Quick Take: Unlike many bond investors who focus on short-term changes in interest rates, Phil Condon, manager of Scudder Managed Municipal Bond Fund (SCMBX) stresses the long term to build stable returns. Condon feels this broader outlook can pay off in the municipal bond market because most investors prefer shorter-term muni bonds, which leads to higher returns for longer-term bonds.
To reduce risk, Condon also stresses high-grade muni bonds, giving the $8 billion fund a 65% to 70% allocation in AAA-rated and insured bonds. Condon doesn’t think lower quality muni bonds offer much better returns than high-grade muni bonds.
Condon’s strategy appears to have worked well both over the long term and during the recent rally in the muni bond market. This year through August, the fund rose 8.2%, while the average long-term municipal (national) bond fund was up 6.5%. For the ten-year period through last year, the fund gained an annualized 6.4%, while its peers rose 5.8%.
The Full Interview:
S&P: What are the fund’s main objectives?
CONDON: It’s a high-grade fund that focuses on income over the long run. There are trade-offs. You can maximize your income in the short run, but you’ll probably take on inappropriate call risk, credit risk, or maturity risk. An investor who picks the highest yielding fund will likely end up with underperformance because of the additional risk.
S&P: So your primary goal is income over the long run?
CONDON: Yes, it is. Most of our investors realize that if I have good call protection on my securities, the income won’t disappear when the bond market rallies, as it has lately. A callable bond may not appreciate as much as a noncallable bond.
S&P: Do you avoid callable bonds?
CONDON: We use a fair amount of noncallable bonds, but we’ll also use premium coupon bonds that are trading to an attractive call. If rates go up or down by 10 to 20 basis points, that bond’s duration won’t have a dramatic change.
S&P: What is the fund’s duration?
CONDON: I aim for a duration neutral portfolio, because I’m not very good at predicting where interest rates will go, and I don’t know anyone who is. Instead of making big bets on interest rates, we make a lot of smaller bets on the yield curve, credits, the right coupon, and the call feature.
S&P: What is your view of the yield curve?
CONDON: The curve usually is now about as steep as it gets, particularly in the 10- to 20-year part of the curve. Typically, we like the 15-year part of the curve, but we’re starting to move into the 10- to 20-year part of the curve because it’s more attractive than the shorter end on a duration neutral basis.
We’ve been underweighted in 20-year bonds, but now that that area has underperformed, we’re trying to get more investments there. As the curve shifts back a bit, we’ll make changes in the portfolio.
S&P: Why is the yield curve so steep in the muni bond market?