JPMorgan Defies Biggest Cash Exodus to Beat Rivals: Muni CreditBrian Chappatta
In a record year for U.S. municipal mutual fund withdrawals, the JPMorgan Intermediate Tax Free Bond Fund shrank more than 25 percent. Yet it has still outpaced almost two-thirds of its peers.
Investors yanked $1.4 billion as of Nov. 30, after it started the year with about $5.3 billion, the second-biggest outflow as a percent of assets among muni funds larger than $1 billion, according to Morningstar Inc. The fund’s 1.4 percent loss in 2013 through Dec. 20 compares with an average drop of 1.9 percent for its peers, data compiled by Bloomberg show.
The fund weathered the withdrawals by choosing higher-quality, frequently traded debt, said Rick Taormina, head of muni strategies in New York. Half the fund’s top 12 holdings as of Sept. 30, including North Carolina general obligations, either had AAA ratings or were refunded, Bloomberg data show. Top-rated bonds are beating the $3.7 trillion local market this year for the first time since 2008, Bank of America Merrill Lynch data show.
“Anytime we see markets really in turmoil, we tend to have better years,” said Taormina, who oversees about $30 billion of local debt at J.P. Morgan Asset Management. “The funds are built and managed to handle these kinds of flows because we know advisers and clients are looking at multiple asset classes. We’re very conscious of having enough liquidity within the portfolios.”
Mutual funds control about 17 percent of the market for city and state debt. Individuals haven’t discriminated in pulling $59.2 billion from the investments this year, the most since at least 1992, when Lipper US Fund Flows data begin. The five vehicles with the most withdrawals as a percent of assets include a long-term fund, an ultra-short option, as well as choices focusing on high-yield and investment-grade bonds, Morningstar data show.
The current streak of 30 straight weekly outflows began in May as investors speculated a stronger economy would lead the Federal Reserve to curb its bond buying, a decision it announced last week. Bondholders are betting the move will cause interest rates to rise, especially on securities with weaker ratings.
Detroit’s record bankruptcy in July and mounting concern that Puerto Rico’s shrinking economy will crimp its ability to repay its debt propelled withdrawals. Munis are set to fall this year for the first time since 2008, Bank of America data show.
One segment of the market that has benefited is short-term debt, which tends to be penalized less than longer-maturity securities when investors bet on rising interest rates.
Alpine Woods Capital Investors’ Ultra Short Tax Optimized Income Fund has earned 0.5 percent this year as of Dec. 20, beating 69 percent of its peers, Bloomberg data show.
Yet the fund, which started the year with $1.7 billion in assets, faced $467 million in outflows, the biggest proportion among the open-end funds tracked by Morningstar.
Steven Shachat, who manages the fund from Purchase, New York, declined to comment.
Other funds experiencing similar outflows trailed competitors. OppenheimerFunds’ AMT-Free Municipals Fund and Eaton Vance Management’s National Municipal Income Fund have lagged behind 94 percent and 99 percent of similar funds this year, respectively, Bloomberg data show. They experienced the fourth- and fifth-largest outflows relative to their size, Morningstar data show.
Over the last five years on average, OppenheimerFunds’ holdings beat 99 percent of comparable funds, while Eaton Vance’s long-term investments outpaced 95 percent.
“I’m holding onto the bonds that hurt me the most, because If I sell them now, I never have the chance to get back” the price declines, said Tom Metzold, co-director of munis in Boston at Eaton Vance, which oversees about $28 billion in local debt. “I’m willing to experience greater volatility in the short-term for five-year type of numbers.”
OppenheimerFunds managers weren’t available to comment, said Kristen Prestano, a spokeswoman for the New York-based company at Prosek Partners.
Tom Weyl, director of muni research at Barclays Plc, and Michael Zezas, chief muni strategist at Morgan Stanley, predict another year of negative returns for local debt in 2014. The securities have dropped 2.9 percent this year, Bank of America data show.
Bonds in the lowest investment-grade tier have plunged 8.2 percent, according to a Bank of America index.
Next year will be another “very volatile year,” Taormina said. Bonds rated A to AA will probably fare best as their extra yield cushions against rising interest rates while at the same time the ratings aren’t so low that any worsening of situations in places such as Puerto Rico will hurt the debt, he said.
The JPMorgan Intermediate fund has historically bested its competition during volatile periods. It outperformed 75 percent of peers in 2007 and 82 percent in 2008, the first full year of the recession, Bloomberg data show.
Top holdings as of Sept. 30 included zero-coupon bonds issued by Adams County, Colorado, that have been refunded, and North Carolina general obligations maturing in March 2017. The state has top credit ratings.
The market closes tomorrow for Christmas and again Jan. 1. Issuers have set $3.1 billion of long-term bond sales in the next 30 days, the least in about a year.
The interest rate on AAA 10-year munis is 2.95 percent, compared with 2.93 percent on similar-maturity Treasuries.
The ratio of the yields, a measure of relative value, is about 101 percent, less than its five-year average of 102 percent. The smaller the number, the costlier munis are in comparison.