U.S. fund managers juggle Puerto Rico debt, redemptions and rate worries

viernes 21 de febrero de 2014 13:27 GYT

By Tim McLaughlin

BOSTON Feb 21 (Reuters) - Municipal bond fund managers, facing heavy redemptions from funds holding unfavorable debt, have been forced to juggle their holdings to pacify moody retail investors.

U.S. investors over the past 12 months have pulled $20 billion from municipal bond funds stuffed with Puerto Rico's recently junk-rated debt, and have also spurned longer-duration bonds.

"Never underestimate the irrational behavior of a retail investor," said Tom Metzold, a municipal bond portfolio manager at Eaton Vance Corp.

In January, investors pulled $1.1 billion from U.S. municipal bond funds with 5 percent or more exposure to Puerto Rico. Meanwhile, the $502 billion municipal bond mutual fund category attracted overall positive flows of nearly $400 million, according to Lipper Inc data.

The exodus from Puerto Rico-heavy funds seemed like a good move before three top Wall Street ratings agencies this month cut the island's general obligation debt to junk status.

But the cash-strapped commonwealth has since hatched a plan to sell nearly $3 billion in new bonds that would give the island liquidity and some breathing room to repair its flagging economy, sparking a rally in its debt.

"The perceived demand for the deal is strong," said Chris Alwine, who oversees $100 billion in municipal bond assets at Vanguard Group. The No. 1 U.S. mutual fund company has an underweight exposure to Puerto Rico debt, he said.

The S&P Municipal Bond Puerto Rico Index is up 4.94 percent so far this year, with most of that increase happening in February. That same index fell more than 20 percent in 2013, when net outflows in Puerto Rico-oriented funds totaled $20.2 billion, or 28 percent of $83.4 billion in assets under management, according to Lipper data.   Continuación...