MUTUAL FUND SPOTLIGHT
T. Rowe Price Tax-Free Bond Funds
Strong Research Guides
Municipal Bond Investments
As investors face potential tax increases over the next few years, tax-free income may become more appealing, especially for individuals in high tax brackets. Munis pay interest that is free from federal tax—and, in some cases, from state and local taxes.
There are more than 55,000 issuers in the $3.6 trillion municipal bond market.1 The wide variety of issuers and bond types, as well as the varying fiscal health of municipal issuers, demands strong fundamental research, both to identify risks and to capture attractive investment opportunities. A dedicated team of experienced analysts collaborates with the T. Rowe Price
tax-free bond funds' portfolio managers, traveling the country to assess the creditworthiness of individual issuers. "We pay close attention to potentially attractive investments toward the riskier end of the credit spectrum, where taking highly calculated risks may help capture higher yields," notes Hugh McGuirk, head of municipal bond investing in the firm's Fixed Income Division. "Our strength in credit research allows us to generate more income potential for our shareholders."
CHOOSING SOLID INVESTMENTS
A team of eight specialized credit analysts starts the bond selection process by examining specific investment possibilities. Their due diligence involves poring over balance sheets and financial results, as well as making site visits to evaluate revenue projections for bonds backed by parking garages, hospitals, or solid waste treatment plants, among others. Up to 50 additional analysts throughout the firm help McGuirk determine the creditworthiness of each state's bonds. The team also weighs the U.S. and global economic outlook from Alan Levenson, the firm's chief economist, and the fixed income portfolio management team. "We use our trading staff to help us figure out where the pockets of value are," McGuirk says.
INVESTING FOR LONG-TERM INCOME
McGuirk considers tax-free bonds a valuable addition to many investors' portfolios. The top income tax rate rises this year from 35.0% to 39.6%, and taxpayers with net investment income or modified adjusted gross income (MAGI) that exceeds $200,000 (or $250,000 for married couples filing jointly) will incur a 3.8% Medicare tax. These factors make the tax-free income paid by municipal bonds even more attractive over the long term. "We have managed to generate solid results using a consistent process," McGuirk says. "Our strong credit research helps us pick good credits and make smart investments."
1Municipal Securities Rulemaking Board, 2011.
2Based on cumulative total returns, 6 of 13 (46%), 8 of 13 (62%), 12 of 13 (92%), and 11 of 13 (85%) T. Rowe Price tax-free bond funds (including all share classes) outperformed their Lipper average for the 1-, 3-, 5-, and 10-year periods ended 12/31/12, respectively. Not all funds outperformed for all periods. Source for data: Lipper Inc.