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Author: henrypeter Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35387  
Subject: VKI opinions Date: 8/23/2004 8:45 AM
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Does anyone have any opinions and/or info on VKI (Van Kampen Adv. Municpal), a bond mutual fund?

It's present price is $14.11 with a yield of 6.80%, but is not fed taxable. It's 52 week lo and hi is 12.45-15.80.

I am looking for opinions or info as to what are the downside risks in the short, mid-term and long term, for both the yield and the stock price.

Many thanks.

Henry
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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10716 of 35387
Subject: Re: VKI opinions Date: 8/24/2004 9:03 AM
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For a municipal bond fund to get 6.8% in this day and age, I would think they must be dealing in a. leverage and/or b. low quality municipal bonds. In either case, the fund seems harzardous to me (I've never heard of it before so I have no first hand knowledge of it.). Since bonds are expected to increase in yield, the unit price will go down which adds some risk if you are not in the fund for the tax advantages. If the fund is leveraged, as I expect, they will be particularly subject to the decreased value of bonds. You should read the prospectus of this fund carefully. You might go to your library and see what Morningstar has to say about this fund.

They may have juiced up the return by getting into revenue bonds and bonds (sorry I have forgotten the term) like hospitals and parking lots in which the interest is subject to AMT (alternative minimum tax). If whatever the revenue bonds are issued for don't produce the necessary revenue, they can go bankrupt and you can lose your principal. This , in fact, happened to me on a couple of Iowa revenue bonds many years ago. Our FBR Virginia Double Tax Free bond fund pays around 4%, but does have some bonds subject to AMT to juice up the return. Our USAA Virginia Bond Fund (also double tax free) does not deal in bonds subject to AMT. In rare years, they have capital gains which are subject to taxes also.

Hope this helps

brucedoe

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Author: galagan Big gold star, 5000 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10717 of 35387
Subject: Re: VKI opinions Date: 8/24/2004 11:55 AM
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For a municipal bond fund to get 6.8% in this day and age, I would think they must be dealing in a. leverage and/or b. low quality municipal bonds.

Actually, there's a third option. If a fund buys bonds that trade at a premium, they get a higher yield. Unfortunately, the tradeoff is that over time, the bonds lose their premium as they approach maturity, and so you have erosion of net asset value.

An example: assume prevailing rates are 5%. An old bond that was issued with a coupon of 10% might trade around 125 with five years to go. For yield purposes, the current yield of this bond would be 8 percent ($100 interest per year / $1,250 market value for $1,000 par value), but the yield to maturity is about 5 percent because you will lose $250 in market value between now and maturity when the bond pays off its $1,000 par value.

The lesson here is that current yield can be extremely misleading and doesn't necessarily tell you anything about projected future total return.

dan

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Author: mhtyler Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10718 of 35387
Subject: Re: VKI opinions Date: 8/24/2004 1:03 PM
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For a municipal bond fund to get 6.8% in this day and age, I would think they must be dealing in a. leverage and/or b. low quality municipal bonds.
---

My Pimco fund PMX probably works in a similar way. It is a leveraged muni fund. I just bought a bunch of it recently when bonds appeared oversold to me. My yield was 7.6% and 7.7%. However, I had bought a bunch several years ago when it came out...a big mistake...and that only yields 6.6%.

How sound is Pimco? Fingers crossed.

mark

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Author: henrypeter Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10720 of 35387
Subject: Re: VKI opinions Date: 8/25/2004 12:41 PM
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<i< For a municipal bond fund to get 6.8% in this day and age, I would think they must be dealing in a. leverage and/or b. low quality municipal bonds. In either case, the fund seems harzardous to me (I've never heard of it before so I have no first hand knowledge of it.)....

....Hope this helps


brucedoe,

Thanks for your comments, as they are very helpful. I will have to tread very carefully with respect to such funds, and since I am becoming more and more risk adverse, probably not buy into this one, if any at all.

I got this fund recommended by a Motley Fool newsletter called Income Investing written by Mathew Emmert. Since my trust in newsletters has approached the zero mark, and I was hoping that this one may be different, but alas, I am increasingly not very trustful of his recommendations either. Most of his picks are low dividend paying stocks (range of 4% dividends) and thus might be relatively safer than some of his high yielding recommendations such some REITs presently yielding around 10%.

If I learn anything else of value regarding VKI, I will post it.

Thanks,
Henry




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Author: ngcpa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10721 of 35387
Subject: Re: VKI opinions Date: 8/25/2004 4:12 PM
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Personally, the only bond fund I would consider buying would be a GNMA fund. Although I would buy (and have bought) individual muni bonds and corporate bonds. I like to know that if worst came to worst, I could hold on to the bond and eventually get my principal back (assuming no default).
Norm

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Author: henrypeter Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10722 of 35387
Subject: Re: VKI opinions Date: 8/26/2004 10:19 PM
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Personally, the only bond fund I would consider buying would be a GNMA fund.

Norm, I think a GNMA fund would hold the same risks as other types of bond funds, at least with repsect to a rising interst rate environment. As rates rise (after the time of your investment) you would find yourself with paper loses on your principal, although you would still collect your interest.

However, unlike a bond fund, there would not be the risk of prinicpal loss due to bankruptcy of the mortgaged properties.

A mortgage REIT called Annaly Mtge (NLY - ticker symbol) presently pays a dividend of 11-12% and all of the mortgages that it owns are GNMA or Fannie Mae insured, and were packaged and sold by GNMA and FNMA to firms like NLY, with the mortgage gtee intact. At least that is how I understand it. So it seems it has the same interest rate risk as a GNMA fund, but also has the same safety of no loss due to defaults on mtges.

NLY also has strategy for preserving their intersst rate spreads in a rising interest rate environment, as long as rates do not rise too quickly. So, overall it has a higher yield than a GNMA fund, but he same risk factors, IMO.

best,
Henry

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10724 of 35387
Subject: Re: VKI opinions Date: 8/27/2004 9:58 AM
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"NLY also has strategy for preserving their intersst rate spreads in a rising interest rate environment, as long as rates do not rise too quickly. So, overall it has a higher yield than a GNMA fund, but he same risk factors, IMO."

Vanguard's GNMA Fund, with lowest costs, has a 4.52% yield. You don't get higher returns without taking on higher risks, and if the difference in return is that much higher, there are going to be different risk factors (not just the usual range of interest rate risk and default risk). The higher risks may be worth it, but don't gloss over them.


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