BlackRock Muni Intermediate Duration Fund: Safe Long-Term Play

Over the last 12 months we have been generally bearish on the equity markets and bullish on bonds. While the market talking heads have been screaming about the coming rate hikes, what no one talked about is that while even though US fixed income rates were low, they were still significantly greater than their European and Japanese counterparts. We discussed this in our 2016 predictions which you can read here.

On that theme, I highlighted an investment that we kept our eye on to take advantage of the values US municipal bonds represented in the global marketplace. That investment was the BlackRock Muni Intermediate Duration Fund (NYSE:MUI). You can read our full take on it here, MUI: A Great Bargain For The Coming Storm.

So let’s see how it has performed.

Performance Update

Since our last update on 5/23, MUI is up 2.9% on a total return basis, compared to a 1.58% gain for the iShares Muni Bond ETF (NYSEARCA:MUB).

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Year To Date you would be a happy investor with equity beating returns.

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MUI has appreciated 12.14% on a total return basis compared to 3.94% for the sister ETF.

Looking further back to the 1 year numbers, the closed end fund has returned a stellar 18%, nearly 3 times greater than the iShares Muni ETF.

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What’s Changed?

Perhaps the biggest change investors need to consider is that the distribution has been lowered by half a cent from $.0605 per share to $.0555 on a monthly basis.

As a result, the current yield, including the capital appreciation we have seen over the last 3 months has dropped .51% from 4.84% to the current 4.33%.

The capital appreciation also came in part from the drop in the discount to NAV, or net asset value.

The fund’s discount to NAV fell 1.36% from 7.32% to the current 6.16%.

To put this into perspective, the lowest the discount has been over the last year is 4.7%. The average for the last year has been a discount of 9.18%, with the largest being 12.49%.

Otherwise, the fund is still a high quality municipal bond fund, with the vast majority of the bonds being rated A or higher.

Key Drivers

Simply put, people are waking up and realizing two things. First, the US economy may not be doing as well as people would have you believe, and equities at all time highs look risky, particularly as they have been driven to those highs on financial engineering and zero interest rate policies, and NOT the due to the health of the markets. The word of the day was share buybacks with many companies employing debt to finance those. EPS are at all time highs even though revenues are not.

Secondly, even though US rates are quite low, our rates are still far better than what you would find in most of developed Europe and Japan. Those international investors and institutions need a place to park their money, and US munis are a great place to be.

As such, Closed End Funds, with the inherent disconnect between market price and net asset value presents that value, even today.

Our Take & Bottom Line

The best time to invest in the fund was a year ago. Perhaps the second best time is now?

While the discount to NAV has shrunk… there is still a discount to NAV.

That discount in turn presents this question, would you rather be invested in the iShares ETF yielding 2.29% or would you be ok buying a closed end fund yielding 4.33% with the only caveat, you are taking a bit of leverage risk and you NEED to keep an eye on the fund with trailing stops?

As we have covered in other articles, even if the Fed raises interest rates, munis should still be a safe place to hang out, not only because they are yielding far above the paltry 1.55% you would get on a 10 year treasury, but because of the federally tax free nature of the income.

What I am fairly positive about, is that if the Fed does raise interest rates, you will most likely have an overreaction on anything bond related, including muni CEFs, which may present you with an opportunity to pick up this fund with a discount greater than today’s.

If you do not want to wait, even if you pick up high quality muni closed end funds such as MUI, you should do just fine over the longer term in today’s deflationary environment of the Western markets.

We will continue to track and discuss this fund in the future articles.

Until the next update, keep doing your due diligence. For more reading, please look at my prior MUI and CEF Articles such as Nuveen Build America Opp Fund: Make America And Your Portfolio Great Again.

Please feel free to reach out to me via direct message if you would like to chat more about this or any other topic.

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