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State bond market takes year-end dip

By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times
published January 13, 2002

The fourth quarter was a letdown, but Florida municipal bond investors finished the year in much better shape than their neighbors who put money in the stock market.

Only one fund, the Evergreen Florida High Income Fund, managed to eke out a tiny gain for the quarter and that was only for one of its four classes of shares. Slightly higher expenses dragged the other three under water. On average, Florida funds were down a little less than 1 percent for the quarter.

"A lot of funds gave up a lot of ground between Sept. 30 and the end of the year," said George Strickland, manager of the Thornburg Limited Term Florida Fund, one of the top performers. The problem: interest rates that inched back up as investors began anticipating economic recovery. Prices for bonds and bond funds fall when interest rates rise.

As it turned out, intermediate-term funds were the best place to be both for the fourth quarter and for the year. Those funds returned 4.49 percent on average for the year. Long-term Florida funds gained 4.23 percent;insured funds, 3.7 percent; and short-term funds, 3.98 percent.

Dorothy Thomas, manager of the AmSouth Florida Tax-Exempt Fund in Birmingham, said keeping maturities relatively short and paying close attention to credit quality contributed to that fund's relatively strong performance. She is remaining defensive as the new year begins because AmSouth analysts expect rates to rise as the economy recovers.

But some bond fund managers aren't so sure a recovery is imminent.

"We're not going to spring out of this recession," said Strickland, in Santa Fe, N.M. "At best, we're going to sort of limp out of the recession."

Rates already have declined a bit this month, and Strickland said he has tried to take advantage of that by buying slightly longer-term bonds for his portfolio. Those bonds appreciate more if rates fall, but also decline more in value if rates rise.

Concerns about the economy are prompting many fund managers to pay closer attention to the financial strength of bond issuers.

"It's going to be tough for states to balance their budgets and Florida is not immune to the economic effects of the recession," said Stella Wong, portfolio manager for the Franklin Tax-Free Florida Income Fund in San Mateo, Calif.

Strickland said he is watching bond issuers for any sign of financial weakness.

"Florida has an economy that's built heavily on the tourist trade and the housing sector," he said. Although housing has remained strong so far, he said he has gotten out of housing development bonds based on the possibility of a "double dip" in the economy, a second drop in economic activity fed by a decline in consumer spending.

The bond fund managers say demand is strong for Florida munis, particularly among investors who buy individual bonds rather than bond funds.

The sharp decline in money-market rates and CD yields is prompting some investors to turn to bonds to improve their yields.

"People can take these low yields in money-market funds for a few months, maybe a year, because they think they're coming back up, but eventually people throw in the towel," Strickland said.

Wong said the market for Florida bonds also may be benefitting from Florida legislators' decision last month to delay a cut in the intangibles tax. Florida bonds and Florida bond funds are exempt from the tax, while bonds issued by municipalities in other states are not.

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