Quick Take:The $14.7-million Lebenthal Taxable Municipal Bond Fund is an oddity among fixed-income portfolios: It is not a typical municipal bond fund, since the interest income from muni bond funds is usually, by definition, tax-free; nor is it a corporate bond fund, since it doesn’t invest in corporate securities.
Regardless of how the fund is classified, it has performed extremely well. Year to date through September 30, the portfolio gained 14.6%, making it the best performer among muni bond funds for the period. It was also a top performer, both on an absolute and risk-adjusted basis, for the three years ended in September, with an average annualized return of 12.4%. The average national long-term muni bond fund, in comparison, returned 7.2% for the same three-year period.
The portfolio is currently the only one of its kind in the mutual fund universe. The Heartland Taxable Short-Duration Municipal Fund, which was the only other taxable muni bond fund, was put into receivership by federal regulators for regulatory infractions.
While the Lebenthal Taxable Municipal Bond fund began operations in December 1993, Gregory Serbe has been lead manager since April 2001. He served as assistant portfolio manager from 1998 to 2001. The fund has carried a 5-Star ranking from Standard & Poor’s since September 2001.
The Full Interview:
S&P: What exactly are taxable municipal bonds?
SERBE: Taxable munis arose from various federal tax law changes starting in the early 1980s. The federal government decided it would both regulate the muni bond market, as well as limit the types of tax-free municipal bonds that could be issued; that is, those bonds which financed activities that are beneficial to the general public. The federal government will not subsidize the financing of certain activities, such as investor-led housing and industrial projects, local sports facilities, or the funding of a municipality’s underfunded pension obligations.
Taxable munis can be used to advance refund tax-exempt issues in situations where the tax laws prohibit a tax-free advance refunding. Probably their greatest advantage is the issuer’s ability to earn and keep arbitrage profits that are connected with a taxable issue. This makes taxable bonds very attractive for funding pension fund liabilities.
S&P: What is the size of the market?
The taxable municipal market has grown phenomenally in recent years — about $75 billion in taxable municipals have been issued in the past five years. Along with increased investor interest has come both an increase in liquidity, and a tightening of spreads.
S&P: How do you run this portfolio?
SERBE: From an overall strategic view, we manage for total return; thus we’re not only looking at the juiciest yields. We place a premium on high credit quality and liquidity. We also look at the shape of yield curve to find where the best values are.
S&P: Is your fund the only open-ended taxable municipal bond fund?
SERBE: Yes. As far as we know, we are the only one.