Tax-exempt investors may often receive an inaccurate picture of their mutual funds' actual total returns because most funds do not take into account fees or capital gains risks, a mutual fund manager said last week.
Although mutual fund advertisements often tout a fund's total return, "total return is not what [investors] take home," said Kimberly A. Raynor, a portfolio manager at Scudder, Stevens & Clark.
Raynor manages about $2.8 billion of tax-exempts for Scudder in private accounts for insurance companies, corporations, and high net worth individuals.
Management fees, loads, or sales charges, and taxable capital pins can cause an investor's actual return to differ from the fund's advertised total return, which can be misleading, Raynor said.
Raynor, speaking last week on a panel of institutional investors at a luncheon of the Municipal Forum of New York, was joined by Kurt Larson of IDS Financial Services, Elizabeth Forsyth of Prudential Insurance, and Peter J. Allegrini of Fidelity Investments.
The strong performance of the municipal bond market during the past two years has some investors concerned about capital gains, Raynor said.
"Some wealthy individuals have told me to get lost because they didn't want the capital gains," Raynor said in an interview following the forum meeting.
Investors in open-end municipal bond funds managed for total return have begun to see their returns shrink because portfolio managers who have sold bonds at higher prices than the initial purchase prices have been forced to pass on taxable capital gains to fund investors.
Investors need to be able to find information to help them determine which mutual funds fit their objectives, Raynor said. But companies that rank mutual funds based on total return generally use unadjusted total return, which can be of little use to investors.
"They've really been a portfolio managers' tool. But where does an investor go to figure out what he's getting.?" Raynor asked.
Scudder makes information on funds' unadjusted total return, after-tax total return, and after-fees total return available to private account investors, she said.
"What we're trying to figure out is what is the best thing for an investor to know" and whether the information provided is "really serving the public," Raynor said.
On other topics, portfolio managers Larson and Forsyth pointed to several sectors that could produce attractive returns for investors in high-yield funds.
An aging U.S. population and a national focus on health care should make nursing homes as well as health care and life care facilities attractive investments, both said.
Private prisons may also flourish because of the difficulty in getting voters to approve bonding for publicly owned prisons, said Larson, who manages about $9.5 billion in assets for IDS Financial. Resource recovery bonds and financings for composting plants could provide favorable returns because of growing concern about the environment and an aversion to garbage burning and landfills, he added.
Forsyth, who oversees slightly more than $1 billion for Prudential's high-yield fund, said that portfolio managers for such funds now have more leverage with issuers because they are often "lenders of last resort." This enables fund managers to influence the structure of deals, helping to make them more secure and to lobby for improved disclosure, Forsyth said.
A lack of buying interest can also keep higher risk deals from being financed, she said.
Allegrini of Fidelity Investments explained how his firm uses quantitative research to evaluate bonds and portfolio performance. Allegrini manages about $2 billion in tax-exempt assets in four high-yield municipal bond funds. In response to a question, the portfolio managers did express concerns about liquidity in the market and their portfolios if a strong wave of redemptions occurs.
Allegrini said that Fidelity has a policy of keeping 3% of a fund's assets in cash to stave off widespread bond sales in case of investor redemptions.
But the portfolio manager still expressed concerns about redemptions. "I hate to think about the real consequences," Allegrini said.
