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By Elizabeth Foos | 03-31-2015 09:00 AM

This Muni Fund Keeps a Lid on Volatility

Bronze-rated Wells Fargo Advantage Ultra Short-Term Municipal Income has delivered solid long-term returns with low volatility, but it can lag more rate-sensitive peers.

Wells Fargo Advantage Ultra Short-Term Municipal Income (SMUAX) is backed by a well-resourced team that delivers solid long-term returns while keeping volatility low. With these strengths come the fund's Neutral parent rating and uneven fee structure, which could be challenging in today's low-rate environment. So, all considered, this fund earns a Morningstar Analyst Rating of Bronze.

This fund is run by veteran managers Lyle Fitterer and Wendy Casetta. Their strategy includes active management of yield-curve and duration exposure to keep interest-rate risk and volatility in check. As an ultrashort fund, managers keep duration here low--lower than its benchmark, which is the Barclays 1-Year Municipal Index--and well below the average duration of funds in the muni-national short Morningstar Category.

But this team is willing to be opportunistic when it comes to credit. They have a preference for midquality munis over the AAA rated prerefunded bonds prevalent in the fund's benchmark. And recently, they built a modest stake in Puerto Rico debt. This tack has delivered solid performance over the longer haul: While this fund's ultrashort focus means that it tends to lag its more rate-sensitive peers over long periods, it stacks up rather well relative to the benchmark.

That said, that focus on the shortest segment of the yield curve has proved challenging in the low-yield environment that has been largely in place since the credit crisis. The fund's recent SEC yield of just 32 basis points makes it hard to find opportunities that generate enough income to offset the expense ratios of the fund's pricier share classes.

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