Morningstar Magazine - December/January 2015 - 65
As the gap between yields on long and short
munis narrowed, these managers focused on
the middle ground. They also improved the
portfolio's overall quality, letting its exposure to
the highest-quality prefunded munis build.
Those moves protected the fund as the munimarket hit turbulence in late 2007 through 2008.
Bond-insurer downgrades and a worsening
economy caused credit spreads to widen.
Tender-option bond programs facing margin calls
also dumped munis, forcing long-term muni
yields higher just as the Fed's accommodative
policy pushed short-term muni yields lower.
After the credit crisis, the team gradually
repositioned the fund to take advantage of better
value among long maturity and midquality
munis. Those themes largely remain in place,
although the team reports recently finding
opportunities in the shorter end of the yield curve.
Through these changes, the team has maintained
a high-quality portfolio, focusing on AA and A
bonds, while treading lightly in BBB rated bonds
(7.4% as of September, roughly half the category
norm) and riskier specific names such as Detroit.
by a couple of percentage points. The fund also
lagged in 2012, a year that favored creditsensitive munis as income-hungry investors piled
into high-yield funds. That discipline also
helps the fund lose less in downdrafts. In 2008, the
fund's 4.6% loss paled in comparison to the
double-digit drops suffered by its more aggressive
peers. In 2013's broad bond market sell-off,
which hit munis particularly hard, its 2.9% loss
was milder than that of 90% of its peers.
In 2014, muni markets have bounced back nicely
thanks in part to technical factors as investors
have flowed back into muni funds at the same
time that supply was down. The fund has
benefited from an overweighting to hospital bonds
and its yield-curve positioning, but its 8.6%
return through Sept. 30 still lands just below the
category average as lower- and midquality
fare has outperformed. This fund doesn't rely only
on solid defense to drive returns. Over longer
periods, its multifaceted approach continues the
same pattern of outstanding total returns
with below-average volatility that repeats itself
here and across Fidelity's muni lineup.
the fund's success. Pagliocco, her comanager
on this fund since early 2009 and lead manager on
Fidelity California Municipal Income FCTFX since
2006, is now in charge here and of the muni
portfolio management overall. Pagliocco is
supported by comanagers Sommer and Ramundo.
Sommer has managed other muni funds
since 2002, and Ramundo, a longtime health-care
sector analyst, rounds out the manager trio.
All three bring complementary skills to the mix:
Pagliocco came from trading, Sommer
from quantitative research, and Ramundo from
credit research.
Parent Pillar: Positive T
As one of the mutual fund industry's giants,
Fidelity has pockets of strength and weakness. Its
fixed-income operations are among the industry's
best. On the equity side, the firm is home
to some talented fund managers, who in many
cases run Fidelity's biggest funds. However,
Fidelity's size hasn't translated into success across
the board. Its sprawling lineup leaves room
for offerings that have produced mediocre results
or have endured many manager changes. Fidelity's
executive management and fund boards have
made consistent performance a priority, but it will
take time to gauge improvement.
Performance Pillar: Positive T
These managers avoid adding yield by sliding
down in quality or extending too far out on
the maturity curve, which often keeps this fund
from achieving greater heights. As creditsensitive fare and long-maturity munis led 2009's
recovery, this fund trailed the category median
People Pillar: Positive T
Strong collaboration among different team
functions-trading, credit research, portfolio
management, and quantitative research-
continues to set this group apart. In mid-2010,
Thompson (who led the firm's muni portfolio
managers since 2002) became chief investment
officer of Fidelity's bond group. The skilled
team she left behind had already contributed to
Price Pillar: Positive T
This fund's 0.46% expense ratio ranks among the
cheapest available to no-load fund investors. K
Style Map 9/30/2014
Credit Quality 9/30/2014
Rolling-Returns Summary 9/30/2014
Credit Quality
High Med Low
Ltd
Mod Ext
Interest Rate Sensitivity
20000
History
Fund
Cat
Bonds (%)
Style Bonds (%)
2014
8
8
98.5
2012
8
98.3
2011
10000
8
98.7
2010
8
60
98.5
15000
2013
Elizabeth Foos is a senior analyst with Morningstar's
manager research group.
70%
36-Month Rolling Periods
137 Observations, 11 Years.
99.3
Bonds % based on
5000
portfolio data.
21
40
9
0
20
AAA AA A
BBB BB B
http://global.morningstar.com/Morningstarmagazine
Morningstar Magazine - December/January 2015
Table of Contents for the Digital Edition of Morningstar Magazine - December/January 2015
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