Delaware Investments Delaware Investments Delaware Investments

Municipal fixed income team

Municipal fixed income team

The case for municipal bonds — the tax dilemma

Municipal bonds remain among the few tax-advantaged alternatives for income investors. Unlike government bonds, corporate bonds, and other major fixed income asset classes that pay taxable income, municipal bonds generate income that, for most investors, is free from federal, and in some cases state and local, income taxes.

As indicated in the charts below, this can amount to powerful savings for certain investors.

Hypothetical investment for a 1-year period

$500,000 in a taxable investment yielding 5.50%
Earned $27,500

Hypothetical investment for a 1-year period

$500,000 in a tax-free investment yielding 4.25%
Earned $21,250

For illustrative purposes only and not representative of the performance of any specific investment. Substantially all dividend income derived from tax-free funds is exempt from federal income tax. Some income may be subject to the federal alternative minimum tax (AMT) that applies to certain investors. Capital gains, if any, are taxable.

The case for municipal bonds

The case for municipal bonds

Source: Delaware Investments, August 2012

The chart is for illustrative purposes only and is not meant to represent the return or yield of any Delaware Investments mutual fund. Actual fund dividends and prices vary with market conditions. The example assumes a fixed rate of return for one year and uses the regular federal income tax rates effective as of September 2012. The chart does not reflect state or local income taxes or the alternative minimum tax. Be sure to consult a professional tax advisor before investing, or when planning tax-advantaged income strategies.

Municipal bonds may offer attractive taxable-equivalent yields

Income from municipal bonds is exempt from regular federal income tax, and in some cases, state and local income taxes.* As such, investors across all tax brackets may realize tax advantages by investing in municipal bond funds.

This potential benefit is evident in reviewing the elevated rates at which a taxable bond would have to yield in order to match the "take home" income from a municipal bond.

*Substantially all dividend income derived from tax-free funds is exempt from federal income tax. Some income may be subject to the federal alternative minimum tax (AMT) that applies to certain investors. Capital gains, if any, are taxable.

The case for municipal bonds
Investment philosophy

Investment philosophy

In managing municipal fixed income securities, our philosophy is based upon our belief in the following key investment principles:

  • Income is the most significant and predictable component of total return over time. Our income-oriented process emphasizes the yield component of total return and minimizes the need to forecast interest rates.
  • A focus on security selection is critical to our bottom-up (bond by bond) portfolio management style.
  • Efficient management of realized gains and losses, through low portfolio turnover and the opportunistic harvesting of losses, may significantly enhance after-tax returns.*

Across all funds, we believe that using proprietary, bottom-up, fundamental research, coupled with disciplined trading execution, is the best way to identify the relative value of individual securities and market sectors. Using this approach, we seek to construct portfolios that we consider to have attractive risk-reward characteristics relative to the benchmark and our peers.

*Portfolio turnover is a measure of how frequently the managers buy and sell assets within a fund over a particular period. It is usually reported for a 12-month period.

Investment team

See Yeng Quek

See Yeng Quek, CFA

Managing Director, Head of Fixed Income Investments

(View bio)

Joe Baxter

Joseph R. Baxter  

Head of Municipal Bond Department, Senior Portfolio Manager

(View bio)

Steve Czepiel

Stephen J. Czepiel

Senior Portfolio Manager

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The case for municipal bonds
Video: Active management

Active management

Gregory A. Gizzi

Gregory A. Gizzi, portfolio manager and head of convertible bond and municipal bond trading on the Delaware Investments Fixed Income team, comments on the importance of the financial crisis as an inflection point within the municipal market, returning it to a credit market that favors active managers. Run time (0:27)

The views expressed represent the Manager’s assessment of the Fund and market environment as of September 2012, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice.

Investment philosophy
Distinguishing characteristics

Distinguishing characteristics

When you choose Delaware Investments, you’ll have an accomplished team of professionals managing municipal bonds on your behalf. Specifically, we offer:

  • Experience: Our experienced municipal team is led by veteran managers (averaging 26 years of investment management experience). The company’s experience managing municipal assets dates back to 1977.
  • Dedicated investment process: We evaluate securities bond by bond, based on thorough fundamental research, to ensure we are comfortable with the credit profile of each issuer. We believe this approach may enable us to uncover potential value that investors with less experience or a less rigorous research discipline might not be able to identify.
  • Scale: The size of our municipal portfolios allows us to invest selectively in new bond issues. We are generally able to fully invest in new issues that meet our standards, yet avoid deals with which we are less comfortable.
  • Ability to diversify: Each of our mutual funds invests across the credit spectrum and yield curve in a way we believe most individual investors would find difficult to match. It’s important to remember, of course, that diversification neither assures a profit nor guarantees against a loss.
  • Performance: Our group’s goals include consistently staying in the top third of a fund’s peer group for yield and in the top half for total return. We generally tend not to “chase yield” by investing in riskier securities during market rallies, nor do we typically seek shelter solely in higher-rated securities during volatile periods.
Video: Active management
Funds we manage

Learn more about the Funds we manage:

Distinguishing characteristics
The case for municipal bonds

Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Fund’s prospectus and its summary prospectus, which may be obtained by visiting our fund literature page or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.

Investing involves risk, including the possible loss of principal.

IMPORTANT RISK CONSIDERATIONS

Fixed income securities can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder a issuer’s ability to make interest and principal payments on its debt.

Fixed income securities may also be subject to prepayment risk, the risk that the principal of a fixed income security may be prepaid prior to maturity, potentially forcing the investor to reinvest that money at a lower interest rate. Securities in the lowest of the rating categories considered to be investment grade (that is, Baa or BBB) have some speculative characteristics.

High yielding, noninvestment grade bonds (junk bonds) involve higher risk than investment grade bonds.

The high yield secondary market is particularly susceptible to liquidity problems when institutional investors, such as mutual funds and certain other financial institutions, temporarily stop buying bonds for regulatory, financial, or other reasons. In addition, a less liquid secondary market makes it more difficult for the Fund to obtain precise valuations of the high yield securities in its portfolio.

Substantially all dividend income derived from tax-free funds is exempt from federal income tax. Some income may be subject to the federal alternative minimum tax (AMT) that applies to certain investors. Capital gains, if any, are taxable.

Funds that invest primarily in one state may be more susceptible to the economic, regulatory, and other factors of that state than a fund that invests more broadly. Substantially all dividend income derived from tax-free funds is exempt from federal income tax. Capital gains, if any, are taxable. Some income may be subject to the federal alternative minimum tax that applies to certain investors.

Diversification may not protect against market risk.

A bottom-up approach to investing primarily considers factors affecting individual companies and secondarily focuses on industries and economic trends.