BOSTON-- Putnam Cos. this month plans to launch the first mutual fund to dedicated to tax-exempt hospital bonds, company officals say.
The Putman Tax-Free Health Care Fund, a closed-end portfolio to be listed on the New York Stock Exchange, is scheduled for sale June 18. Seven million Shares will be sold in an offering underwritten by PaineWebber Inc.
According to mutual fund sources, Putman's creation will be only the sector-specific fund in the municipal bond market.
The first such fund is the Duff & Phelps Utilities Tax-Free portfolio, which was launched last November.
Like the proposed Putnam fund, the $115 million Duff & Phelps Utilities is a closed-end fund listed on the New York Stock Exchange. Putnam's concentration on the health-care market, widely considered to be among the riskiest of municipal sectors, raises questions of credit quality and diversification. Since most investors buy funds for their diversity, narrowing the scope of possible investments for a mutual fund might seem contradictory.
"You're exposing yourself to more risk because you're concentrating in one sector," said one PaineWebber source who requested anonymity.
But Howard Manning, portfolio manager of the new fund, said Putnam is equipped for the for the undertaking. Health care is "a very credit research-intensive sector, and we've got the staffing to properly analyze it," Mr Manning asserted.
Furthemore, Mr. Manning said, the health-care sector can offer enormous bargains to investors willing to sift through the bad credits for the good. Putnam deems the hospital sector to the "least efficient" in the tax-exempt realm, he said. "And inefficiency creates opportunities."
Mr. Manning pointed out that, according to Lehman Brothers municpal indexes, hospital bonds are outperforming the general market by a wide margin. The Lehman Brothers Municipal Bond Hospital Index had a total return of 287.12% since its inception Dec.31, 1979, while the firm's general market Municipal Bond Index returned Mr. Manning.
Triet Nguyen, senior vice president and manager of the Putnam Tax-Free High Income fund, said the credit analysis would play an important role in the success or failure of the single industry fund.
"We have a very good health-care analytical group," said Nguyen. His fund--with a total return of 11.34%--was the top-ranked high yield portfolio in the 12-month period ending April 30, according to Lipper Analytical Services Inc.
"Where we bring the value added is we're willing to negotiate nonrated placements," he said. "And we're more willing to go after distressed secondary market opportunities. There's nobody out there that's really doing quite the same kind of thing."
In additiona, Putnam's review process reduces the guesswork in the nonrated market. Where rating agencies might examine a nonrated nursing home only once a year, Putnam's in-house policy requires monthly evaluations of every bond rated below Baa, according to Mr. Manning.
Mr. Manning said the firms has hired and additional analyst, bringing the health-care fund's analytic staff to four.
The Putnam Tax Free Health Care Fund's projected after-tax yield ranges from 6.80% to 7%, for an investor with a marginal tax rate of 31%, according to promotional material. At least 70% of assets are slated for investment-graded municipals, those with ratings of triple-B or better. The remainder can be invested in below investment-grade or nonrated bonds.
The fedeal law governing mutual funds is mostly contained in the Investment Company Act of 1940. While it requires diversification in terms of credit, it does not mandate diversification by industry or economic sector.
Thomas Kelly, an expert on the Investment Company Act with Boston-based municipal bond attorneys Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, said the act requires only that if more than 25% of a fund's assets are to be concentrated in a specific sector, the concentration must be stated ahead of time.
Putnam condsiders the hospital sector of the bond market to be very hot, Mr. Manning emphasized.
"The demographics, in our opinion, are very favorable," he said. "Public perception of the industry is lagging the reality. the industry as a whole has done a very good job of controlling costs in the last few years."