Active Muni Fund
FCAL is remarkable because it covers the California municipal bond market via an active strategy. Both the existing ETFs covering California’s municipal bonds are index-based. The PowerShares California AMT-Free Municipal Bond Portfolio (PWZ) and the iShares California Muni Bond ETF (CMF) have $184 million and $762 million, respectively.
With California the most populous state in the union—and heavily taxed, to boot—“there’s certainly a large number of people whom we think would generate demand for this sort of product,” Issakainen said. In general, with municipal bonds, only the residents of an issuing state can see the full tax benefits.
The new fund can invest in California’s municipal securities, as well as in those of U.S. territories such as Puerto Rico, the U.S. Virgin Islands and Guam. The types of securities can range from municipal lease obligations to inverse floating-rate securities and include everything in between.
Although the fund is expected to have a weighted average maturity of 14 years or less, it can invest in securities of any duration or maturity. At least 50% of the portfolio must be rated investment-grade when it is added to the fund, and those rated as less than investment-grade securities at the time of addition must represent no more than 50% of the portfolio, the prospectus said.
“Because it’s actively managed, we’re comfortable allowing there to be more below-investment-grade bonds in the portfolio,” Issakainen noted. “We can do credit analysis and evaluate the ability of the borrowers to service and repay their debts, and we think there are opportunities to add value.”
He further notes that the team managing the fund has a long history and extensive experience in the municipal bond space.
Contact Heather Bell at [email protected].