What are the Best College Savings Plans (Morningstar)

Morningstar Names Best 529 College-Savings Plans for 2015

Twenty-nine plans are Morningstar Medalists, and two receive Negative ratings.

Leo Acheson, 10/22/2015

Each year, Morningstar evaluates and rates college-savings plans based on five key pillars--Process, People, Parent, Price, and Performance. When rating 529 plans, Morningstar also takes into consideration any unique benefits that plans offer to college savers, including local tax breaks, grants, and scholarships. Morningstar’s "Choosing a 529 Investment," available here and summarized in an article tomorrow, covers some of these main considerations.

In 2015, Morningstar identified 29 plans expected to outperform peers on a risk-adjusted basis over the long haul, assigning those plans Gold, Silver, and Bronze Morningstar Analyst Ratings. Plans that receive Gold and Silver ratings stand out because of generally attractive investment lineups, well-resourced asset-allocation teams, capable oversight, and competitive fees. Bronze-rated plans also offer compelling features, though Morningstar’s analysts don’t have quite as much conviction that these plans will outpace competitors over time.

Meanwhile, 32 plans received Neutral ratings, a reflection of the team’s belief that, although these plans likely won’t deliver standout risk-adjusted returns, they are also unlikely to significantly underperform. Some Neutral-rated programs may hold appeal for in-state residents because of meaningful added benefits, such as local tax breaks, so investors should research their state’s particular benefits.

Just two plans earned Negative ratings in 2015. These plans have flaws that will most likely lead to underperformance over long investment horizons.

This year, Morningstar upgraded five plans and downgraded one, compared with five upgrades and 10 downgrades in 2014. In general, the industry continues to take steps in the right direction, with a number of plans cutting fees or improving the quality of their investment lineups.

Gold MedalistsThe four Gold-rated plans represent some of the best options available to college savers. Investors who favor active management will find much to like with the Maryland College Investment Plan and Alaska’s T. Rowe Price College Savings Plan. Both enlist T. Rowe Price as the program manager and use highly regarded strategies from the firm. The plans also stand out for their asset-allocation glide paths. Unlike some plans that reduce equities in large, abrupt steps at various ages for the beneficiary, these plans’ age-based tracks gradually reduce their stock stakes each quarter to limit the risk of shifting out of equities shortly after a market sell-off.

College savers looking for low-cost, broad diversification should consider Nevada’s Vanguard 529 College Savings Plan, which uses all passively managed strategies. Although many plans have adopted a similar set of inexpensive Vanguard indexes, this plan has lower fees than most thanks to its economies of scale. With nearly $11 billion in assets, it is the second-largest direct-sold plan in the nation. It has passed along cost savings to investors, who can own the age-based portfolios for just 0.19%.

Gold-rated Utah Educational Savings Plan should particularly appeal to investors who want to build customized portfolios. In addition to its premixed offerings, it also allows account holders to design their own age-based tracks using a wide array of investment options. The plan offers primarily Vanguard index funds and mixes in a few strategies from Dimensional Fund Advisors.

Silver MedalistsFour plans carried over their Silver ratings from 2014, including two programs from Virginia. With over $46 billion in assets, advisor-sold CollegeAmerica is more than twice the size of the nation’s second-largest 529 plan. Investors in the program can choose from a compelling set of equity and balanced fund options from American Funds. These investments also underpin the plan’s age-based and static-allocation portfolios, and the plan has some of the lowest-priced investments in the advisor-sold space. Virginia’s direct-sold plan, Virginia529 inVEST, also receives a Silver rating. It uses an assortment of specialty asset classes within its age-based options that aren’t always found in direct-sold 529 plans, such as stable value and global REITs. The age-based track blends active and passive management, favoring index strategies in more-efficient asset classes, and uses strategies from a variety of highly regarded firms.

Ohio’s CollegeAdvantage and Michigan Educational Savings Program also retained their Silver ratings. CollegeAdvantage offers investors a breadth options, including three all-index tracks and one age-based track that mixes active and passive management, while Michigan Education Savings Program uses index strategies from program manager TIAA-CREF. Both offer their investment options at low prices.

Morningstar also upgraded three plans to Silver from Bronze in 2015 thanks to various improvements made by the plans. New York's 529 College Savings Program previously omitted foreign equities from the age-based and static allocation options, though it lacked a solid investment-based reason for doing so. It addressed that shortcoming in July 2015, adding international stocks and bonds to the mix. The plan uses all Vanguard index options and remains one of the industry’s cheapest direct-sold programs.

