Aisle Nine for Muni Bond Funds

Kurt Brouwer July 25th, 2007

Russel Kinnel wrote an interesting article that was picked up on Yahoo, but originally appeared in Kiplinger’s magazine. Russel is Morningstar’s director of mutual fund research. He is also the editor of Morningstar FundInvestor.

The premise of the article was that investors seeking tax-exempt municipal bond funds should only look to the two largest mutual fund companies–Fidelity and Vanguard.

‘…Choosing a municipal-bond fund can be a piece of cake–if you start by choosing the fund company before you look for the fund. Muni-bond funds are often team efforts, making the manager less important than the group behind the fund. Typically, a fund company will run all its muni funds with the same core philosophy and the same underlying fee structure. There’s tremendous uniformity of quality and strategy within a fund company’s muni operations.

It Gets Easier
Now I’m going to make it really easy by telling you to limit your search to just two fund companies (if you are a no-load investor). That’s right, Fidelity and Vanguard are the only fund companies you need to know when you’re looking for a tax-free bond fund. If you’re familiar with the prowess of great bond firms such as BlackRock, PIMCO, and Western Asset, you may wonder why they aren’t in the running. The reason is that they mostly manage money for giant institutions, such as pension funds, and pension funds don’t need municipal bonds’ tax advantages. (Click here to see all of our Fund Analyst Picks.) [link requires registration]. That narrows the field to fund companies focused on individual investors. Although there are many worthy competitors, they don’t measure up to Vanguard and Fidelity…’

Hmmm. I think I get his point that you really cannot go wrong by going to Fidelity or Vanguard because they have a good group of bond funds. I agree that both are fine mutual fund companies. And, we do use a Vanguard municipal bond fund.

Nonetheless, his approach seems a bit limited to me. Isn’t that like saying if you’re looking for clothes just go to Sears or Wal-Mart because you can’t go wrong. Or, just go to Macy’s or Nordstrom. I’m not knocking Fidelity or Vanguard or even all of these great merchandising chains, but it does seem pretty limiting.

He also gives a nod to great bond fund families such as PIMCO or Western Asset, but then dismisses them as being mainly for institutional investors and therefore not as good for muni bond investors who are largely individuals. In my opinion, that’s painting with a pretty broad brush.

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