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Fund Spy

Munis: A New Flexible Mandate

Breaking the mold.


Five years after taxable non-traditional-bond strategies started gaining traction, funds with more-flexible mandates have begun making their way into the municipal market. At least half a dozen muni-bond funds, including offerings from BlackRock, Nuveen, and Goldman Sachs, have been launched or retooled to give their managers more flexibility to manage duration and/or buy below-investment-grade fare. The change comes in response to investors’ concern over the prospect of rising interest rates, an evolving muni market landscape that provides more opportunity for credit managers to distinguish themselves, and the asset-gathering success of their taxable nontraditional brethren. While these funds promise a lot, investors should be aware of their potential pitfalls.

 BlackRock Strategic Municipal Opportunities (MAMTX) is illustrative of the new flexibility sported by funds in the group. In January 2014, the firm revamped that fund’s strategy to allow manager Peter Hayes and his team the freedom to set the fund’s duration between zero and 10 years instead of the previous 3.0 to 10 years. The mandate was further expanded from a focus on investment-grade municipals to allow up to 50% in below-investment-grade municipal bonds. Since its strategy change, the fund has raked in approximately $2.3 billion of net new money (through February 2015), the fourth-highest estimated net inflow across the muni-bond Morningstar Categories. Under its new mandate, the fund has, not surprisingly, been run with a shorter duration: Shortly after the strategy change, the fund’s duration, which had run at more than six years, dropped to less than three years. It’s also making use of its flexibility to invest in below-investment-grade bonds, with such bonds accounting for 18% of assets as of Feb. 28, 2015.

Elizabeth Foos does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.