THORNBURG LIMITED MATURITY NATL. FUND
Thornburg's Limited Maturity Muni Fund Delivers
If you're a fan of municipal bond funds and portfolios made up of short maturing bonds and funds with a solid long-term record, here's a muni bond fund worth looking into.
The Thornburg Limited-Term Municipal National Bond Fund, (800-847-0200), has been around since 1984. Throughout all of those years, the fund has had the same management, followed a disciplined investment strategy and provided its shareholders with very competitive returns. Through Nov. 15, for instance, the fund's total return was up 6.18 percent. At year-end 2000, it was up 6.8 percent, and in 1999, up 0.3 percent, according to Morningstar.
George Strickland is the fund's portfolio manager. With about 400 holdings in the portfolio, bonds from 48 states, and fund assets totaling over $800 million, the Thornburg Limited-Term Municipal National Bond Fund (LTMFX) is best suited for investors in the 31 percent tax bracket who are looking for a high quality, short-term muni fund investment. Here's more about the fund from Strickland:
Q: With the current low interest rate environment, is there appeal for this shorter-term municipal bond fund right now?
Strickland: We are definitely seeing an interest. I think it has to do with a fear of equities and the steepness of the yield curve. People have had large amounts of money parked in cash and CDs and watched the rates fall dramatically this year and they're looking for something that will give them additional yield.
Q: I have a hard time understanding the steepness in the yield curve when rates are so low. Can you help me understand it?
Strickland: In early 2000, for instance, even though rates were higher, to go from a one year (maturing) municipal bond out to a 10-year maturing one, you only picked up 20 basis points---let's call it from 4.5 percent to 4.7 percent. Today, there is roughly a 200 basis point difference--- from about 2 to 4 percent. The steepness in the yield curve is represented by that 200 basis point difference. That's a jump in yield that a lot of people are seeing and find attractive. Another point about that steep curve is if you think about the current structure of the yield curve, you're going from 2 to 4 percent, which doubles your yield and you take on significantly less risk.
Q: If interest rates were to spike up suddenly, is this fund managed to take advantage of that?
Strickland: Yes. Currently, the average maturity of the bonds in the Limited Maturity National Fund is 4.6 years. But that doesn't mean we own a bunch of four- and five-year bonds. Typically what we do is keep roughly 10 percent of our assets invested in bonds that mature each year for the next 10 years. By doing that, we wind up with a nice, evenly distributed, laddered portfolio.
So, if we are reinvesting that 10 percent a year in a lower interest rate environment, then the return of the portfolio gradually edges lower. If we are reinvesting in a higher interest rate environment, then we'll get additional yield for each rung of the ladder--- and that leads to higher long-term returns.
Q: Laddering a portfolio isn't a new concept, so what makes this fund different from others?
Strickland: We tend to be more value buyers in the muni market. And even though we have a portfolio made up of high credit quality---92 percent of the bonds in it are A-rated or above---we look for situations where we can buy the bonds as cheaply as possible.
Q: Have you found something in particular that investors misunderstand about this fund?
Strickland: In general, the one thing about bond funds that people don't understand is that the longer the maturity, the more interest-rate risk you're taking. So, most investors don't understand that limited maturity equals much less risk. Specifically with our fund, they don't always understand that our laddering process allows the fund to take advantage of changes in interest rates.
Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.
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