Pioneer High Income Municipal Fund was last year's best performer among peers because it held revenue bonds from non-government issuers such as airports and hospitals, which were sheltered from the default speculation that buffeted states and cities.
“We do not own general-obligation bonds,” Timothy Pynchon, 51, manager of the $636 million fund said, referring to debt backed by states' or local governments' promise to pay. Bloomberg News incorrectly reported earlier, based on erroneous data, that Ivy Municipal High Income Fund was last year's best performer.
U.S. states face deficits totaling $140 billion next year, according to the Center on Budget and Policy Priorities. Enough investors fled the market to make the last three months of 2010 the worst quarter since 1994, with a 4.5 percent loss, after interest payments, according to the
Bank of America Merrill Lynch Municipal Master Index.
“It's important for investors to start to distinguish between that stressed debt of some states and cities and what is otherwise very healthy revenue-bond debt,” Pynchon said. “I own bonds from issuers based in stressed states or cities, but which are doing very well as standalone entities.”
The Mount Sinai Medical Center, Miami Beach, for example, is located in Florida, where lawmakers are working to close a deficit once estimated at $4.7 billion.
“I'm satisfied with those bonds and the performance of that hospital's operations,” Pynchon said in an interview.
Pioneer's Return
The 7.14 percent return on the Pioneer fund, after interest and price changes, was almost three times the 2.44 percent return for general-obligation bonds due in 22 years or more, according to a Merrill Lynch index.
“A lot of individual investors are reading the headlines about governments' financial problems and capitulating, saying ‘I want out of all municipal bonds,'” said Michael Walls, manager of the $303.3 million asset Ivy High Income fund, whose 6.96 percent total return last year was the second-best among open-end funds of more than $100 million, according to data compiled by Bloomberg.
With the U.S. economy recovering and local-government revenue rebounding, default fears are overblown, Walls said. He and Pynchon said they would both consider buying state or city general-obligation bonds if their yields rise high enough.
Investors are going to lose more money this year because of reduced credit ratings rather than from bond defaults, said Pynchon. Prices on California securities may fall 15 percent to 20 percent as it works to close a budget gap, “but that's very different than a default” and could mark the point at which he would consider buying the bonds, Pynchon said.
‘Limited' Defaults
In the coming year, there will be “some defaults, on a limited basis, that will grab a lot of headlines,” he said.
Defaults will be far less than the “hundreds of billions” by 50 to 100 issuers predicted by Meredith Whitney, a Wall Street analyst whose forecast was widely publicized, and helped push tax-exempt bond prices down and yields higher since mid- November, Pynchon said.
The 7.14 percent total return for the Pioneer fund was lower than more than the 10 percent or more that seemed likely as recently as October, when the fund benefited from bonds yielding more than 7 percent and rising prices, Pynchon said.
The Pioneer fund's top-ranking return was for shares sold only to institutions in amounts of at least $5 million. The expense ratio of 0.67 percent was less than the 0.90 percentage point charged individual buyers of its class A shares who also pay a purchase charge, or front load of 4.5 percentage points.
The Pioneer fund is a unit of Pioneer Global Asset Management, which is owned by UniCredit SpA, a Milan-based bank. Pioneer has total assets under management of 185 billion euros ($239.6 billion) and total municipal-bond portfolios of $2.3 billion, Geoff Smith, a Pioneer spokesman, said.
Note: This article was corrected from its original wire version on January 11, 2011.
