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Bond funds remain a haven for another quarter

By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times
published October 13, 2002


Betting on bond funds paid off big again last quarter as investors sought shelter from the stock market's storms.

"Stock market volatility is scary to people, and municipal bonds have done very well this year," said Robert Pariseau, manager of the USAA Florida Tax-Free Income Fund.

The average long-term Florida bond fund returned 4.26 percent for the third quarter and was up 7.36 percent over 12 months. The best performers were the insured long-term funds, up 5.36 percent for the quarter and 8.77 percent for the year.

That extra boost in return for insured funds came from the same flight to quality that occurred in the taxable bond market. Investors worried about the weakening economy have been avoiding bond issuers perceived as less-than-sterling credits. That has hurt high-yield funds, which specialize in lower-quality bonds, and helped funds with a high percentage of insured or other highly-rated bonds.

"When it's all insured, it's all AAA-rated, so that eliminates any concerns about credit, even though in Florida, there's not that much to worry about," said Clark Wagner, manager of the First Investors Insured Florida Tax-Exempt Fund, which was the top performer last quarter.

"Relative to the rest of the country, Florida's actually done well from a credit perspective," he said. "Roughly a third of the states are on negative credit watch, and Florida is not."

The state's efforts to cut expenses to match revenues have been a big plus for bond investors, said James Willison, lead portfolio manager for Morgan Stanley's Florida bond fund.

"It's created a more favorable environment for bonds," he said.

Declining interest rates have driven the bond market as a whole. Managers of some of the best performing funds added longer-maturity bonds as rates fell, allowing them to capture more of the gains. When interest rates fall, bond prices typically rise.

That was evident last quarter, as intermediate-term and short-term funds lagged the long-term funds. The average return for the quarter was 3.68 percent for intermediate-term Florida funds and 1.78 percent for the Hough Florida Tax-Free Short-Term Fund, the lone fund in its category.

When rates rise, the whole process happens in reverse, and shorter-term funds outperform those holding longer-maturity bonds.

That's why some managers concerned that rates will start inching back up are getting a little more defensive and shortening maturities or increasing their cash positions.

"The market has run a long way," Morgan Stanley manager Willison said. "While the economy is slow and the Fed may ease some more before tightening eventually, we think there may be some better opportunities ahead" to buy bonds at cheaper prices.

He said some individual investors are experiencing "sticker shock" over low bond yields and are reluctant to commit more money to the market until higher yields are available.

But interest rates are no easier to predict than stock prices.

"We all know that interest rates are going to go up; the problem is when?" USAA manager Pariseau said. In the meantime, he says, investors who commit to longer-term bonds earn more than those who stick with cash.

-- Helen Huntley can be reached at huntley@sptimes.com or (727) 893-8230.

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