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Municipal Bond Funds ?
Old 12-17-2003, 10:25 AM   #1
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Municipal Bond Funds ?

There are several closed end municipal bond funds out there from Van Kampen. And they are yielding almost 7 percent tax free. Wondering what others think about investing in those funds ?
Note that the semi-annual report for one of these funds states that they do things to minimize the effects of rising interest rates while protecting the yield.
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Re: Municipal Bond Funds ?
Old 12-17-2003, 10:59 AM   #2
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Re: Municipal Bond Funds ?

Don't know about VK, but I own some closed-end Pimco muni funds yielding around 7%. Anything yielding in this range uses leverage to get there, so they tend to be more sensitive to interest rate swings. On the upside, they also tend to trade at a discount to NAV (about 5% for the PML I own) which gives you a slightly higher effective yield.

I love them so far, but ask me again when the rates start climbing.
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Re: Municipal Bond Funds ?
Old 12-17-2003, 11:18 AM   #3
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Re: Municipal Bond Funds ?

Wabmester, thanks for responding. VK , as I mentioned, claims to be less sensitive to rising interest rates. Don't fully understand how that's possible, but that's what they say. And, VK, also, trades at a discount to NAV. A 6 or 7 percent tax free yield is really terrific , about equal to 10 percent taxable.
Maybe others will other their opinions.
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Re: Municipal Bond Funds ?
Old 12-17-2003, 06:40 PM   #4
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Re: Municipal Bond Funds ?

I just compared the charts of VKA and PML, and they seem to be equally sensitive to interest rate changes.

Interestingly, VKI had a nice little bounce after it got hyped in a Motley Fool newsletter, but it otherwise behaves like the other closed-end leveraged muni funds.
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Re: Municipal Bond Funds ?
Old 12-18-2003, 06:17 AM   #5
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Re: Municipal Bond Funds ?

I haven't specifically checked on any muni bond funds lately because I can't imagine anything that might have occurred to make tham any more attractive than they have been over the years.

First, I doubt that any muni bond fund is paying 7% unless the bonds are extremely risky. The 7% probably represents the equivalent return on taxable bonds for investors in the highest tax bracket. The actual return is probably around 4.5%.

Secondly, the reported return is before fund expenses. These closed end bond funds typically have expenses of around 1% per year, which is huge considering that bonds should not require much active management. These expenses are reported in the annual reports of the fund, but are not as widely publicized as the expenses of open end funds. So the actual yield, after expenses, is likely to be around 3% to 3.5%. There is an additional loss to commissions in buying and selling the closed end fund.

People who have sufficient income to warrant owning municipal bonds should generally purchase the individual bonds of several issuers. In states with an income tax, the bonds from issuers within the state are exempt from state tax as well as federal tax. (Although if I lived in California I'd consider any municipal debt to be about as secure as in Russia and would not want to own any!)

If a person wants a relatively small, liquid exposure to some muni bonds, then Vanguard's muni bond funds are a good, inexpensive way to get it.
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Re: Municipal Bond Funds ?
Old 12-18-2003, 07:42 AM   #6
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Re: Municipal Bond Funds ?

Quote:
First, I doubt that any muni bond fund is paying 7% unless the bonds are extremely risky. *The 7% probably represents the equivalent return on taxable bonds for investors in the highest tax bracket. *The actual return is probably around 4.5%.
Bzzzt. But thanks for playing.

For some reason, closed-end funds tend to use leverage (either in the form of selling preferred shares or borrowing at low rates and buying higher-rate instruments) to get these high yields. The funds we're talking about invest in high-quality bonds.

PML, for example, pays dividends monthly at a tax-free rate of over 7% (11% or so tax-equiv) after fees (and you're right about the magnitude of the fees).

Great stuff in a declining interest rate environment. Not so hot when rates start going up.

