Municipals make sense

Andrew Leckey

March 13, 1991|By Andrew Leckey | Andrew Leckey,(C) 1987 Tribune Media Services, Inc., 435 N. Michigan Ave., Chicago, Ill. 606ll.

It's tax time and everybody's looking for a break.

Ever since the overhaul of the nation's tax system, municipal bonds have stood as one of the few breaks left. Free of federal tax, municipals generally make sense for anyone in a 28 percent or higher individual tax bracket. Mutual funds investing in municipals have skyrocketed to more than $131 billion in assets, a reaction by investors who lost precious deductions.

Municipal bond yields are currently attractive in relation to taxable bonds. That's due to a rush of $15.9 billion in new municipals issued this year that must attract buyers. Experts note that, for an investor in a 28 percent tax bracket, it would take a 9.72 percent taxable yield to equal the after-tax results of a current AAA-rated long-term municipal bond yield of 7 percent.

Investors in tax brackets higher than 28 percent fare even better with municipals.

"The glut of bonds has pushed up rates, and the municipal market right now looks like a diner who digested a large meal," said Ian McKinnon, portfolio manager of Vanguard Municipal Bond Fund -- Long Term, up 10.55 percent in total return over the past 12 months. "We see interest rates remaining stable over the next three months and then, depending on consumer confidence and the economy, likely to decline later in the year."

More municipals were downgraded by debt rating services last year than were upgraded, McKinnon noted, but he doesn't believe that's cause for concern.

Don Phillips, editor of Mutual Fund Values, a Chicago-based investment advisory, says it's important to check expenses and sales charges of any municipal fund.

"With all of those 'dark' partnership deals gone with tax reform, munis are the only game in town."

Top-performing municipal bond funds in total return (yield plus price appreciation) over the past 12 months, according to Mutual Fund Values, have been:

Fidelity High Yield Tax Free Fund, Fidelity Investments, Boston, $1.8 million in assets, no "load" (no initial sales charge), $2,500 minimum initial investment, up 11.05 percent.

Vanguard Municipal Bond Fund -- Long Term, Vanguard Group, Valley Forge, Pa., $733 million assets, no load, $3,000 minimum, up 10.55 percent.

Vanguard Municipal Bond Fund -- Insured Long Term, Vanguard Group, Valley Forge, Pa., $1.3 billion assets, no load, $3,000 minimum, up 10.48 percent.

IDS Tax-Exempt Bond Fund, IDS Financial Services, Minneapolis, Minn., $1.2 billion assets, 5 percent load, $2,000 minimum, up 10.40 percent.

Scudder Managed Municipal Bond Fund, Scudder Stevens & Clark, Boston, $727 million assets, no load, $1,000 minimum, up 10.07 percent.

UST Master Long Term Tax Exempt Fund, UST Securities, Los Angeles, $37 million assets, 4.5 percent load, $1,000 minimum, up 10.05 percent.

Templeton Insured Tax Free Fund, Templeton Funds, St. Petersburg, Fla., $8 million assets, 4.5 percent load, $2,500 minimum, up 10.05 percent.

Financial Tax Free Income Shares, Financial Programs, Denver, Colo., $192 million assets, no load, $250 minimum, up 9.98 percent.

Vista Tax Free Income, Vista Mutual Funds, Kansas City, Mo., $4.5 million assets, 4.50 percent load, $2,500 minimum, up 9.88 percent.

Merrill Lynch Municipal Bond Fund Insured Class "A," Merrill Lynch & Co., New York, $2.2 billion assets, 4 percent load, $1,000 minimum, up 9.81 percent.

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