California’s direct-sold ScholarShare reaffirmed its commitment to open architecture over the last year, which helped it to regain its Silver rating. The plan has long stood out for its use of best-in-class active managers regardless of fund company affiliation. However, in 2014, it quickly removed PIMCO Total Return from the lineup following Bill Gross’ departure and replaced it with Neutral-rated TIAA-CREF Bond Plus strategy, calling into question the state’s dedication to open architecture. It’s good to see that, following additional analysis, California elected to more permanently house this sleeve of bond assets with Gold-rated Metropolitan West Total Return Bond.

Lastly, Illinois’ advisor-sold Bright Directions College Savings Plan cut fees significantly in the process of renegotiating a contract with program manager Union Bank and Trust. In addition to lowering program management fees, the plan eliminated its account setup and maintenance fees.

Bronze MedalistsWhile not as attractive as Gold- and Silver-rated plans, programs that receive Bronze Morningstar Analyst Ratings also hold appeal. In some cases, generous tax benefits can boost a plan’s rating to Bronze, as is the case with Indiana’s direct- and advisor-sold plans. Hoosiers receive a 20% tax credit on contributions of up to $5,000 to the state’s plan, which more than offsets some of the plans’ high fees.

Morningstar bumped one plan’s rating to Bronze from Neutral in 2015: Maine’s NextGen College Investing Plan Direct has reduced fees in each of the past two years, and a few fixed-income funds used within the age-based track managed by BlackRock recently received upgrades of their Morningstar Analyst Ratings. The plan’s expenses now appear attractive, and it offers Maine residents additional benefits in the form of public and private grants.

Neutral RatingsIn 2015, 32 plans received Neutral Morningstar Analyst Ratings, indicating that analysts believe those programs likely won’t outperform or underperform their peers by a significant margin. College savers in these plans should expect returns to land near their peer-group norms over the long haul. Investors living in states with Neutral-rated plans without local tax breaks or other benefits should consider looking nationwide at a Gold- or Silver-rated plan.

In 2015, Morningstar upgraded one plan to Neutral from Negative and downgraded another to Neutral from Bronze. Kansas’ direct-sold Schwab 529 College Savings Plan has improved over the past year, garnering it an upgrade to Neutral from Negative. It had long charged hefty fees to investors, but in 2015 it slashed expenses for its passive and active age-based options by about 45% and 25%, respectively. Such fee cuts mark a meaningful commitment to providing better outcomes for investors. Meanwhile, Nevada’s USAA College Savings Plan’s rating fell to Neutral. The plan has a decent, but not standout, manager lineup, and its fees look middling versus competitors. Moreover, Nevada has no state income tax, so its residents have good reason to shop around.

Avoid These OfferingsMorningstar assigned two plans Negative Morningstar Analyst Ratings in 2015. Both plans also received Negative ratings in 2014. High fees continue to detract from the appeal at South Dakota’s CollegeAccess 529. Although South Dakotans can gain access to the plan for a relatively attractive price, out-of-staters--who make up the majority of the plan’s assets--pay significantly higher expenses. Annual account maintenance fees of $20 create a further hurdle to results.

Arizona’s Ivy Funds InvestEd 529 Plan continues to look unattractive, owing largely to concerns about the plan’s oversight. Program manager Waddell & Reed, parent of Ivy Funds, receives a Negative parent rating stemming from concerns regarding the firm’s thin fixed-income resources and recent manager turnover. The state's oversight also fails to inspire confidence. Arizona defers heavily to Waddell & Reed and, unlike many states, has not hired an investment consultant to help monitor the plan. Arizona is a tax parity state, so residents receive a state tax benefit for investing in any state’s 529 plan--there’s no reason for Arizonans to limit themselves to their home state’s offerings.

Analyst Rating Inputs
Since 2012, ratings for 529 plans use the same scale as the Morningstar Analyst Rating for mutual funds. Both Analyst Rating methodologies consider the same five factors to arrive at the final rating, though the 529 ratings reflect the quality of the entire plan--not a single investment, as is the case for the fund rating. To arrive at an Analyst Rating for 529 plans, analysts consider:

·         Process: Did the plan hire an experienced asset allocator to design a thoughtful, well-diversified glide path for the age-based portfolios? What suite of investment options is offered?

·         People: What is Morningstar’s assessment of the underlying money managers’ talent, tenure, and resources?

·         Parent: Is the program manager a good caretaker of college savers' capital? Is the state managing the plan professionally?

·         Performance: Have the plan’s options earned their keep with solid risk-adjusted returns over relevant time periods? How is the plan expected to perform going forward?

·         Price: Are the investment options a good value?

What is going on with municipal bonds? The End of BABs (Build America Bonds) (from WSJ)

Muni Bonds Continue to Tumble
A Rush to Sell Build America Bonds Before They Are Gone.

