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During th e market turmoil of recent years, most municipal funds have delivered solid returns by following plain-vanilla strategies. Typical portfolio managers have bought a cross section of investment-grade bonds. Not surprisingly, fund returns tended to be bunched in a close pack. But not all managers are content to stay in the middle of the field. A few stars have topped the averages by following unusual strategies.

The winning approaches have fallen into two camps. At one extreme, the managers are exceptionally conservative, sticking with the very highest quality bonds. In the turmoil of recent years, the cautious approach produced good results by limiting losses in downturns. On the other end of the spectrum, some funds have outpaced competitors by taking on risk. By buying some low-quality bonds or using leverage, the managers have beaten the benchmarks. Either the conservative or aggressive approach can work, but advisors should be clear about what they are buying.

Among the most conservative funds is Baird Intermediate Municipal Bond (BMBIX). While the average intermediate municipal fund lost 2.3 percent in 2008, Baird actually gained 6.4 percent and ranked as the top performer in its category. The number two finisher trailed Baird by nearly 2 percentage points. The strong showing can be attributed to Baird’s simple strategy of sticking with the highest quality bonds. The fund currently has 70 percent of its assets in AAA-rated bonds and most of the rest in AA. “The people who buy our fund are concerned about wealth preservation, so it makes sense to have a bias for higher quality,” says portfolio manager Warren Pierson.

The approach doesn’t work every year. In the rebound of 2009, Baird finished near the bottom of the standings. But by shining in downturns, the fund outdid 95 percent of competitors during the past five years.

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Another fund that stayed in the black during 2008 is Marshall Intermediate Tax-Free (MITFX). The fund currently has most of its assets in bonds rated AAA or AA. Portfolio manager Duane A. McAllister says that he is finding attractive AA-rated bonds with yields of 5 percent. That is a rich after-tax payout for high-income investors. “You don’t need to go into the low-quality space to find good opportunities,” he says.

Among the more aggressive choices is Wells Fargo Advantage Municipal Bond (SXFIX), which ranks as the top-returning, long-term municipal fund for the past decade, according to Morningstar. Portfolio manager Lyle Fitterer boosts results by putting up to 20 percent of his assets in high-yield (junk bonds), which are rated below investment grade. Of course, Fitterer concedes that high-yield securities can be risky. During downturns, junk can crash. But the low-quality bonds can soar during periods when the economy is growing and investors are less concerned about risk.

To avoid trouble, Fitterer aims to buy high-yield bonds when they seem cheap and sell when the securities look rich. In 2007, he became concerned that the economy was headed for trouble at a time when high-yield bonds looked expensive. “The economy was slowing, and we were just not getting compensated to take credit risk,” he says.

Fitterer sold high-yield securities, raising the average credit quality of the portfolio to AA. That helped the fund weather the financial crisis. Then as high-yield prices collapsed late in 2008, he shifted 15 percent of assets into high-yield bonds, and lowered the average credit quality of the portfolio to BBB. The move proved on target when low-quality bonds rallied sharply as markets rebounded.

Another fund that can shift to high-yield bonds is BlackRock National Municipal (MDNLX). BlackRock can hold up to 25 percent of assets in high-yield bonds. In addition, the fund boost yields by holding investment grade bonds in unloved sectors, such as hospitals. At a time when many AAA-rated state bonds yield 4 percent, it is possible to get a 6 percent yield on an A-rated hospital, says Peter Hayes, who heads BlackRock’s municipal department. “Many hospital bonds don’t have a big buyer base because individual investors gravitate to the higher-quality part of the market,” he says.

To gain some extra yield, BlackRock sometimes uses leverage. The fund borrows by selling short-term securities known as inverse floaters to money-market funds. Then the portfolio managers take the proceeds and invest in bonds. By using such leverage, the fund can take a bond with a 5 percent yield and enhance it to the equivalent of a bond with a 7 percent yield. As a result of its strategies, BlackRock has a yield of 4.8 percent, compared to a figure of 4 percent for its average competitor. The extra yield helps to increase returns and serves as a cushion in downturns.

Besides using inverse floaters, DWS Managed Municipal Bonds (SCMBX) aims to boost results by avoiding overvalued bonds. In 2007, portfolio manager Phil Condon thought that bonds with long maturities and lower quality seemed expensive, providing little additional yield. So he focused on 10-year bonds with AA ratings. The strategy enabled the fund to outdo most peers during the financial crisis. “In 2007, some of our competitors could have picked up 50 basis points of extra yield by buying 30-year bonds that were rated BBB,” he says. “But when rates rose in 2008, our portfolio was much more defensive.”