New Fidelity funds meld target date portfolios, muni bonds

Fidelity Investments is marrying the concepts of target date portfolios and municipal-bond investing

Fidelity Investments is marrying the concepts of target date portfolios and municipal-bond investing.

The Fidelity Defined Maturity Funds, launched last week, are four muni-bond portfolios with maturity dates ranging from 2015 to 2021. Unlike traditional bond funds, these portfolios will mature and liquidate at their stated date and thus have declining interest rate risk — something that many investors are worried about these days, said Mark E. Sommer, the lead portfolio manager of the funds.

“These funds have much less interest rate risk than traditional bond funds,” he said, noting that unlike traditional bond funds, the price volatility of the funds is designed to decline toward maturity.

Traditionally, retail investors use individual muni bonds to fund specific events in their lives, such as retirement or their children’s’ education, said Miriam Sjoblom, associate director of fund analysis at Morningstar Inc. U.S. households own about 37% of the muni-bond market and represent the largest holders, according to Federal Reserve data.

But with these funds, investors can fund events while having the diversification of a mutual fund and the expertise of its managers, she said.

“Municipalities are going through a really tough time, and investors can no longer rely on the insurers of muni-bond funds,” Ms. Sjoblom said. “In this environment, you are really gambling if you aren’t diversified.”

Fidelity’s launch couldn’t have better timing. The one-week period through June 8 was the first time since November that muni-bond funds saw inflows—taking in $274 million, according to Lipper Inc.

“When we initially thought about launching these funds, the reaction we got was: “Now?’” Mr. Sommer said. But post-2008, financial advisers and retail investors have seen how different one muni-bond fund can be from another.

“The market used to be much more homogenous,” Mr. Sommer said, noting that the difference between the best-performing municipal-bond fund and the worst performer was around 8%. “But then in 2008, you saw closer to a 40% difference.”

Fidelity has competition in this area. In January, BlackRock Inc. launched a series of muni-bond exchange-traded funds with different maturation dates. The iShares S&P AMT-Free Muni Series comprises six ETFs with $166 million in assets and an expense ratio of 0.3%.

Fidelity looked at ETFs when designing its own product but decided to adopt a mutual fund structure instead, Mr. Sommer said.

The funds each will close to new investors 12 months before their respective maturation dates. “We don’t want investors coming in at the end and using the funds as money market funds, thus diluting the value for other shareholders,” Mr. Sommer said.

The total operating expenses for retail and institutional shares of the funds are 0.4%, and 0.65% for adviser shares.

E-mail Jessica Toonkel at [email protected].