Putnam Municipal Income CEF

PMM, or Putnam Managed Muni Income, has been a nice little addition to my portfolio. I bought starting on May 20th, 2019. My total return has been around 8% over the last 8 months, this is due to buying at a variety of times throughout the year ( a few times rather high). While it did underperform the market; from a risk-adjusted basis I don’t think it’s too bad. It functions as diversification, income and risk management.

This is a MONTHLY dividend payer, so you’ll get income in your account every month.

What is the yield currently?

Current Distribution Rate is 4.71%. If you are in the 22% tax bracket, this is the equivalent of a 6.04% yield!

What are the expenses?

Expense Ratio is 1.01% total. While this number is certainly high overall, especially in the world of Fidelity/Vanguard ETFs and Mutal Funds. For a Closed-End Fund, it isn’t bad. It has one of lower expense ratios of it’s peers. Bond funds are the one place I don’t mind using an active manager. For example, my Long-term bond mutual fund always outperformed TLT because of active management.

Tax Advantages:

The best thing about this is the municipal bond income is exempt from Federal Taxes. I hold this in my taxable brokerage account so that comes in handy. A municipal bond is only state exempt if you hold one from the particular state you live in.

Risks?

Even though it is a BOND FUND, it carries risk somewhat similar to stocks. Mainly, the price could go down because a closed-end fund is traded like a stock.

For comparison, during the great recession, while stocks went down over 30%, a municipal bond CEF fell somewhere around 20%. Of course, they recovered faster than stocks. So this does carry risks with it.

Why did it fall 20% and not less like your typical Government bond? Because Closed-End Bond Funds are usually leveraged. This particular CEF is leveraged around 20%, that is how they get such high yields. This adds risk but also adds returns. I personally do not believe it is a good idea to buy CEF’s with a high percentage of leverage, say 30%, this could be disastrous to your portfolio.

Secondly, the bonds within the vehicle could default. On the other hand, once you get above BBB grade muni bonds, the chances of default are INCREDIBLE slim. Just be careful what type of bonds you are getting in the fund. This particular CEF carries about 60% of its bonds above the BBB rating. 27% of its bonds haven’t been rated, that’s not necessarily a bad thing, some are not bad, they just haven’t been rated. Around 14% are BB or B rated, this is where you are getting into riskier bonds. Once again, yields are pumped due to a small portion of poorer bonds.

Lastly, the MAIN RISK is a rise in interest rates. While the sentiment at the moment is they will not raise interest rates any time soon, this cannot be removed from the land of possibility. I’m honestly not 100% convinced we won’t see an unexpected rise in the 10 yr treasury yield this year. So even if we don’t get an interest rate increase we could still see a rise in bond yields.

Is now a good time to buy?

I think now is not a good time to start a new position. I think the prices SHOULD come down here over the next few months. Why? The price to nav is only trading at a discount of 1.1%. This is close to its 52 week high. The spread between the NAV and Share price is too close, you are not getting much of a discount. At the same time, there IS a shortage of municipal bond issuance at the moment, too much demand and not enough bonds. So, we COULD also see the price continue to go up for another two months or more. We will just have to see, I am no fortune teller.

In closing, I would just like to say, don’t cross Closed-End Funds off of your list just because they are an older investment vehicle. One website I used to find my fund is located at CEFCONNECT.COM:

https://www.cefconnect.com

Here, you can screen for funds based on NAV-Price discounts, expense ratios, leverage percentage and more. A GREAT resource for Closed-End Funds.

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