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Fidelity Tops Muni-Bond Shop Rankings

Plus, a disastrous performance from one of the biggest fund companies.

Russel Kinnel, 04/22/2008

Who's your pick for fund manager of the year?

It's time to wrap up my fund-company performance overview with municipal bonds. (Follow these links to see my past articles on domestic stocks, international stocks, and taxable bonds.) Right now munis are particularly attractive as they offer a huge advantage over Treasuries after factoring in taxes.

So, with that in mind, let's get to it. As before, I screened for the 10 largest municipal-bond fund managers based on retail share classes. Then we took each fund's performance ranking against its peers and asset-weighted it based on how much money it had at the beginning of the three-year period. That helps to give you a sense of how the firm did for its average shareholder.

This time, we had six of the top 10 produce strong performance. One was awful and it wasn't even at the bottom of the rankings.

1. Fidelity, Average Performance, Top 11%
Fidelity was number two for the three years ended 2005, and it improved to number one for the period ended February 2008. It did a great job continuing its success, unlike the number-one shop from 2005. Fidelity's emphasis on tremendous fundamental and quantitative research continues to work just fine. It doesn't take big interest-rate or credit bets and instead focuses on small incremental bets. In addition, it has pretty low costs, though not as low as Vanguard.

2. AllianceBernstein, Top 14%
The same conservative streak that held the fund back in the 2002-05 period was a source of strength more recently. AllianceBernstein's muni group comes from Bernstein's private wealth area and that's why it is understandably focused on wealth preservation. Thus, single-state funds, like AllianceBernstein Muni Income NY ALNYX and AllianceBernstein Muni Inc II VA AVAAX, boast top-decile returns and some of the national funds run by Guy Davidson are near the top decile. Davidson generally takes on less interest-rate and credit risk than his peers but will make some value investments in bonds that he thinks have been oversold. Tellingly, nearly all of AllianceBernstein's funds are in the black for 2008 despite a very tough market. Even the worst performer is only down about 50 basis points.

3. FranklinTempleton, Top 17%
FranklinTempleton was a picture of stability as its relative performance ranking stayed at 17%. Stretching for yield has burned funds in both muni- and taxable-bonds lately, but Franklin's emphasis on yield hasn't hurt it. It takes a measured approach to getting yield. It diversifies away from most sector and individual issue risk. In addition, it avoids taking on a lot of credit risk. That put it in good stead as the funds have held their value nicely. The worst year-to-date loss in an A share was an 80-basis-point drop in Franklin CA High Yield Municipals FCAMX. It doesn't hurt that it has some of the lowest costs in the broker-sold world so that it doesn't have to stretch to have a decent yield.

4. T. Rowe Price, Top 20%
As in taxable bonds, T. Rowe's conservatism is working well. At T. Rowe Price Tax-Free Income PRTAX, managers Mary Miller and Konstantine Mallas have toned down risk through diversification and caution on credit. Thus, in a tougher market, T. Rowe's funds have percolated to the top. The worst year-to-date loss is T. Rowe Price Tax-Free High-Yield's PRFHX 0.43% drop.

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