A Standout High-Yield Muni Fund

Alaina Bompiedi: Over the last five years, assets in the Morningstar High Yield Muni category have grown by nearly 80%, with five newcomers entering the category in just the last year. Among this increasingly diverse peer group, Bronze-rated MainStay MacKay High Yield Muni stands out.

At a bird's eye level, this fund's broad characteristics look fairly average. Its SEC yield of 3.2% sits squarely in the middle of the category, while its 7 1/2-year duration is just on the longer end. And like many high-yield muni funds, it underweights general obligation bonds, preferring revenue bonds instead.

But the fund has some characteristics that aren't obvious on its tear sheet. About 7% of the fund's nearly 9% Puerto Rico stake is wrapped by insurance, and the fund holds a small short position in U.S. Treasury futures to counterbalance the duration of its longer-maturity holdings. Both positions reflect two of this team's top-down views: they believe insured bonds remain relatively undervalued, and they continue to like the remaining steepness at the long end of the curve.

It's worth noting that positions contribute can volatility to the portfolio; insured Puerto Rico bonds are still susceptible to headline risk, and hedging Treasury futures can introduce basis risk if Treasuries and munis become decorrelated. But for the most part, we find that this team has reined in those risks well so far.

Overall, this is a unique offering in the muni space that will reward investors who have patience for short-term volatility and are willing to understand its more idiosyncratic risks.