Dupree Funds is launching a taxable municipal bond fund this week, just the second effort at creating a mutual fund devoted to Build America Bonds.
Last month, Dupree filed a prospectus giving birth to the Dupree Taxable Municipal Bond Fund, which is designed to invest in long-term investment-grade taxable municipal debt. The fund's benchmark is the Barclays Capital Taxable Municipal Bond Index.
While the fund's mandate does not restrict it to BABs, they compose two-thirds of the fund's benchmark index.
More than 75% of the taxable securities sold by municipalities this year have been BABs, according to Thomson Reuters.
A small shop based in Lexington, Ky., Dupree runs eight state-specific tax-free funds with about $1.2 billion in assets. Its funds are managed by Vincent Harrison and Gene Gard, who will also manage the new taxable fund.
The fund is still assembling securities and has not yet sold shares to the public.
Mutual funds have participated little in the expansion of the taxable muni sector. Taxable munis outstanding have grown to nearly $390 billion, according to Bloomberg LP. Out of 1,280 taxable bond funds, two by charter pursue taxable municipal bonds specifically.
A year ago, Eaton Vance launched the Build America Bond Fund, the first BAB mutual fund. One year later, it has accumulated $53.1 million in assets.
That was all until the latest Dupree fund. Even as fund complexes launch closed-end funds, exchange-traded funds, and unit investment trusts dedicated to BABs, mutual funds are largely absent from the sector.
The BAB program is scheduled to expire at the end of this year, and extension is questionable at this point.
With the $2.6 trillion fixed-income mutual fund industry awash in cash, it seems puzzling that only two mutual funds dedicate themselves to taxable municipal bonds.
Investors have stuffed $620 billion in new money into bond funds since the beginning of 2009 - $520 billion of it into taxable bond funds, according to the Investment Company Institute.
Other types of vehicles have embraced BABs. Investors have purchased hundreds of BABs UITs with more than $3.4 billion in assets.
BlackRock launched a $1 billion BAB closed-end fund in August, and Nuveen Investments runs a $620 million BAB closed-end fund. Guggenheim Funds Investment Advisors launched a $340 million BAB closed-end fund last month.
Three BAB ETFs have compiled more than $600 million in combined assets.
James Colby, municipal strategist at Van Eck Global, believes the reason BAB mutual funds have not caught on is their demographic appeal. While mutual funds are predominantly a retail product, Colby said BABs have so far lured institutional investors: pension funds, foreign institutions, and the like.
"Despite the success of the product, it has fallen predominantly in the domain of the 'professional' investor," Colby said.
Retail investors might eventually warm to BABs for tax-deferred portfolios like retirement accounts, provided they had "a little more coaching and awareness," he said.
Jeff Tjornehoj, a mutual fund analyst at Lipper, said that's going to be an uphill climb. "That's a long-term project, to change people's perspective," he said. "Investors expect that their municipal portfolios are going to deliver tax-exempt distributions. I still think it's a question of communicating, and educating investors."