Municipal bonds did well in '92, look good for '93

ANDREW LECKEY

October 16, 1992|By ANDREW LECKEY

For municipal bonds and their investors, it's been a very good year.

The average tax-exempt municipal bond fund boasted a total return of nearly 10 percent for the past 12 months. About 6 percent of that is yield and 4 percent capital appreciation of underlying bonds.

Munis should still look good no matter who is in the White House next year. After all, they remain the only tax-advantaged game in town, except for deductible home mortgage interest. Some experts predict municipals could be even more advantageous in the event of a Clinton presidency.

"If you think that Gov. Clinton will win the election and marginal tax brackets will be raised 2 to 3 percent during his administration, then municipal bonds will be looking even more attractive than they already are," said Philip Condon, portfolio manager of the Scudder High-Yield Tax Free Bond Fund.

But other investment pundits are concerned that interest rates would rise during a Democratic administration, having a negative impact on the value of existing bonds held by investors.

"As it's begun looking increasingly likely Gov. Clinton may be elected, we've been selling our 30-year bonds and moving into 15- and 20-year bonds," said Thomas Conlin, portfolio manager for Strong Municipal Bond Fund, who basically has been shortening that duration in anticipation of a future rate rise. "We believe the bond market may react negatively to Clinton's spending proposals."

Political intrigue aside, munis look like a good deal, particularly when their tax-free nature is considered. For example, Mr. Condon points out his fund's current tax-free yield of 5.76 percent is the equivalent of an 8 percent taxable yield for someone in a 28 percent tax bracket and 8.35 percent in a 31 percent bracket.

Municipal bond funds have been strong performers since 1987. Total return averaged 10.44 percent in 1988, 9.23 percent in 1989, 6.12 percent in 1990 and 11.37 percent in 1991, according to the Morningstar Mutual Funds investment advisory.

"Still, anyone looking at the returns of long-term municipal bond funds must keep in mind yields have been declining this year as older bonds have been called and replaced," warned John Rekenthaler, editor of Morningstar Mutual Funds publications.

Top-performing municipal bond funds in 12-month total return, according to Morningstar, have been:

* Vista Tax-Free Income Fund, Kansas City, Mo.; $16.3 million in assets; 4.5 percent "load" (initial sales charge); $2,500 minimum initial investment; up 14.60 percent.

* Strong Municipal Bond Fund, Menomonee Falls, Wis.; $246.8 million in assets; no load; $2,500 minimum; up 14.07 percent.

* Transamerica Tax-Free Bond Fund "A," Houston; $96 million in assets; 4.75 percent load; $1,000 minimum; up 12.64 percent.

* Putnam Tax Exempt Income Fund, Quincy, Mass.; $1.8 billion in assets; 4.75 percent load; $500 minimum; up 12.56 percent.

* Scudder High-Yield Tax Free Fund, Boston; $186.5 million in assets; no load; $1,000 minimum; up 12.45 percent.

* Premier Municipal Bond Fund, Dreyfus Corp., New York; $451 million in assets; 4.5 percent load; $1,000 minimum (must be bought through a broker-dealer); up 12.26 percent.

* Putnam Municipal Income Fund, Quincy, Mass.; $383 million in assets; 4.75 percent load; $500 minimum; up 12.24 percent.

* Flagship All-American Tax-Exempt Fund, Dayton, Ohio; $141 million in assets; 4.20 percent load; $3,000 minimum; up 12.20 percent.

* Quest for Value National Tax-Exempt Fund, Oppenheimer Capital Inc., New York; $53 million in assets; 4.75 percent load; $1,000 minimum; up 12.16 percent.

Longer-term bonds offer greater rate risk. For those preferring more stable shorter-term bonds averaging 1.3 years in duration, Rekenthaler recommends Vanguard Municipal Bond Fund -- Short-Term Portfolio. It's up 5.84 percent the past 12 months.

* Tribune Media Services

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