Lipper Research Senior Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN Tuesday - A Look at Colorado Bond Funds

Tuesday, August 30, 2005

A. Of course!

Q. What do you see overall, in the bond funds arena?

A. Well, to be consistent with last week's study, we're looking at thelatest three-year returns. I found it interesting that even thoughDenver/Colorado is not thought of as a bond-type headquarters, seven of the13 local funds beat their peer averages. This is a slight majority, muchlike we saw last week for stock funds.

Q. There are only 13 Colorado-managed bond funds?

A. There are 13 funds that have been out for the whole three years. Thereare two funds, one from Janus the other from Icon, that have been out formore than a year but less than three.

Q. OK, so who has these Colorado-based bond funds?

A.

• Janus (5) excluding their newer fund
• Westcore (3)
• Aquila (1)
• Freedom Funds Mgmt (1)
• Dreyfus/Founders (1)
• Delaware (1)
• Tributary Capital Mgmt (1)

Q. OK, so how have they been doing in terms of performance?

A. These firms have at least one winner against peer averages or LipperIndexes where they exist...

• Westcore (2)
• Janus (2)
• Aquila (1)
• Colorado Bond (1)
• Delaware (1)

Q. OK, so take us through the funds' three-year performance in detail.

A.

• Westcore Plus Bond focuses on Intermediate-Term Investment Gradebonds. Performance: +24.9% vs 16.6% for peers.
• Janus Flexible Bond is also an Intermediate-Term Investment GradeBond Fund. It slightly beat the benchmark: +16.9% vs +16.6%.
• Westcore Colorado Tax- Exempt (muni bonds, fairly short-termportfolio). Performance: +10.5% vs peers' 9.7%.
• Janus Short-Term Bond is a taxable bond fund. It beat its peeraverage by +8.8% to 7.5% for cumulative three years.

The other three-year winners were Colorado Muni Funds:

• Aquila Tax-Free Fund of Colorado "A" returned 10.9% overall, vs anational single-state average of 9.7%
• Colorado Bond "A" returned +20%
• Delaware Investors Colorado Insured Muni (a closed-end fund)returned +23%.

Q. Tell us a little more about that closed-end Delaware fund.

A. Sure. The fund used to be called Voyager Colorado, but after a managermerger, its new name, Delaware Colorado, is a little confusing to people.This closed-end fund trades on the American Exchange under the symbol"VCF." It yields about 5.5% currently. It recently was trading at about a10.5% premium over its underlying asset value. That premium is almostcertainly because of its high yield.

Q. How do they get such a high yield in the muni market? Long treasuriesare well under five percent!

A. They use leverage, meaning they borrow money on a short-term basis andinvest long-term. This fund is about 35% leveraged. If the yield curvecontinues to flatten, I think they will have difficulty maintaining thedividend. Their average bond coupon is about 5.33%, so it is apparent thatthey have a lot of older bonds in the mix.

Q. Are there structural advantages, or risks, in closed-end bond funds?

A. Yes, both advantages and risks. The advantage is that in a rising bondmarket the closed-end fund has a fixed asset pool and no new money iscoming in, so it is not forced to dilute its average yield with new,lower-coupon bonds by taking in new money. Also, leverage works in an upmarket, but it hurts in a down market. And in a closed-end fund, you canget an advantage by buying when the fund is at a discount. I would surehesitate to pay a 10.5% premium though. This fund traded at a 12% discountas recently as 2001 and at a 16% discount back in 1996, so you can seethere is a lot of movement.

Q. I noticed that you did not mention any high-yield funds as winners.

A. Right. Janus High Yield (+34.4%) and Westcore Flexible Income (+44.0%)are both managed in a more conservative style than a lot of their highyield peers, so they trailed the average (+51.2%). I think that to buy anyhigh-yield fund right now, you need to be very confident that the economicexpansion will continue for a few more years. The past three years hasbeen a good time, but those returns are not long-term sustainable.

Q. Generally, what do you think of the various Colorado-managed bond fundsnow?

A. Well, I like that a number are more cautiously managed than average. Butin general, (not a reflection on local funds per se) I am reasonablyconcerned that inflation is rising and that long rates will probablyfollow. If that is the case, you don't want to own long-bond funds. If myassumptions are correct, you want to own very short-term funds (but youwill give up a lot of yield) or own TIPS funds, since they are indexed toinflation. But those do not work well in taxable accounts, so they arebetter in your IRA. There are no Colorado managed TIPS funds.

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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).