CA Muni Bonds: A good place for tax free income?

Franklin CA Muni Update 5/20/2015

Franklin Templeton Fixed Income Group

The gist of our recent conference call with portfolio manager, John Wiley, is that over the long term, rising rates should be good for the total return of the tax-free fund that he manages.

Rates recently adjusted up in the Muni market causing bond prices to fall slightly. This gave the managers an opportunity to by new bonds at a better price with a higher yield. The CA tax free fund now has a yield around 4%. Inflation tends to drive long-term interest rates and the manager feels that inflation is now stable.

The total return of the CA Tax free fund is driven by the income: “Income drives total return.” The chart below shows a hypothetical example of how the vast majority of the growth of the fund comes from income– see the blue line.

Growth from income

Chart taken from the Franklin Single Sheet: Click here for more details.

Past returns are not a guarantee of future performance. The returns depicted above would be lower if sales charges were reflected.

There are many reasons why we enjoy using the Franklin CA Municipal Bond fund in our managed taxable accounts.

  • • Conservative investment strategy
  • • Attractive taxable-equivalent yield record
  • • Historically lower volatility record, compared to the S&P 500
  • • Relatively low expense ratio, compared to other muni bond funds.
  • • Experienced portfolio management team
  • • Monthly income exempt from regular federal and California personal income taxes 1
  • • Portfolio diversification
  • • Tenured investment team with expertise across market cycles

1. For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable.

Franklin CA Municipal Bond Fund invests at least 80% of its total assets in investment grade municipal securities whose interest is free from federal income taxes, including the federal alternative minimum tax, and from California personal income taxes.

During a recent interview, Rafael spoke about the strength in the CA muni bond market. “…the sector has been recovering in terms of income tax collection, sales tax collection, property taxes as properties have come back significantly in areas like California. All those have combined so far to have given us a pretty good year in 2014.” -Rafael Costas, Co-Director, Franklin Templeton Municipal Bond Department 

Franklin Templeton’s Strategy

  • • Conservative, income-oriented approach.
  • • No using leverage or investing in derivatives, which can increase portfolio volatility.
  • • Analysts search for high-quality, undervalued bonds.
  • • Buy and hold for the long term.

We also had the privilege of hearing John Wiley speak about the CA muni bond market and the fund he manages, which happens to be the largest CA muni bond. He mentioned that, in his opinion, the bond market was fairly priced and the income payout was attractive.

CA Muni Manager“In the Franklin Muni Department, we are committed to a conservative, disciplined investment strategy. For over 30 years, we have worked to provide shareholders with a high level of tax-free income.”

-John Wiley



This information is not intended to be tax advice.  Partnervest Advisory Services. LLC does not provide tax advice.