Recent News You Can Use on Municipal Bond Funds and Managed Equity Funds

November 8, 2008 by  
Filed under Investing

I am generally a fan of The Vanguard Group.  Vanguard offers a wide variety of index and exchange traded funds with low fund expenses.  Also, Vanguard publishes straightforward and easy to understand news about the economy that is helpful to investors. 

There were two tidbits of news this week from and about Vanguard that Mr. ToughMoneyLove found interesting. 

Municipal Bond Fund Update

Vanguard announced that it was shutting down its Vanguard Insured Long-Term Tax-Exempt Fund (VIPLX) and merging it with the Vanguard Long-Term Tax Exempt Fund (VWLTX).  Both are muni bond funds.  The interesting part is the explanation that Vanguard gave for the merger.  Vanguard concluded that there was no longer any meaningful value to shareholders in purchasing insured municipal bonds, which is what the now closed fund held.  (An insured municipal bond is one in which repayment of bond interest and principal is guaranteed by a separate bond insurer.  Bond insurance is sometimes used to increase the marketabiiity of bonds issued by smaller or less well-known governmental entities.)  Of the six major insurers of municipal bonds, three had been downgraded by credit rating agencies.  The other three insurers were also under increased scrutiny.  In other words, the bond insurers themselves were of such high risk that the market no longer priced the insurance into the value of the bonds.  Thus, there is no reason to have a fund that focused on such bonds because the cost-benefit trade-off was too high.  Investors in municipal bonds and muni bond funds should reconsider whether holding insured muni bonds or funds is worth the extra cost of the insurance.  

If you are interested in municipal bond funds (and you should be for 2009 with tax rates going up), you might want to review my earlier article on considering municipal bond funds for fixed income investing.  There are extensive comments to that article that you also might find helpful. 

Index Funds Continue to Outperform Managed Funds 

The other interesting news actually started with the well-known Fidelity Magellan Fund.  As of October 31, Fidelity Magellan was down 50.5%, underperforming the S&P 500 index by 12.2%.  The Vanguard Balanced Index fund (VBINX) that is similar to Fidelity Magellan (except that it is not a managed fund) actually outperformed 87% of similar managed funds over the same time period.  In many severe down markets, managed funds have a tendency to do better than index funds because most managed funds hold some cash.  Cash can soften the blow of severe down markets.  Index funds on the other hand tend to stay fully invested with little or no cash.  Despite this history, Vanguard index funds held up relatively well, with lower expenses to boot.  Score another one for index funds compared to managed funds. 

Personal Finance Blog Carnivals 

If you are a new reader of personal finance blogs, you may not have heard of “blog carnivals” in which the best recent contributions of the various personal finance bloggers are assembled and organized in one place.  Mr. ToughMoneyLove was pleased to have been selected to participate in the following carnivals this week: 

Carnival of Financial Planning hosted by The Skilled Investor. 

Carnival of Debt Reduction hosted by the Financial Wellness Project. 

Carnival of 20 Something Finances hosted by My Family’s Money. 

Carnival of Personal Finance hosted by the Sun’s Financial Diary. 

Take a few minutes to visit the carnivals – definitely worth your time.

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