US Muni Funds See 2015's First Outflow

U.S.- based funds witnessed the largest outflows for the one week period ending April 1 since early January, according to Lipper. This was largely due to massive outflows from U.S. focused stock funds, while non-U.S. stock funds helped offset the outflows with some new cash addition. Equity mutual funds saw outflows of $4 billion. Meanwhile, the US municipal funds saw their first outflows this year.

Head of research services at Lipper, Tom Roseen, noted that institutional investors were the “net redeemers” of the US stock funds and withdrew money from the ‘so-called macro group’.

As for the broader markets, the S&P 500 and the Dow both advanced 0.3%, but the Nasdaq declined 0.1% during the holiday shortened week ending Apr 2. Among the positives, China central bank governor’s indications about additional monetary stimulus and deal news in the domestic healthcare sector boosted investor sentiment. Separately, private sector job additions were weaker than expected in March, manufacturing activity in the U.S. expanded at the slowest pace in March since May 2013. Continuous drop in oil prices also intensified the pressure on energy companies.

For the month, the S&P 500, the Dow and the Nasdaq declined 1.7%, 2% and 1.3%, respectively. For the quarter, the Dow snapped a three-quarter winning streak and declined 0.3%. The S&P 500 gained 0.4% and extended its quarterly winning streak to nine quarters. The Nasdaq advanced 3.5%, its longest stretch of quarterly gains ever.

Funds Flow Data

U.S.-based stock funds saw outflows of $11.2 billion for the one week period ending Apr 1. This was the largest outflow since early Jan. According to Lipper, all Equity funds saw outflows of nearly $4 billion. While Domestic Equity funds lost $3.040 billion, Non-Domestic Equity funds saw cash withdrawal of $0.929 billion.

This came a week after the U.S.-based stock mutual funds saw $1.6 billion of withdrawals, which had somewhat negated the $7.3 billion inflows into exchange-traded funds. For week ending Mar 25, U.S.-based stock funds had attracted $5.7 billion.

The massive outflows was a result of domestic stock funds losing out $12.8 billion, while the non-US counterparts provided some support by adding $1.6 billion in new cash.

“Dovish comments by the People's Bank of China and the European Central Bank's commitment to its quantitative-easing plans emboldened authorized participants to be net purchasers of non-domestic equity funds,” said Tom Roseen.

Ex-ETFs, notes Lipper, Emerging Markets Equity funds added $384 million. Meanwhile, all taxable bond funds attracted $2.483 billion. This came a week after $2.6 billion was poured into taxable bond funds. Thus, the taxable bond funds have now seen inflows for three straight weeks. The high yield funds saw inflows of $315 million, after adding $856 million for the week ending Mar 25.

However, US municipal funds were big losers, as $300.6 million was pulled out for the week ended Apr 1. This was the first outflow from the US municipal funds. For the one week period ending Mar 25, the same had attracted $581.7 million in new cash.

Markets and Key Developments Last Week

China central bank governor’s indications about additional monetary stimulus and a slew of new deals in the healthcare sector helped benchmarks start the holiday shortened week on a positive note. China’s move to ease lending requirements for buying a second home also added to the bullish sentiment. However, growing concerns about abundant supply of oil and worries over an Iranian nuclear deal dragged oil prices down last Monday.

Weakness in healthcare, industrial and energy shares dragged benchmarks significantly lower last Tuesday. The energy sector took a beating after oil prices dropped. Meanwhile, as talks on Iranian nuclear deal neared its deadline, oil prices dropped. Worries about abundant supply of oil also continued to pressure oil prices.

Benchmarks ended in the red on Wednesday, pulled down by weak economic data. Private sector job additions were weaker than expected in March. The national employment report from Automatic Data Processing (ADP) showed 189,000 private jobs were added in March, less than expectations of an increase of 230,000 jobs. Separately, the Institute for Supply Management reported its March PMI had dropped from February’s reading of 52.9% to 51.5%.

However, upbeat report on jobless claims on Thursday boosted markets. The positive data raised hopes among investors for a positive nonfarm payrolls report that was scheduled for release on Friday. Retailers benefited from the decline in initial claims as it eventually boosts consumer spending. Energy shares also ended in positive territory, despite drop in oil prices.

PBOC Comments: People’s Bank of China governor Zhou Xiaochuan’s said there is “more room” for China to ease its monetary policy provided China’s economic growth slows down further and inflation continues to weaken. This came after Premier Li had previously provided reassurances that his government would take further steps to manage the economic situation. (Read: China Cheers Economic Bright Spots & Stimulus Hopes).

2 Municipal Bonds to Buy

Despite the first outflows from municipal funds this year, there are a bagful of municipal bond funds worth investing in. Most of the funds have historical track record of decent gains. The bulk of the outflows were from JPMorgan Tax Aware Real Return Institutional (TXRIX), which carries a Zacks Mutual Fund Rank #5(Strong Sell).

Also, interest income exempt from federal income tax is among the many distinct advantages that municipal bonds offer to investors. They offer relatively high yields at lower levels of risk and are considered second only to government securities in terms of safety of capital invested.

Below we will share with you 2 top rated Muni Bond mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) as we expect these mutual funds to outperform their peers in the future. 

Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

The funds may have negative return in one week, but have historical track record of decent gains. They carry no sales load and have a low expense ratio. The maximum initial investment in these funds is within $5000. The recent drop over the last one week also offers investors a chance to buy favorably-ranked funds that may be flying under the radar. Immediate price decline should not be an immediate signal to sell funds. (Read: Debunking Common Mutual Fund Myths)

RS High Income Municipal Bond Y (RHMYX - MF report) seeks high current income that is tax exempted. Capital growth is secondary. The fund invests mostly in municipal obligations. Interests from them (as per the opinion of the issuer's bond counsel) are free from federal individual income tax (but not necessarily the federal alternative minimum tax (the "AMT")).

RHMYX currently carries a Zacks Mutual Fund Rank #1. It dropped a meager 0.01% over the last 1 week. However, it has gained 11.4% and 4.8% over the last one and three years. The expense ratio is 0.54% as compared to category average of 0.99%.

Franklin Insured Tax-Free Income Adv (FINZX - MF report) invests a lion’s share of its assets in securities whose interest income is exempted from federal income taxes. These interest incomes are also exempted from federal alternative minimum tax. A minimum of 80% of the assets will be invested in insured municipal securities.

FINZX currently carries a Zacks Mutual Fund Rank #1. It dropped a negligible 0.01% over the last 1 week. However, it has gained 8.8% and 4.8% over the last one and three years. The expense ratio is 0.51% as compared to category average of 0.93%.