Mutual Funds

Regina Shafer: The more taxes rise, the better municipal bond returns look

Detailed research has helped this USAA portfolio manager produce uniformly good results

Regina Shafer may have been one of the few Americans who wasn’t cursing Congress and President Barack Obama for raising tax rates in January. She knew that Washington’s move made her already successful municipal bond fund look even hotter.

Ms. Shafer, 46, has been portfolio manager of the USAA Tax Exempt Intermediate-Term Bond Fund (USATX) for a decade. The fund’s performance — it returned 7.2% last year — puts it in the top 10% of the muni bond sector for the one-, three-, five- and 10-year periods, according to Lipper Inc.

“Municipal bonds right now are attractive versus other fixed-income products, especially on an after-tax basis,” Ms. Shafer said. “They can play an important role in someone’s diversified portfolio.”

The fund has become even more valuable this year for people in the top tax brackets. An investor in the 39.6% bracket who owns a tax-exempt bond paying 3.5% will experience a taxable-equivalent yield of 5.8%. And after accounting for the new 3.8% Medicare surtax applying to taxable investment income, the taxable-equivalent yield would total 6.18%, Ms. Shafer said.

CREDIT RESEARCH

She attributes the superior performance of the fund, which has $3.4 billion invested in 557 holdings that have weighted average maturities of three to 10 years, to its dedication to fundamental credit research. It’s crucial to keep a close eye on the local economy and political factors that could affect the jurisdiction that issued the bond. Essentially, her researchers have managed to keep her out of muni disasters such as the debacle in Illinois, which has no plan for how it will fund its $96.8 billion pension liability.

A team of five financial analysts researches every bond that the fund buys, and makes independent credit decisions about that security, considering its fiscal management, liquidity and ratios, Ms. Shafer said. Most of the fund’s purchases are investment-grade bonds, but it also incorporates some A-rated or even BBB-rated bonds, she said.

“Our research gives us a deep understanding of the risks, and we make sure we get paid for the risk,” she said. “We like to find undervalued bonds when we can take advantage of that.”

Ms. Shafer focuses the fund on garnering tax-free income without taking on undue risk. Its investments include issues such as Harris County, Texas, Industrial Development Corp. — the fund’s largest holding — and the New York State Dormitory Authority.

An Arkansas native and the first in her family to earn a college degree, Ms. Shafer has spent her 22-year career at USAA Investments, the mutual fund branch of USAA, which sells insurance and other financial products to members of the military and their families. Ms. Shafer’s intermediate muni bond fund has about 40,000 shareholders, half of whom are current or former servicemen and women. Most of the other shareholders are members of USAA.

Recruited from Texas State University, where she majored in accounting, Ms. Shafer soon moved into fixed income, where she worked for four years as a credit analyst before managing a tax-exempt money market fund. She also earned a master’s degree in finance from the University of Texas-San Antonio.

In addition to USATX, Ms. Shafer manages the USAA Tax-Exempt Short Term Fund (USSTX) and the New York Bond Fund (USNYX), overseeing a total of $5.8 billion in municipal bond assets.