First, we select the top trending category from more than 200 categories listed on MutualFunds.com based on the percentage increase in monthly viewership. From the top trending category, we select the top three funds with the highest one-year trailing total returns. To ensure the quality and staying power of funds, we only look at mutual funds with a minimum of $250 million in assets and a track record of at least one year. We also remove mutual funds that are closed to new investors and not available for investment outside registered accounts, such as retirement or 529 accounts.
In this week’s edition, we analyze the top three California Municipal Bond Funds that are concentrated in the State of California. These funds invest in municipal bonds issued by state and local governments in California, including both general obligation and revenue bonds.
Municipal bonds have been a safe haven within fixed income markets that have been rocked by the prospect of higher inflation. Since they’re exempt from federal—and often state and local—taxes, these bonds have a built-in interest rate buffer that Treasury and corporate bonds lack. The Biden Administration’s federal aid to cities and states has also lessened the risk of credit rating cuts in the wake of the COVID-19 pandemic.
Our breakdown of each fund includes key aspects, such as one-year performance, fund expenses, investment style and management teams, to give you an overview of how these funds hold up against their peers.
Be sure to check out the California Municipal Bond Funds page to find out more about other funds in this category as well.
1. Nuveen CA High Yield Municipal Bond Fund (NCHAX)
The top fund in our list this week is Nuveen CA High Yield Municipal Bond Fund (NCHAX). It generated a solid 15.21% trailing one-year total return with a 1.21% expense ratio and a 3.7% yield, making it the highest yielding, but most expensive, fund on the list.
The fund’s strategy is to invest at least 80% of its net assets in municipal bonds that pay interest that is exempt from regular federal and California personal income tax. These municipal bonds include State of California obligations along with its subdivisions, authorities, instrumentalities and corporations, as well as obligations issued by U.S. territories.
The fund is solo managed by John Miller, CFA, MBA, who leads the municipal fixed income strategic direction and investment perspectives for Nuveen Investment Manager. Prior to his 15-year tenure, Mr. Miller earned a BA in Economics and Political Science from Duke University, an MA in Economics from Northwestern University and an MBA in Finance with honors from the University of Chicago, beginning his career as a municipal credit analyst in 1996 before being steadily promoted over the years.
The fund’s portfolio consists of about 90% California-based and 10% U.S. territory-based municipal bonds. With an average duration of 11.56 years, the fund has greater interest rate exposure than the category average and the other funds on the list. The fund also holds 56% unrated bonds with an average credit rating of BB, making it tied with the American Century CA High Yield Municipal Bond Fund for lowest credit quality on the list.
Learn more about different portfolio management concepts here.
2. American Century CA High Yield Municipal Bond Fund (BCHYX)
The number two fund on our list this week is the American Century CA High Yield Municipal Bond Fund (BCHYX). The fund delivered a solid 11.23% one-year total return with a 0.50% expense ratio and 3.03% yield, making it the least expensive fund on the list.
Like the Nuveen CA High Yield Municipal Bond Fund, the fund’s strategy is to invest in high yield municipal bonds that are exempt from federal and California income taxes while maintaining low exposure to the alternative minimum tax, or AMT. However, the American Century CA High Yield Municipal Bond Fund doesn’t hold any U.S. territory bonds.
The fund is managed by three portfolio managers with an average tenure of 16.9 years and a max tenure of 32.3 years. The longest tenure belongs to Steven Permut, MBA, Senior VP and Senior Portfolio Manager, for American Century Investments. Mr. Permut is joined by Alan Kruss and Joseph Gotelli, who have a tenure of 9.25 years each.
The fund’s portfolio consists exclusively of California-based municipal bonds with an effective duration of 8.1 years, making it less sensitive to interest rates than the number one fund on the list, and an average credit rating of BB, making it riskier than the third-place fund on our list.
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3. BlackRock California Municipal Opportunities Fund (MECMX)
The third place on the list belongs to the * BlackRock California Municipal Opportunities Fund* (MECMX). The fund generated a robust 10.58% trailing one-year total return with a 0.88% expense ratio and a 1.73% yield, making it the lowest yielding fund on the list.
Like the other two funds on the list, the BlackRock California Municipal Opportunities Fund aims to invest at least 80% of its assets in California municipal bonds. The difference is that this fund aims to invest at least 50% of its assets in investment grade securities, including both fixed rate and variable rate obligations, which translates to less credit risk.
The fund has five portfolio managers with an average tenure of 21.1 years and a max tenure of 27.3 years. The longest tenure belongs to Walter O’Connor, CFA, Managing Director and Co-Head of the Municipal Funds team within BlackRock’s Global Fixed Income Group. Mr. O’Connor is joined by Theodore Jaeckel, Peter Hayes, James Pruskowski, and Michael Kalinoski.
The fund holds exclusively California municipal bonds along with a roughly 5% cash position. With an effective duration of just 5.01 years, the fund has less interest rate sensitivity than the other funds on the list while holding a higher quality portfolio of about 55% AA-rated bonds and just 11% unrated bonds.
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The Bottom Line
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Note: Trailing one-year total returns (daily) as of April 8, 2021.