For investors living in California and subject to the alternative minimum tax, there is a new way to have your cake and eat it too. The Fidelity California Short-Intermediate Tax-Free Bond Fund is a municipal bond fund that will provide California residents with income that’s exempt from alternative minimum taxes (AMT), as well as federal, state, and local income taxes. That’s a powerful punch, since many higher-income Californians get hit with the alternative minimum tax each year, on top of one of the highest state income tax rates in the nation. This fund is Fidelity Investments’ first state municipal bond fund that will be AMT tax-free. “The State of California has a higher percentage of residents that are subject to the alternative minimum tax than many other states, so it makes sense to have our first product [like this] out in the State of California,” says Fidelity Investments’ Doug McGinley, the fund’s portfolio manager.
The Fidelity California Short-Intermediate Tax-Free Bond Fund will focus on California municipal securities that are deemed AMT tax-exempt, mostly investment grade, typically with a dollar-weighted average maturity of two to five years, and 2.5 to 3.5 year duration, a timeframe that usually means that the portfolio should be less interest-rate sensitive than longer bond maturities can be. The Lehman Brothers California 1-7 Year Non-AMT Municipal Bond Index will be a benchmark for this fund.
An Addition to the Fidelity Advisor Line-up
For advisors who are in the market for an national intermediate municipal bond fund, Fidelity Investments has added to its Advisor line-up a the Fidelity Advisor Intermediate Municipal Income Fund. “Muni rates have been relatively attractive compared to taxable alternatives,” for investors seeking income outside of retirement accounts, says McGinley, portfolio manager for the new fund as well as its non-Advisor twin, the Fidelity Intermediate Municipal Income Fund.
McGinley says he likes managing the intermediate fund because it is in a “part of the curve where you can take advantage of some of the longer offerings in our market but the fund doesn’t carry the same amount of interest rate risk as our long advisor fund.” He adds that sometimes in this shorter end of the yield curve you can get more yield if you are comfortable with a lower credit rating–still investment grade, but not the top rating. “The Intermediate Fund well positioned to take advantage of the extra credit spread that a 5- or 10-year bond might carry for a certain credit versus what a 30-year bond might come with.” For example, if a AAA rated municipal bond comes to market with a 3% yield on the 5-year maturity, and a BBB rated hospital municipal bond comes to market with a 4% yield on the 5-year maturity–that’s a100 basis point difference in yield (because of the difference in credit quality) on a relatively short maturity date. That may be more attractive than the 30-year maturity on the same two bond issues, where the AAA rated bond might yield 5% and the BBB rated bond might yield 5.5%, a difference of only 50 basis points on bonds with a much longer maturity date.
Duration for the new California fund is around for this 5-years, and it is measured against the Lehman Brothers 1-17 Year Municipal Bond Index benchmark.
In addition to the three funds mentioned above, McGinley manages four other state municipal bond funds: The Fidelity California Municipal Income Fund, Fidelity Florida Municipal Income Fund, Fidelity Michigan Municipal Income Fund, and Fidelity Ohio Municipal Income Fund.