‘Steadfast’ muni bond fund pushes for long-term outperformance
When it comes to investing in municipal bonds, the Fidelity Intermediate Municipal Income Fund (FLTMX) has a “steadfast” approach that has served investors well, according to Morningstar. For its portfolio manager Michael Maka, that means being research driven and focused on total return. “We’re really trying to build portfolios that just outperform over the long term and without trying to predict what the future holds,” said Maka, who has spent two decades working in the muni market, first as a trader and now as a manager of several Fidelity funds. Like the rest of the bond market, munis are enjoying elevated interest rates. The assets are particularly loved by wealthy investors because the income is free of federal taxes, as well as state taxes if the investor lives in the state where the bond was issued. FLTMX has a 30-day SEC yield of 3.28% and a 5.54% tax-equivalent yield, as of Monday. It has nearly $11.5 billion in total assets and an expense ratio of 0.36%. Meanwhile, muni bonds could see some price appreciation once the Federal Reserve starts to cut rates, which the market believes will begin in September . Bond yields move inversely to prices. Finding opportunities Fidelity Intermediate Municipal Income Fund, as its name suggests, focuses on the middle of the yield curve — an area where bond investors have started moving in anticipation of Fed rate cuts. FLTMX has a duration — which measures a bond portfolio’s sensitivity to interest rates — of 4.89 years. When choosing assets for the fund, everyone on the team — from traders to research analysts to portfolio managers — is encouraged to contribute ideas, Maka said. They look at the yield curve, credit quality and structure of the bond when assessing assets, he added. The fund is tilted towards revenue bonds, with 63% of the portfolio allocated to the segment. Revenue bonds tend to have more diverse credit ratings than general obligation bonds, which usually have higher credit ratings. “We tend to move down the quality spectrum a little bit,” Maka said. The result is a 45.5% allocation to AA-rated munis, 31% in A-rated and 7% in BBB-rated municipal bonds. AAA-rated assets comprise just 12% of the portfolio. However, Maka is still constructive on general obligation bonds, which make up about 37% of the fund’s assets. That said, the fund won’t outperform over the long term by owning high-quality credits, he said. “We need to take risks,” he said. The team also makes a lot of small bets instead of relying on big investments that can make or break a portfolio, Maka added. “We’re really trying to hit singles [and] doubles and not swing for the fences,” he said. Meanwhile, the fund managers have taken advantage of some opportunities that have arisen due to the structure of certain bonds. “With the rise in rates that started in 2022, certain bond structures were more interest-rate sensitive and went down in price significantly more than others. So we’ve been buying some of those deep discount securities that were hit hard as rates rose,” Maka explained. Morningstar said Fidelity’s value-conscious approach could mute returns relative to some of its more aggressive peers when muni bonds rally. However, “it’s provided solid protection in challenged muni markets and has produced strong volatility-adjusted results over the past decade,” Morningstar’s associate director, Elizabeth Foos, wrote in April . FLTMX currently has a total one-year trailing return of 3.65%, above the 3.25% performance of the Bloomberg Municipal 1-15 Year Index, according to Morningstar. Zeroing in on sectors In this environment, Maka sees opportunities in the health-care and transportation sectors. “They’re monopolistic service providers, essential services, generally professional management teams, as opposed to elected officials, so oftentimes there are less politics involved in those sectors,” he said. They are also fairly large sectors with a range of issuers and credit quality, so the team can dig to see which ones are improving and which ones are deteriorating, he added. “We can go down the quality spectrum and really find the value and get compensated for it as well,” Maka said.
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