Read all about 'em here:

http://www.pimcofunds.com/closedEndF...ture/funds.jsp
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Re: Municipal Bond Funds ?
Old 12-18-2003, 08:50 AM   #7
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Re: Municipal Bond Funds ?

wow - I looked at the web site. I agree the current yield is close to 7%. However, they leverage it with preferred shares paying almost 1.2%. The 1.2% is basically short term borrowing at market rates to buy the long term bonds. If short term rates goes above 4 to 5%, then they will start losing on the leverage. There are also options (calls/puts) available for them to use to enhance returns. Then there is up to 10% that can be invested in "RESIDUAL INTEREST MUNICIPAL BONDS (RIBS)" which I am not familiar with. They are some kind of interest enhancement device.

Since rates have nowhere to go but up, I wouldn't go near this myself. As you say, " Great stuff in a declining interest rate environment. Not so hot when rates start going up".

As I have said before, bond funds are not bonds, and do not behave like bonds in some very important ways. Personally, I don't like bond funds and like this even less.

Seperate question: How can they get short term money for only 1.2%? That sounds like quite a feat!

Wayne
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Re: Municipal Bond Funds ?
Old 12-18-2003, 10:11 AM   #8
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Re: Municipal Bond Funds ?

Ted,
let's get specific, the Van Kampen fund is VMO, Municipal Opportunity Trust fund.
Latest info published from 9/30/2003:
average coupon is 5.53%, number of holdings 149,
current nav 17.24, discount to NAV 5.16%,
credit allocation: 81% AAA/Aaa, 4% AA/Aa, 10% A/A, and 3% BBB/Baa., current yield on Market 7.08%,
leverage 150,000,000, total assets: 414,746,997
wgted aver. maturity 16.45 years, objective: high level of current income exempt from Fed. tax, consistent with preservation of capital, 6 mo. total return 11.62%,
1 yr total return, 22%, 5 yr ave total return 9%,
10 year total return 7.72%, life of trust ave. return 8.11%,
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Re: Municipal Bond Funds ?
Old 12-18-2003, 11:46 AM   #9
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Re: Municipal Bond Funds ?

If you wanna play "You Bet Your Life's Savings," you say the magic word and a buzzard comes down and pecks your bald spot. Here, the magic word is "leverage." I don't care to analyze the details of this fund, but it's obvious that it has done well over the past few years as the result of short term borrowing costs being low and long term interest rates declining (with an associated rise in value of long term bonds). If short term and/or long term interest rates go up, the value of a leveraged fund like this will collapse.

Regardless of the specifics of how this fund may be structured, it's almost a dead certainty that it is not exempt from the financial principle that the only way to increase return is to assume greater risk, and the leverage is what provides both.

For people who can afford risk, leverage is not necessarily a bad way to enhance returns -- provided that the transaction costs involved in performing the necessary financial manipulations are not excessive.
The data presented by Bennevis still doesn't indicate the expenses that the VMO fund is assessing for performing all of this financial juggling, but I would bet that they are on the order of 2% per year. Caveat emptor.
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Re: Municipal Bond Funds ?
Old 12-18-2003, 12:42 PM   #10
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Re: Municipal Bond Funds ?

Quote:
The data presented by Bennevis still doesn't indicate the expenses that the VMO fund is assessing for performing all of this financial juggling, but I would bet that they are on the order of 2% per year. *Caveat emptor.
The expenses are between 1 and 1.4% for the funds we've been discussing. However, that's a percentage of NAV, and since the NAV is inflated by the use of leverage, they probably are getting closer to 2% of investor's money. Not to mention a front-end load (never buy a closed-end fund at it's offering).

It looks like VMO does hedge, but I couldn't tell how much of the risk they insure.
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Re: Municipal Bond Funds ?
Old 12-19-2003, 07:12 AM   #11
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Re: Municipal Bond Funds ?

THanks to all for responding.
A few things:
1. only an idiot would put all his/her savings into a muni-bond fund. So, Ted, I won't "be betting your (my) life's savings" on one and only investment vehicle.
2. I, too, prefer to buy bonds themselves over bond funds. If the value of a bond goes down, so what ?
Just hold the bond until maturity and enjoy the yield until then.
3. For someone in a 28% or higher tax bracket, muni's return a very nice yield. Even if VMO reduces their yield to, say, about 4.5%, it's still pretty nice. What's not nice is the value of the fund's NAV will decline too.
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Re: Municipal Bond Funds ?
Old 12-19-2003, 01:32 PM   #12
 
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Re: Municipal Bond Funds ?

