USAA Tax Exempt Intermediate Term Fund

Scorecard
5 / 5 Stars
Lipper
5 5 4 4 4
Zacks Investment Research
1 (Strong Buy)
Standard & Poor's
5 / 5 Stars
TheStreet.com
A+ (Buy)

#1 in Muni National Interm

U.S. News evaluated 82 Muni National Interm Funds. Our list highlights the top-rated funds for long-term investors based on the ratings of leading fund industry researchers.

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Performance

The fund has returned 0.56 percent over the past year, 5.94 percent over the past three years, 6.65 percent over the past five years, and 4.27 percent over the past decade.

Trailing Returns Updated 02.28.2014
Year to date 2.6%
1 Year 0.6%
3 Years (Annualized) 5.9%
5 Years (Annualized) 6.7%
10 Years (Annualized) 4.3%

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Summary

In the eyes of USAA Tax Exempt Intermediate-Term’s management team, some risks are clearly worth taking.

As of March 05, 2014, the fund has assets totaling almost $3.08 billion invested in 570 different holdings. Its portfolio consists of municipal bonds (debt issued by state and local governments, as well as their agencies).

Compared with its peers, this fund digs deeper into the credit spectrum. Since 2009, that’s worked out quite well. The fund rocketed to an 18 percent return that year. In the fixed-income universe, that’s a staggering number. But the fund’s added risk magnified its losses in 2008, when the recession stung muni bonds, particularly those with lower ratings. That year the fund lost 5 percentage points more than the average for its peer group, according to Morningstar. Currently, roughly 28 percent of the fund’s bond holdings are rated BBB, and this allocation has added value during the muni market’s recovery. Lately, one of the fund’s bigger changes has been the departure of lead manager Clifford Gladson, who left his post to assume the role of USAA’s chief investment officer. Regina Shafer, who had co-managed the fund since 2003, is now in charge. Says Morningstar: “While losing an experienced manager is never pleasant, USAA handled the transition well, and we have significant confidence in Shafer’s abilities.”

Going forward, one of the bigger risks for the fund is rising interest rates. Rates, which are at historic lows, can only go up, and when that happens, bond prices will go down. Additionally, state and local governments continue to struggle. Still, management is cautiously optimistic about the muni market’s future. “Looking ahead, we expect tax-exempt yields to remain low for some time. The U.S. economic recovery is fragile and deflation appears to be more of a risk than inflation in the near term. As a result, we do not expect the Federal Reserve to raise short-term interest rates until 2011 at the earliest. Although a number of states and municipalities face budgetary challenges, municipal credit quality is generally solid,” management says in commentary for the first half of 2010. The fund has returned 0.56 percent over the past year and 5.94 percent over the past three years.

Historically, the fund has done a fine job of achieving its goal: providing investors with steady income and tax advantages (muni investors traditionally do not need to pay federal income taxes on their interest). Over time, though, the fund has had its fair share of ups and downs. Since 2000, it’s finished in the top 10 percent of Morningstar’s intermediate-term national municipal bond category in five separate years. But it has also finished in the bottom quartile three times. The fund has returned 6.65 percent over the past five years and 4.27 percent over the past decade. 

Investment Strategy

In an effort to increase the fund’s yield, management dips down into the credit spectrum. Currently, roughly 28 percent of the fund’s bond holdings are rated BBB, the lowest rating still considered to be investment grade. To reduce volatility, management runs a highly diversified portfolio, which currently includes upwards of 500 securities.

Role in Portfolio

Morningstar calls this fund a “core” holding.

Management

Regina Shafer manages the fund.

Fees

USAA Tax Exempt Intermediate Term Fund has an expense ratio of 0.54 percent.

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Risk

Going forward, one of the bigger risks is rising interest rates. When interest rates go up, bond prices will fall.

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