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By Elizabeth Foos | 08-13-2015 11:00 AM

Added Credit Risk Has Paid Off for This Muni Fund

Bronze-rated USAA Tax Exempt Intermediate-Term's fondness for midquality issues can lead to underperformance in down markets, but the fund has excelled over the long term.

Beth Foos: Longtime manager Regina Shafer runs the USAA Tax Exempt Intermediate-Term fund (USATX) for investors willing to take on a little bit of credit risk and, at times, some interest-rate risk in exchange for an above-average yield.

Her income-oriented approach is supported by an experienced analyst team. That, together with strong long-term returns and a below-average price tag, earns this fund a Morningstar Analyst Rating of Bronze.

Shafer focuses on the midquality tiers of the muni market because she finds the risk/reward profile of these issues much more attractive than those in the highest tiers of the credit scale.

This portfolio has its heaviest stakes in debt rated A and BBB, often making it one of the more aggressive options in the category when it comes to credit. That said, this team does remains choosy--they do extensive research on each offering and will only invest in credit-sensitive or long-maturity bonds when they find value there.

At the same time, Shafer largely steers clear of the riskiest parts of the muni market, such as Puerto Rico bonds and tobacco bonds. That position is partly checked by the fund's relatively cautious interest-rate stance in recent months. Although it historically carries heavier weights in longer-maturity bonds, the fund's average maturity has come down a bit recently. 

This income-focused strategy can stumble in rocky economic environments, yet its long-term results show that investors have been compensated for the added credit risk here.

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