Municipal bond funds holding short to intermediate-term issues have generally been the top performing tax-exempt funds in the first nine months of this year, according to Lipper Analytical Services Inc.

Among the worst performers were longer-term mutual funds, insured portfolios, and some that placed a heavy bet on derivatives, the Lipper figures show.

In all, fund performance in this year's bear market has been fairly dismal, with the average total return on the 1,241 municipal funds tracked by Lipper off by 5.7% in the first nine months. The results exclude money market funds.

"This has been the year from hell -- I can't wait till it's over," said Pam Hunter, who runs the Vista Tax Free fund.

The Vista fund, which was the top-ranked municipal fund for the year ending Sept. 30, 1993, slipped to 123d in a universe of 175 national funds in the recent period.

Hunter said the long-term fund is not hedged, and that hurt its performance this year.

Overall, the funds with a short duration and with quality paper did well, said Janet Yuen, a fixed-income fund analyst with Lipper.

"Everything seems to [indicate] that a long position is wrong in municipal debt funds," Yuen said.

The best performing funds consisted primarily of short or intermediate municipal debt funds, which Lipper identifies as those with an average maturity of less than 10 years. One high-yield fund and a long-term fund were included among the 10 top funds.

The 10 best funds had an average total return through Sept. 30 of 1.91%. Returns on those funds ranged from 4.65% to 1.24%. For the 10 worst performers, the average total return was negative 10.49%, with individual funds off anywhere from 8.98% to 15.53%.

During the past nine months, the short-term funds have been less volatile than intermediate and general municipal debt funds with longer maturities, Yuen said.

This is not surprising given the steep rise in interest rates this year. Since the Federal Reserve began tightening credit on Feb. 4, municipal yields have climbed more than 100 basis points.

The Bond Buyer's 20-bond general obligation bond index jumped from 5.25% on Feb. 3 to 6.43% on Sept, 29.

Among the best-performing municipal bond funds were some newcomers.

The Montana Tax-free Fund Inc., which opened in August of last year, ranked second, with a return of 2.23%. While most of the other top performers were short-term funds, the average maturity of issues held by the Montana fund is 21.5 years.

"It's conservative. We don't chase capital gains," said Robert E. Walstad, president of ND Money Management in Minot, N.D., the Montana fund's sponsor. "We're out to provide a stable net asset value through conservative management."

The fund invests in Montana general obligation bonds, state agencies, and hospitals. On average, bonds in the portfolio are rated single- or doubleA Walstad said.

Portfolio manager W. Dan Korgel attributes the fund's superior performance to his practice of hedging a portion of the portfolio using Treasury and municipal bond futures.

In early 1994, anticipating that the Fed would tighten and that bond prices, in ram, would fall, Korgel sold futures to hedge a portion of the bond portfolio, he said.

"It's not the rates that we're hedging -- it's the market value of the bonds," he said.

Korgel removed the hedge about three weeks ago.

"We don't.see enough of a Chance of a big movement to care about the hedging now," he said.

"We hold [futures] until we don't need the lactic. We don't actively trade them," Korgel said. "lt's really quite simple, but I hope a lot of other funds don't pick it up."

The fund manager said the strategy worked well in the current market environment, but could falter if the market changes.

"In times of a big up market, we aren't going to shine," Korgel said.

"We know we're not going to keep up those kind of numbers through all the cycles, but we're not trying to," Korgel added.

For the most part, the worst performing tax-exempt mutual funds have been those with long durations or long average maturities, Lipper's Yuen said.

A number of the worst performing funds also have a large number of holdings in the utility sector, Yuen said.

For example, the Bull & Bear Municipal Income fund had about 30% of its assets in the utility sector, which is higher than most of its peers, Yuen said. Such a significant weighting in utilities hurt the fund because utilities are more sensitive to interest rate cycles, the analyst said.

The fund was off 9.19% in the first nine months of this year.

G. Clifford McCarthy, senior vice president and portfolio manager of the fund, also cited the fund's long average maturity and other factors for its performance woes.

"We had a lot of current coupon bonds, which became discount bonds as the market eroded," McCarthy said.

To help improve performance, McCarthy shortened the average maturity of the fund from 18 years to about 11 years and has been selling some discount holdings.

Looking forward, "the fund as it stands, without drastic moves in the market, is pretty well positioned," McCarthy said.

An average maturity of about 25 years also hurt the performance of Alliance Capital's Florida Municipal Income Fund in the current environment. But fund manager David M. Dowden isn't making apologies.

Two classes of the fund's shares posted a total return of minus 10.04%. The front end load shares had a total return of minus 9.53%.

The fund, which was introduced in June 1993, purchased most of its securities during the market's peak, said Dowden, an assistant portfolio manager for Alliance Capital Management. The fund has been fully invested and maintains a long term investment horizon, Dowden said.

"We're topping out on municipal interest rates and expect better performance of municipals" in 1995, and "that's what we're invested for," Dowden said.

Derivatives may have been the downfall of the Fundamental New York and California municipal bond funds, Yuen said. In July, Fundamental's California fund had about 20% of its portfolio invested in derivative securities, Yuen said. The fund also had a long duration of approximately 16 to 17 years.

Approximately 60% of the securities in the fund had an average maturity of between 20 to 30 years, while 40% of the securities had an average maturity of approximately 10 to 20 years. That and the combination of the use of derivatives when rates rose "didn't help the situation," Yuen said. "We were totally wrong on the direction of interest rates and that's what got us," a Fundamental spokesman said.

To minimize some losses, the funds have tried to link some of their inverse floaters, convening them into fixed-rate bonds and selling them, market sources said.

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