Re. "someone in the 28 % or higher tax bracket",
this is a very important aspect of ER which I
overlooked. I am now able to control my taxable
income to a large extent. I can adjust what I receive
each year quite easily and thus my tax liability as well.

John Galt
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Re: Municipal Bond Funds ?
Old 12-19-2003, 05:28 PM   #13
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Re: Municipal Bond Funds ?

Quote:
If you wanna play "You Bet Your Life's Savings," you say the magic word and a buzzard comes down and pecks your bald spot. *Here, the magic word is "leverage."
This is intended to be a humorous allusion to Groucho Marx's TV quiz show, "You Bet Your Life." In it, there was a magic word (I guess it was actually called a "secret word) and if one of the contestants happened to say it, a rubber duck would drop down and they would win $100 (a lot of money in the 50s).

Contestants weren't actually betting their lives on the show, and I assume that most people wouldn't be betting their life savings on a closed end leveraged municipal bond fund. But considering the millions of people with money to invest, some would, especially with prompting from some "financial professional" pitching such a fund. So in making remarks on this forum, I don't particularly care if some posters are intellectually insulted, as long as other readers are not mislead into putting too much of their money into securities that are inappropriate for them.
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Re: Municipal Bond Funds ?
Old 12-30-2003, 06:16 AM   #14
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Re: Municipal Bond Funds ?

Re: Teds remarks about being sold on an idea (closed end muni bond fund), inappropriate for the investor.

Brokers come out of the woodwork with ideas that appeal to yield starved investors everytime that we are in a low interest rate environment.
I honestly cannot think of a more risky investment under current conditions than a closed end bond fund.
In 1975 I was sold a closed end bond fund. (It was a muni fund, paying 5.5 (CD,s were paying about the same.)
I had a young family at the time and my understanding of investment cycles, etc. was also young. (A poster earlier had commented how doctors are such terrible investors). I hope that continues, because if I had to go in for major surgery, I want a guy that is naive about investments, but a cracker jack surgeon.
Back to my investment. I contiued to get my 5.5 tax free return. By 1981, my investment had been just about halved. At that point, I could have sold, and taken almost a 50% long term loss, or continue to take below mkt. rates, and wait for the worm to turn. ( I eventually got out of the fund about 12 years later at about a 10% long term loss. ).
Like Ted, I hope that none of our posters fall for the sales pitch that are going to come in hot and heavy at the bottem of this cycle. (We all worked too hard to get to this point in our life).
I look back on myclosed end bond fiasco, and am reminded about the cowboy that jumped on a cactus, and when asked why he did it, replied that it seemed like a good idea at the time.
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Re: Municipal Bond Funds ?
Old 12-30-2003, 06:20 AM   #15
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Re: Municipal Bond Funds ?

Re: Teds remarks about being sold on an idea (closed end muni bond fund), inappropriate for the investor.

Brokers come out of the woodwork with ideas that appeal to yield starved investors everytime that we are in a low interest rate environment.
I honestly cannot think of a more risky investment under current conditions than a closed end bond fund.
In 1975 I was sold a closed end bond fund. (It was a muni fund, paying 5.5 (CD,s were paying about the same.)
I had a young family at the time and my understanding of investment cycles, etc. was also young. (A poster earlier had commented how doctors are such terrible investors). I hope that continues, because if I had to go in for major surgery, I want a guy that is naive about investments, but a cracker jack surgeon.
Back to my investment. I contiued to get my 5.5 tax free return. By 1981, my investment had been just about halved. At that point, I could have sold, and taken almost a 50% long term loss, or continue to take below mkt. rates, and wait for the worm to turn. ( I eventually got out of the fund about 12 years later at about a 10% long term loss. ).
Like Ted, I hope that none of our posters fall for the sales pitch that are going to come in hot and heavy at the bottem of this cycle. (We all worked too hard to get to this point in our life).
I look back on myclosed end bond fiasco, and am reminded about the cowboy that jumped on a cactus, and when asked why he did it, replied that it seemed like a good idea at the time.
Regards, Jarhead




















































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