A new short-term mutual fund offers small corporations the opportunity to receive after-tax income from both tax-exempt and taxable securities.
The Warburg Pincus Short-Term After-Tax Bond Fund invests in municipal bonds and taxable government and corporate debt.
By moving between the two markets, the fund hopes to take advantage of seasonable market variations and other factors that cause favorable after-tax realms to fluctuate between the two markets.
"At a certain point in time, municipals are more attractive on an after-tax basis," but at other times taxable securities may offer better returns, said Steven Rung, manager for retail marketing at Warburg Pincus Counsellors, the fund adviser.
"This allows the portfolio manager to switch between the two" markets, Rung said.
In many instances, when market conditions cause municipals to offer better after-tax returns than taxable investments, large corporations delve into the market, and are commonly dubbed "crossover buyers" by market participants.
Through the mutual fund, introduced Oct. 1, Warburg Pincus employs an investment strategy that it already uses for its larger corporate accounts. For such clients, the firm purchases individual tax-exempt or taxable securities, moving between sectors to garner the greatest after-tax returns. The minimum investment in such accounts is $25 million. Warburg Pincus manages about $600 million for large companies in these individual corporate accounts.
However, with less cash to invest, smaller companies are less likely to achieve the greatest economies of scale when purchasing individual securities. The mutual fund seeks to offer smaller companies the same opportunity for after-tax returns as are available to the larger corporations.
The minimum investment in the mutual fund is $250,000.
By moving slightly further out on the yield curve, the Warburg Pincus short-term after-tax fund hopes to give investors a higher return than is traditionally available on a money market fund, with only modest price changes, said Sharon B. Parente. a vice president and portfolio manager. The fund is intended for cash reserves that will not be used for a minimum of six to 12 months.
The expense ratio for the no-load fund will be capped at 40 basis points for the first year, Parente said.
Parente said an objective is to maintain a high-quality fund, with an average credit quality of double-A or higher. The average credit quality stands at triple-A now, Parente said.
A minimum of 50% of the fund must be invested in municipals. Currently, about 95% of its assets are in the municipal market, composed of prerefunded and insured bonds and short-term notes. The overweighting in municipals is because yearend tax-loss selling has pushed up yields on municipals, making tax-exempts attractive relative to Treasuries, Parente said.
In 1995, an expected decline in municipal supply and huge expected redemptions will exaggerate the normal seasonal supply-demand imbalances.
"This could cause the normal municipal-to-Treasury ratios to become more extreme, creating greater investment opportunities than in prior years," Parente said.
None of the securities will have a maturity longer than five years. The average maturity of the fund cannot exceed three years and is now about a year, Parente said.
Assets of the fund total about $25 million.
Warburg Pincus also plans to offer another class of shares for individual investors. The minimum investment for those shares is expected to be about $2,500. Rung said the shares are expected to be introduced early next year.