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.

Franklin’s K2 Alternative Strategy Fund

K2 Highlights from Meeting with Manager

Martha Levacy with portfolio manager Max Corvin

Martha Levacy with portfolio manager Max Corvin

At a recent meeting with Franklin Templeton, Max Corvin explored some reasons why some wealthy investors have outperformed the markets and most mutual funds over the long term.

He and his team called K2 believed from their research that the wealthiest of investors were making more money because they had access to Hedge Funds. These Hedge Funds used alternative investing strategies that tended to have better downside protection during poor market cycles. Because they didn’t go down as far, they then didn’t need to gain as much when markets turned around.

Last year, Franklin Templeton acquired K2 advisors and gave non-accredited investors access to Hedge Fund managers. We’re excited to be able to offer this fund to you in your portfolio at Pershing.

What are the advantages to the Franklin K2 Alternative Strategies Fund versus a traditional hedge fund?

  • These funds are open to all investors. Clients don’t need to meet any income or net worth minimums.
  • Tax reporting is done with a 1099, not a K1 that often comes late and may complicate your taxes.
  • Better oversight and transparency: The hedge fund managers who work with K2 must disclose their holdings daily. The traditional hedge fund isn’t regulated in the same way and doesn’t need to disclose holdings or trading activity as frequently.
  • Lower fees. The K2 charges around 2% in management fees, compared to a 20% performance AND a 2% management fee commonly charged by hedge funds.
  • More Liquid. You get daily liquidity with this mutual fund. Not all Hedge funds are liquid.
  • Having an alternate investment may lead to better portfolio performance.

Value Graph adding alts 150501

*This chart depicts hypothetical investments.  It is for illustrative purposes only and does not represent the K2 Alternative Strategies Fund’s portfolio composition or performance.  The HFRI index is comprised of traditional hedge funds.  The K2 fund may have performed differently than what is depicted here.  Charts and graphs should never be relied upon as the sole basis for investment decisions. Chart from Franklin Templeton K2 brochure

How does it work?

The K2 team doesn’t directly manage the money. Rather, they actively select the hedge fund managers whom they consider to be the best in the industry, and allocate the money daily between these managers. They now have 4 or 5 different active strategies that they allocate the money to:

  • Global Macro
  • Long Short Equity
  • Event Driven
  • Relative Value

How have Alternate Strategies performed in the past?

Hedge Strategies chart 150501

**Chart from Franklin Templeton K2 brochure

To learn more about this The K2 Alternate Strategies funds, please click here for the PDF Guide. Please give us a call at 619.435.1234 or an email if you have any questions.

NOTE: This article is not intended as a solicitation to sell the K2 Alternative Strategies funds. Investors should read the fund prospectus prior to investing in any fund.

*Source: FactSet. Initial allocations for the conventional portfolios are 100% Global Fixed Income, 50% Global Fixed Income / 50% Global Equity and 100% Global Equity. For the 50% Global Fixed Income / 50% Global Equity portfolios with hedge components added, the stated allocations to the hedge components are taken equally from the fixed income and equity portions of the portfolio, respectively. Illustration assumes monthly rebalancing. Global Equity is represented by the MSCI World Index. Global Fixed Income is represented by the Barclays Global Aggregate Index. Hedge Strategies are represented by the HFRI Fund Weighted Composite Index. Indexes are unmanaged and one cannot invest directly in an index. While this information is based on index returns and does not represent the fund’s performance, it provides an indication of how an allocation to hedge fund strategies could affect overall portfolio performance. Returns data represents average annual total returns and assumes reinvestment of interest or dividends. Risk is measured by the annualized standard deviation of monthly total returns.

**Source: FactSet. U.S. Equity is represented by the S&P 500 Index. Global Equity is represented by the MSCI World Index. U.S. Fixed Income is represented by the Barclays U.S. Aggregate Index. Global Fixed Income is represented by the Barclays Global Aggregate Index. Hedge Strategies are represented by the HFRI Fund Weighted Composite Index. Indexes are unmanaged and one cannot invest directly in an index. While the information is based on index returns and does not represent the fund’s performance, it provides a general indication of the risk/return profile of hedge fund strategies. Returns data represents average annual total returns and assumes reinvestment of interest or dividends. Risk is measured by the annualized standard deviation of monthly total returns.


