PIMCO’s Intermediate Municipal Bond Strategy Fund (NYSE:MUNI) turns one today, having been launched on November 30th, 2009 a year ago. MUNI has been one of two actively-managed ETFs that hone in on the intermediate muni bond market, with the other fund being the Grail McDonnell Intermediate Municipal Bond Fund (NYSE:GMMB). MUNI has been a lot more successful than its competition from Grail Advisors and it has gathered close to $50 million in assets. That makes it the 2nd largest of PIMCO’s four actively-managed ETF offerings. MUNI has generally been received quite well by investors, due in no small part to PIMCO’s strong reputation in managing fixed-income funds. It has appealed to investors looking for tax-exempt income from muni bonds, especially those in higher tax brackets.
MUNI invests in a diversified portfolio of intermediate duration municipal bonds that provide interest income which is exempt from federal tax and in some cases also state tax. PIMCO utilizes issuer specific credit analysis to identify which bonds to own and this is a key selling point for MUNI versus index funds like iShares S&P National Municipal Bond Fund (NYSE:MUB). Index funds and passive ETFs rely on the national rating agencies for credit analysis since the selection criteria for the underlying indices is usually based on the ratings on each muni bond. Active management of the fund allows the portfolio managers behind MUNI to decide which names to own and to adapt the portfolio to changing credit conditions. Given the recent upheavals in the municipal bond market and unstable financial positions of many municipalities in the US, that could be a crucial differentiating factor for the fund. Another point of note is that MUNI only invests in AMT-free bonds. The fund is benchmarked against the Barclays Capital 1-15 Year Municipal Bond Index.
As of Nov 26th, MUNI had a 30-day SEC yield of 2.14% and an effective duration of 5.55. 83% of the fund was invested in municipal bonds that had a maturity between 5-10 years, giving the overall fund an average maturity of 6.36 years. The largest allocation in the fund was to state and local general obligations, making up 19% of the fund – in contrast to the index, in which these types of bonds made up 32% of the total. On the opposite side of the ledger, MUNI significantly over-weighted educational revenue bonds which made up 15% of the fund, in contrast to 5% for the index. Looking at overall performance, MUNI has been able to outperform its benchmark marginally by 47 basis points, returning 5.96% as of the end of October. MUNI’s general outperformance of the market is also visible when compared to how the passive MUB has performed, shown in the chart below. MUNI has held up especially well in the last couple of weeks when the entire US municipal bond market took a tumble due to state budgetary problems and the pending closure of the Build America Bond program.
MUNI charges investors 0.35% in expenses compared to MUB’s 0.25%. The extra 10 basis points in cost is to be expected given that investors are getting access to an actively-managed portfolio with MUNI. MUNI’s asset base has grown slowly but steadily through the year. Back in March 2010, the fund’s size was only $23 million but it has accumulated investor assets since. As with most PIMCO ETFs, MUNI has also done well in a keeping a tight check on the premium/discounts of the ETF share price from the fund NAV – in Q3 2010, there was not a single day where the premium or discount exceeded 50 basis points.
Written By Shishir Nigam from ActiveETFs | InFocus Disclosure: No positions in above-mentioned names.
Shishir Nigam is the founder of ActiveETFs | InFocus (http://www.etfshub.com/), which provides extensive coverage and analysis of actively-managed ETFs in US and Canada, including debates on major industry trends, insights on the latest product launches from issuers in the Active ETF space as well as in-depth interviews with industry executives and thought leaders.
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