Bloomberg News

Franklin Michigan Fund Lost 5% of Assets in July as Detroit Sank

August 15, 2013

The biggest Michigan-focused municipal-bond fund lost 5 percent of its assets to net withdrawals last month as Detroit sank into bankruptcy, according to Morningstar Inc.

Investors took $66 million from the $1.3 billion Franklin Resources Inc. (BEN:US) portfolio, Morningstar said yesterday in a report. It said muni-bond funds shrank by $10.2 billion in July, half by those holding intermediate- and long-term bonds.

“The Detroit bankruptcy filing kept municipal-bond funds in heavy redemptions,” Morningstar’s Michael Rawson said in the report. “July marked the fifth straight month of outflows,” he said, with net withdrawals of $29.7 billion for the period.

Government debt originating in Michigan has been less attractive to investors after Detroit’s record bankruptcy filing on July 18. At least three municipal issuers -- Genesee County, Battle Creek and Saginaw County -- put off sales this month, citing interest rates that were higher than they wanted to pay. Kevyn Orr, Detroit’s emergency manager, has proposed paying some general-obligation bondholders pennies on the dollar.

The Franklin Michigan Tax-Free Income Fund (FTTMX:US) is the biggest of the 16 that focus on the eighth-largest U.S. state by population, according to data compiled by Bloomberg. The portfolio’s largest single holding (FTTMX:US) as of June 28 was $37.5 million of Detroit water bonds that mature in July 2034 and are backed by Assured Guaranty Municipal Corp., the data show.

Enhanced Credit

All the Detroit general-obligation bonds held by Franklin funds are insured or backed by the state, Matthew Walsh, a spokesman for San Mateo, California-based Franklin, said by e-mail. He said no one from the company was available to comment on the Michigan fund withdrawals.

Detroit, the biggest city in Michigan with about 700,000 residents, last month began the largest U.S. municipal bankruptcy, listing about $18 billion in debt.

“The angst in the market isn’t really about Detroit in isolation,” Municipal Market Advisors said this week in a report, citing legal precedents that may be set by the case.

“Investment in Michigan local governments during this period of uncertainty should take into account the potential downside risk that could come with decisions from the Detroit bankruptcy case,” according to the MMA report.

Franklin’s open-end Michigan fund has three out of five stars from Morningstar, according to its website. Its net asset value fell (FTTMX:US) to $11.44 on Aug. 13, the lowest since April 2011. The fund has lost 5.6 percent this year, a smaller decline than 41 percent of its peers, data compiled by Bloomberg show.

Morningstar, based in Chicago, rates funds based on risk-adjusted returns compared with peers, according to its website.

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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Companies Mentioned

  • BEN
    (Franklin Resources Inc)
    • $55.1 USD
    • -0.97
    • -1.76%
  • FTTMX
    (Franklin Michigan Tax-Free Income Fund)
    • $11.81 USD
    • -0.01
    • -0.08%
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