Many of our client’s portfolios are holding PIMCO’s Total Return Fund.  Will the fund’s performance be impacted by the fact that the chief portfolio manager, Bill Gross, is leaving the firm

First of all, Total Return has always benefited from the input of many portfolio managers. The success of the fund rests on a time-tested, team-oriented investment process. Quoting from one of the managers of The Total Return Fund, Mark Kiesel, “I think it’s important to highlight that all three of us have already been part of the Total Return investment process for many years. As with every other generalist portfolio manager at PIMCO, Bill Gross relied on us—along with the firm’s 240 other portfolio managers–for help in generating the trade ideas that have driven the strategy’s strong historical performance. When we took over the strategy there were no surprises. It was a seamless transition.”

One of our favorite managers at PIMCO, Rob Arnott, felt there was going to be a transition from Bill Gross to a successor team at some stage. He emphasized that the Total Return fund has “an awesome team” that Bill Gross and the rest of top leadership has hand-picked over the years. “Their credentials are superb”, he says, and “their demonstrated abilities are impressive.”

Qualified Dividends

Qualified dividends, as defined by the United States Internal Revenue Code, are ordinary dividends that meet specific criteria to be taxed at the lower long-term capital gains tax rate rather than at higher tax rate for an individual’s ordinary income.

Clients in the 15% or lower tax bracket pay zero income tax on qualified dividends and clients in all but the highest tax bracket pay 15%. This differs from ordinary income and non-qualified dividends that are taxes at the client’s normal tax bracket.


Dividend Taxation in the United States 2013 +
Ordinary Dividend
Tax Rate
Qualified Dividend
Tax Rate
10% 0%
15% 0%
25% 15%
28% 15%
33% 15%
35% 15%
39.6% 20%


Qualified dividends are often found in pure stock funds, such as Franklin’s Rising Dividend fund.

You can see how many of your dividends were considered qualified by looking at your 1040 tax return on line 9b.

Qualified Dividend

If you don’t have an immediate need for income, then moving towards qualified dividends for the growth portion of your portfolio may be a good idea, especially if you are in a high tax bracket.

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


Past visit with portfolio manager

Muni Manager

Twice now I’ve had the opportunity of meeting with the chief portfolio manager of the Franklin CA Tax-free fund, Christopher Sperry, CFA®, who joined Franklin Templeton in 1996.

Here are some points that Chris made:

  • Muni Bond Market is $3.7 Trillion in size
  • Interest rate is 4.3% * TAX-FREE—equivalent to about a 6% taxable
  • Supply of Muni bonds is down and the demand is up.
  • Investors tend to like the steadiness of the Muni bonds
  • Net asset value has been relatively flat for a long time—nick- named Dead Man’s pulse

Chris pointed out a very interesting reason why volatility tends to be low in the municipal bond market. Because of the double tax free advantage, California residents are typically the only ones investing in these funds. With US Treasuries, however, the whole world invests and global influences can cause a greater amount of volatility.

If you’re wondering about the strength of California and the ability of the different cities to keep their obligation to pay bond holders, Chris is not concerned. He said that even Vallejo in bankruptcy never missed a payment.

Investment Recommendations:

The Franklin Group feels that investors waiting on the sidelines may miss out on current income opportunities. We agree and are using these funds in portfolios when appropriate. If you’d like to explore getting more tax-free income, be sure to let me know.

Distribution Rate at NAV4
As of 3/31/12. 4.37%

Thank you so much,

ML's Signature

Fund Update

Remember our email message last April that discussed the PIMCO All Asset All Authority Fund? We wanted you to know that Morningstar gave it its highest pick this week. Here’s what they wrote:

PIMCO All Asset All Authority (PAUDX) is one of the very few allocation funds that actually remained in the black, with a 4.4% return only down slightly from a 6.4% return at the end of July. Manager Rob Arnott has been bearish on the United States for years due in large part to the federal deficit. This fund gives him wide discretion to invest wherever he sees the best opportunities. He had a 12% short-position bet against U.S. stocks, and was long some emerging markets and PIMCO Unconstrained Bond‘s (PFIUX) portfolio.

(This is the April message)

*This month we’d like to share some additional details about one of the funds: PIMCO All Asset All Authority Fund

GOAL OF FUND (as noted in PIMCO Single Sheet):

  • Protect from inflation
  • Outperform the Consumer Price Index by 6.5%


  • Diversification around the world
  • Tactical allocation
  • Ability to short equity markets
  • Use variety of PIMCO funds

This is one of many excellent investments you may find in your portfolio. If you’d like more details, please email me or bring some questions to your next appointment.

All my best,

ML's Signature