A Standout Stuck in the Shadows


By James A. Anderson Try as he may, Phillip G. Condon can't seem to beat the yield trap. Condon heads the Scudder High-Yield Tax-Free Fund (SHYTX), a portfolio of municipal bonds that mixes investment-grade and noninvestment-grade holdings. And it happens that his fund has logged some of the best numbers among the 28 high-yield muni offerings tracked by Morningstar.

Over the past three years, he has managed an average total return of 4.8%, the best in his class. The fund has a 6.9% average annual tally the past five years, and 7.3% gain the past 10 years -- again, the best in class. Not only that, but Condon runs the only high-yield muni fund that's a member of BusinessWeek's A list of high-return, low-risk, fixed-income offerings.

Even with that kind of record, Condon still has to field questions focusing on the bane of every fixed-income manager around: just how much his fund generates in yield income. That's a shame, because at the end of the day, the number that matters most for investors is a fund's total return, an amalgam of the change in a bond portfolio's holdings and whatever yield income gets mixed in.

UPHILL BATTLE. Condon, who has run the fund since its inception in 1987, says it may cost him a bit of popularity, but he's far more focused on the business' bigger picture -- total returns. BusinessWeek data show that Condon's yield isn't shabby, either. The Scudder fund carried a 5.3% yield at the end of September, giving it a rank of 19 out of 31 high-yield muni-bond competitors. Stack high-yield munis by their more revealing total return data, and you see a different picture: Scudder's selection finishes a good deal ahead of funds with bigger yields.

What's irksome to Condon is that his rivals offer just about a percentage point or so more yield (the highest in BusinessWeek's database is 6.2%), yet they seem to win investors' hearts -- and wallets. Yes, Condon's fund just cracked $600 million in assets this past quarter. But look at the Van Kampen High-Yield Muni (ACTHX), which can brag about a 6% yield and $1.26 billion in assets as of Sept. 30. Its three-year average total return of 3.1% was a full 35% below Scudder's.

Then there's AXP High-Yield Tax-Exempt (INHYX), a fund that offered a yield of 5.4% as of Sept. 30, a mere tenth of a percentage point above Condon's, yet it had $4.8 billion in its coffers. The AXP fund also trails Scudder's long-term results. In fact, over the past 3, 5, and 10 years, AXP's total return has been between 12% and 16% lower.

BOTTOM-UP STRATEGY. What makes Condon's uphill battle all the more ironic is that he's in one of the few hot spots in the mutual-fund market these days. Bond funds -- and high-yield munis in particular -- have had a ball so far in 2001, thanks in large part to falling interest rates. BusinessWeek stats show the average bond fund was up 4.7% for the year as of Sept. 30. High-yield muni portfolios bettered that figure, with an average 5.4% climb. Condon's fund, meanwhile, has put up an outstanding total return of 7.5% as of the market's close on Oct. 19.

As a result, muni managers saw their coffers swell some $10 billion year-to-date at the end of August, according to the Investment Company Institute. That's compared to net outflows of $14.1 billion in 2000 and $12.2 billion the year before.

If you were to compare Condon to a stock-fund manager, you would label him a bottom-up investor. He says he chooses individual investments on their merits, rather than focusing on top-down strategies such as outfoxing the yield curve and cashing in on bond-value shifts that may be triggered by interest-rate moves. "A lot of bond portfolio managers spend all their time studying the direction of rates and making adjustments based on the yield curve and credit quality," he says. "We're much more concerned about the number on the coupons of the bonds we buy and whatever call protection we can secure. That way, we can deliver strong performance without worrying so much about the direction of rates."

"GOOD INFLOW." That's important in the high-yield, tax-free market. High-yield muni funds make a lot of their living off of nonrated issues. In some cases, it's paper floated by municipalities that don't want to pay extra money to carry a rating. Other times, an issuer foregoes a rating, under the assumption the bonds wouldn't receive a very good grade. "In this space, credit quality is a major concern," says Morningstar analyst Alan Papier.

When he comes to market these days, Condon says he's leaning more to long-term paper in the 15-year range and issues with A ratings or better. "We've enjoyed a good inflow of new investor money, but as the money has come in, we've typically put it to work in high-grade paper," he reports.

Condon's issue-by-issue scrutiny has paid off, particularly in the market for health-care bonds, used in part to build and upgrade hospitals and other facilities. A large portion of the nonrated muni-bond market, health-care issues made up almost 28% of Condon's portfolio at mid-year. Then, as Medicare payments were increased and HMOs started to ease pricing pressure on hospitals, health-care bonds staged a strong rally, and Scudder was there to cash in.

NOTHING PERSONAL. Condon says, though, that as great as health-care paper has been for him this year, he's not looking to add to positions there. Instead, he finds more value in bonds floated to fund senior-care homes and real estate issues.

Meanwhile, Condon is working on getting his fund a bit more attention. "Yield always seems to sell more easily," he admits. "But I don't take it personally when investors seem to gravitate to the numbers that don't count the most." Still, he keeps spreading the word as best he can. "Clients are spending more time looking into bond funds," he notes. "Every time I speak to investors, I try to stress which figures they should focus on. If we keep doing that and keep putting up good performance figures, I think the public is bound to gradually start to grasp how well we're doing." Anderson teaches journalism at the City University of New York. Follow his Mutual Fund Maven column, only on BW Online


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