10.5 percent total return of municipal bonds beats Treasuries, which earned 9.6 percent, and corporate debt, up 6.9 percent, Merrill indexes show. The S&P 500 (SPX) stock index has fallen 3.3 percent, while the S&P GSCI Spot Index of commodities lost 2.2 percent."

http://www.bloomberg.com/news/2011-12-16/whitney-s-armageddon-belied-by-best-returns-of-2011-muni-credit.html

fundalarm

Bee, unfortunately, your 1 and 2 requirements are difficult to implement simultaneously. To satisfy 2, you need high yield, levereged loans or EMD -- all of these distribute high taxable income. Why don't you stay with munis but convert into a shorter duration fund? Does it have to be 'either/or'? One's porfolio could have exposure to both, as munis, just like treasurys, will be little or no correlated with equities in your porfolio and protect on the downside. My personal opinion of course.

bee

Reply to @fundalarm:

Thanks for the reply FA.

USAA does offer a short term muni fund, USSTX, which might be a way of transitioning onto a lower rung on the muni ladder...kinda like a CD ladder.

My thoughts for both (favorable tax status and rising rate appreciation) got me to thinking there might be mutual funds / ETFs that are managed with both a growth and tax strategy. USAA offers,

USBLX, Growth and Tax Strategy:

"The investment seeks a conservative balance for the investor between income, the majority of which is exempt from federal income tax, and the potential for long-term growth of capital to preserve purchasing power. The fund typically invests a majority of assets in tax-exempt bonds and money market instruments and the remainder in blue chip stocks. It is managed with the goal of minimizing the impact of federal income taxes to shareholders"

It holds 55% bonds, mostly munis and 45% blue chip stocks such as Apple, Exxon Mobile. It has a low turn over rate (19%) so most of its dividends are tax exempt.

Finally Fundmojo gives this fund an A+ rating:
http://www.fundmojo.com/mutualfund/fund_report/mutualfund/USBLX

Other funds thoughts:
HBLIX
GLRBX
BERIX
HSTRX
PRPFX
JMSCX
BRUFX
VILLX
ICMBX
OAKBX

msf

A couple of different thoughts:

The rise in 2011 was in large part due to a corresponding drop in 2010. That is, 2010 Q4 LT munis dropped 5.11% (per M*) and recovered 4.35% 2011 Q1 (again per M*). All a lot of noise signifying very little. (I watched a AA-rated muni bond I'd purchased mid 2010 drop about 10%, only to recover and go a little ahead of my original purchase price. No reason.) Ignore that little gyration (which accrued to the benefit of 2011) and you see 2011 having a good, but not especially unusual, year.

Muni bonds in general will react much more tamely to interest rates, because they generally yield just a fraction of corporates. So, if corporates move up 1% in yield, munis will move up a good amount less; thus their prices will also move less.

Regarding HY bonds - these exist in munis as well, if you want to follow that plan. For example, BCHYX - Benham (American Century) California High Yield fund comes to mind. (M* puts single state HY funds under state, not under muni high yield.)

As an alternative to USBLX, you could consider VTMFX Vanguard Tax-Managed Balanced. It's more conservative (shorter duration, higher quality), much lower cost (more than 3/4% lower) comparable turnover (23% vs. 19%), and excluding this past year, has performed better over most periods, despite being more conservative. (The three year performance of USBLX beats VTMFX by 1%/year, which is accounted for almost entirely by its 2.8% outperformance in the past year.)

bee

Reply to @msf:

Thanks for reply msf.

I agree that the gyration in muni bond funds is typical. The fund, USATX, is at a new all time high so it may be due for a retreat. I like the Vanguard suggestion since it is one of my brokerage choices. Thanks as well for the information on muni's interest rate sensitivity.

msf

Reply to @bee:
Don't know if it matters to you, but Vanguard funds are not available through VBS (Vanguard Brokerage Services). You have to buy them directly from the fund, and not through their brokerage. (The only exception that I know of is that VBS uses Vanguard MMFs as the settlement account.)

It's hard to find an explicit statement to this effect, but in its brokerage FAQ, Vanguard states that you can hold Vanguard ETFs, and funds and ETFs from other companies. Conspicuously absent is "Vanguard funds".

Sven

Reply to @msf: Not exactly sure why Vanguard makes such a distinction between their brokerage services and funds. Could it be how their company structure itself comparing to Fidelity, for example?

msf

Reply to @Sven: I've no idea why the distinction exists. Neither T. Rowe Price nor American Century brokerages restrict themselves to non-house funds.

Aside from the unique structure of Vanguard, there's also the fact that they had originally used Pershing as a back office, and it's quite possible that Pershing refused to handle Vanguard funds NTF without Vanguard paying them extra to do so (which of course would defeat the whole purpose of including Vanguard funds in the brokerage). Now, Vanguard does the back office work, but this could be a left-over from the Pershing days.

Various possible reasons, and no information to suggest one over another.

Sven

Reply to @msf: thank you for the detailed explanation.

AndyJ

There's no wall between Vanguard fund accounts and brokerage accounts. You can buy Vanguard MFs with the same MM fund you use as the holding tank for brokerage transactions - as long as the registration of the accounts is the same. Not being able to hold Vang funds specifically within the brokerage account is essentially meaningless; the only difference is that you have separate account numbers. And you get a single statement for all your holdings at Vanguard.

For example, the other day I bought some FAX and VWLUX and sold PCY using the same MM account, just using different buttons on my account page. At the end of the month, the single statement will show all three transactions.

MSF's thought about the V. setup being a Pershing leftover rings a bell; I believe I've read that explanation before.