Is PRFHX a Strong Bond Fund Right Now?
Having trouble finding a Muni - Bonds fund? T. Rowe Price Tax Free High Yield Retail (PRFHX) is a potential starting point. PRFHX possesses a Zacks Mutual Fund Rank of 1 (Strong Buy), which is based on various forecasting factors like size, cost, and past performance.
Objective
PRFHX is one of many Muni - Bonds funds to choose from. Muni - Bonds funds invest in debt securities issued by states and local municipalities, which are typically used to pay for infrastructure construction, schools, and other government functions. These securities can be backed by taxes (revenue bonds), but others are known as "general obligation" and are not necessarily backed by a defined source. These bonds are especially attractive because of their inherent tax benefits.
History of Fund/Manager
T. Rowe Price is based in Baltimore, MD, and is the manager of PRFHX. T. Rowe Price Tax Free High Yield Retail debuted in March of 1985. Since then, PRFHX has accumulated assets of about $1.32 billion, according to the most recently available information. The fund's current manager, James M. Murphy, has been in charge of the fund since January of 2001.
Performance
Of course, investors look for strong performance in funds. This fund has delivered a 5-year annualized total return of 1.38%, and is in the top third among its category peers. But if you are looking for a shorter time frame, it is also worth looking at its 3-year annualized total return of 5.26%, which places it in the top third during this time-frame.
It is important to note that the product's returns may not reflect all its expenses. Any fees not reflected would lower the returns. Total returns do not reflect the fund's [%] sale charge. If sales charges were included, total returns would have been lower.
When looking at a fund's performance, it is also important to note the standard deviation of the returns. The lower the standard deviation, the less volatility the fund experiences. The standard deviation of PRFHX over the past three years is 6.53% compared to the category average of 9.31%. The standard deviation of the fund over the past 5 years is 7.46% compared to the category average of 10.86%. This makes the fund less volatile than its peers over the past half-decade.
Bond Duration
Modified duration is a measure of a given bond's interest rate sensitivity, so when judging how fixed income securities will respond in a shifting rate environment, it is an excellent figure to look at.
For investors who think interest rates will rise, this is an important factor to consider. PRFHX has a modified duration of 7.89, which suggests that the fund will decline 7.89% for every hundred-basis-point increase in interest rates.
Income
We must remember to consider the fund's average coupon, as income is traditionally a big reason for purchasing a fixed income security. This metric calculates the fund's average payout in a given year. For example, this fund's average coupon of 5.14% means that a $10,000 investment should result in a yearly payout of $514.
If you are looking for a strong level of current income, a higher coupon is a good choice, though it could pose a reinvestment risk; these risks can occur if rates are lower in the future when compared to the initial purchase date of the bond. Investors also need to consider risk relative to broad benchmarks, as income is only one part of the bond picture.
PRFHX carries a beta of 0.79, meaning that the fund is less volatile than a broad market index of fixed income securities. With this in mind, it has a positive alpha of 1, which measures performance on a risk-adjusted basis.Ratings
Investors should also consider a bond's rating, which is a grade "AAA" to "D" given to a bond that indicates its credit quality. With this letter scale in mind, PRFHX has 26.67% in medium quality bonds, with ratings of "A" to "BBB". The fund's junk bond component-bonds rated "BB" or below-is at 17.16%, giving PRFHX an average quality of BBB. This means that it focuses on medium quality securities.However, it is worth noting that 48% of the bonds in this fund are not ranked, so take the average quality level with a bit of caution.
Expenses
As competition heats up in the mutual fund market, costs become increasingly important. Compared to its otherwise identical counterpart, a low-cost product will be an outperformer, all other things being equal. Thus, taking a closer look at cost-related metrics is vital for investors. In terms of fees, PRFHX is a no load fund. It has an expense ratio of 0.65% compared to the category average of 0.90%. PRFHX is actually cheaper than its peers when you consider factors like cost.
Investors need to be aware that with this product, the minimum initial investment is $2,500; each subsequent investment needs to be at least $100.
Fees charged by investment advisors have not been taken into consideration. Returns would be less if those were included.
Bottom Line
Overall, T. Rowe Price Tax Free High Yield Retail ( PRFHX ) has a high Zacks Mutual Fund rank, and in conjunction with its comparatively strong performance, average downside risk, and lower fees, T. Rowe Price Tax Free High Yield Retail ( PRFHX ) looks like a good potential choice for investors right now.
Don't stop here for your research on Muni - Bonds funds. We also have plenty more on our site in order to help you find the best possible fund for your portfolio. Make sure to check out www.zacks.com/funds/mutual-funds for more information about the world of funds, and feel free to compare PRFHX to its peers as well for additional information. If you are more of a stock investor, make sure to also check out our Zacks Rank, and our full suite of tools we have available for novice and professional investors alike.
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This article originally published on Zacks Investment Research (zacks.com).
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