The Covid-19 world has altered the municipal bond market, highlighting the benefits of active management.
CFRA’s Focus Mutual Fund for July is JPMorgan Tax-Free Bond Fund (PRBIX), which earns our top overall mutual fund rating of five-star. To rate municipal bond mutual funds such PRBIX, we conduct holdings-level research and fund-focused analysis from a forward-looking risk, reward, and cost perspective. PRBIX rates favorably across all three, but particularly stands out for its reward potential. Our bond mutual fund ratings are derived independently from our ETF coverage but goes beyond traditional past performance valuations.
PRBIX ’s experienced management team combines fundamental analysis with macroeconomic and technical views. While a bottom-up approach drives the security selection for PRBIX, lead manager Rick Taormina explained to CFRA that JPMorgan’s broader fixed income strategy team helps frame the duration, credit, and sector positioning of the portfolio. The multi-state fund will rotate its exposure based on valuation focused on spreads, yield curve, and bond structure.
For example, the fund was heavily underweighted California (7.8% of May assets) and New York (8.0%) relative to the Bloomberg Barclays Municipal Bond index benchmark in 2019 on local economic concerns, but Taormina noted that Covid-19 created buying opportunities to increase the exposure in these states. Meanwhile, the fund’s largest state exposure is to Pennsylvania (10%) with a weighting more than double the benchmark.
The fund seeks a durable income stream with less volatility than peers. The fund had 45% of assets in AA-rated bonds and an additional 13% in AAA securities, which we think provides management with flexibility to support potential redemptions and navigate the unique Covid-19 market impacting states and municipalities in unprecedented ways. While the fund can own speculative-grade bonds, it had just 1% of assets in these riskier securities and had 26% in A-rated and 14% in BBB-rated bonds. PRBIX sports an above-average 2.1% 30-day SEC yield, equivalent on a tax-adjusted basis of 3.5% based on a 37% federal tax rate and a 3.8% ACA tax.
Management favors revenue bonds in the education and hospital sectors over transportation. The fund recently had 71% of assets in revenue bonds based in part on fundamental considerations such as usage, pledged revenues, debt service coverage, essentiality, and pricing power. For example, Taormina explained that many A-rated hospitals have sizable cash available and government funding. Within the general obligation portion of the portfolio (19%), there is a preference for municipalities that rely on residential, not commercial real estate taxes, which provide more stable cash flows.
The fund’s average duration is higher than its peers and its benchmark, as management thinks interest rates will remain low for longer and the intermediate/long-term portion of the market provides more benefits as economies recover. However, as additional stimulus and Treasury issuance occurs Taormina expects to rotate back to a normal positioning.
While we like the fund’s positioning looking forward, the track record and fees are also appealing. The fund has outperformed its national municipal bond peers and the broader municipal bond fund category on a one- and three-year basis. In addition, it has generated an above-average risk-adjusted Sharpe ratio relative to peers.
Supporting the fund’s record is a modest 0.45% expense ratio, much lower than 0.75% for peers. A retail share class, available under the ticker PMBAX, holds the same securities has also outperformed, despite a slightly higher 0.67% fee.
Free Live Webinar
On July 20, CFRA will be moderating a webinar on Generating Income in the second half of 2020, with Taormina and bond fund portfolio managers from PGIM and PIMCO. To register for the event please click the following link:
JPMorgan Tax Free fund earns a five-star rating for a combination of risk, reward, and cost metrics. Investors seeking an actively managed multi-state municipal bond mutual fund should give it a closer look.
Todd Rosenbluth is Senior Director of ETF and Mutual Fund Research at CFRA