By Romy Varghese and Kelly Nolan
Of DOW JONES NEWSWIRES

Prices of municipal bonds fell sharply for the second day Tuesday, driving yields on long-term bonds to the highest points in more than 18 months, as investors worried about the impact of the end of a federally subsidized borrowing program.

The yield on a closely watched index of high-grade, tax-exempt 30-year muni bonds rose to 4.84%, its highest level since March 2009, according to Thomson Reuters Municipal Market Data. The yield on 10-year bonds climbed to 3.24%, the highest since June 2009. Yields move inversely to prices.

.The market took a hit Monday as well, as the expiration of the Build America Bond program by the end of the year looked increasingly likely.

An extension of the program, which provides a 35% interest-rate subsidy from the federal government on taxable bonds issued by municipalities, on Monday wasn't included in legislation introduced in the U.S. Senate that continues Bush-era tax cuts.

Since the government started the BAB program in April 2009 as part of its economic stimulus, more than $165 billion of these bonds have been sold, accounting for about 22% of all new municipal debt, according to data from the U.S. Treasury Department.

Many municipal-bond market participants expect that, without BABs, state and local governments will issue more tax-exempt bonds next year and may overwhelm investor demand for that debt. This would force states and cities to raise their rates to attract buyers.

About $100 billion in long-term tax-exempt bonds would return to the market next year, estimated Robert Nelson, managing analyst at Municipal Market Data.

"With the loss of leveraged buyers of municipal bonds in 2008, there has been a dearth of demand for long maturity munis--this is where BABs came in and diverted this issuance to the taxable market," Nelson said. "Now without BABs the market is left to deal with the same supply/demand imbalance that plagued munis in 2008 and early 2009."

He added that long-term yields have generally returned to the same level seen at the outset of the Build America Bond program last year.

States with some of the lowest credit ratings have been especially battered by the recent muni-market turmoil.

The spreads on Illinois 10-year maturity general obligation bonds grew from 1.60 to 1.90 percentage points from Nov. 1 through Monday above a benchmark triple-A bond with the same maturity, according to Municipal Market Data.

Spreads on California general obligation bonds increased from 0.97 to 1.30 percentage points over the same time frame.

Meanwhile, municipal borrowers are plowing into the market with BAB deals in the last few market days of the year.

"We are hitting the market as quickly as we can because it's only going to get worse," said Harold Downs, treasurer of the Metropolitan Water Reclamation District of Greater Chicago.

Because of the market conditions, the water district is shrinking the size of its bond sale this week from $500 million to $280 million, he said. Most of the offering is BABs.

The Metropolitan Water District of Southern California is planning to sell $250 million in BABs this week, moving up part of a $450 million deal it had originally scheduled for the spring, said Brian Thomas, the water district's assistant general manager and chief financial officer.

"I think the market is still favorable if you look back over the last 10 years, but if you look compared to a month ago, it's a much more difficult market," Mr. Thomas said.

Higher yields may ultimately help stabilize the market by attracting buyers, said Dan Solender, director of municipal bond management at investment firm Lord Abbett in Jersey City.

And amid the volatility, some analysts are encouraging investors to buy municipal bonds from creditworthy issuers. Munis are now offering higher yields than U.S. Treasurys of comparable duration, which is the inverse of the usual relationship, noted Dan Loughran, senior portfolio manager at OppenheimerFunds. "Prices in the municipal bond market may continue to be volatile in the near term, but we believe relief is likely waiting in the wings once the New Year gets underway," he wrote in a report.

—Jeannette Neumann contributed to this article.
-By Romy Varghese, Dow Jones Newswires; 215-656-8263; romy.varghese@dowjones.com

The Yields are Staggering - Tax Free Muni Bonds (Barrons)

Monday, October 20, 2008






The Yields Are Staggering
By ANDREW BARY

Many munis are battered -- but hardly broken. Patience will pay.

THE CREDIT MARKET'S WOES are benefitting one group: buyers of municipal bonds, who have seen prices plunge and yields soar. Munis, some of which offer long-term tax-free yields topping 6%, have almost never looked so attractive, relative to U.S. Treasuries.

"The market is way undervalued," says Laura Milner, a portfolio manager at SCM Advisors in San Francisco. "It's more the result of liquidity than credit problems. You don't have to stretch in terms of credit quality to get high yields." She favors state general-obligation bonds and revenue bonds for essential services, like water and sewers.

THE MARKET HAS BEEN HURT by selling pressure from hedge funds, issuers of structured notes and mutual funds, which have been experiencing redemptions. Buyers have been scarce, with retail investors now the main source of demand. The problem is that individuals can absorb only so much supply. There also is concern that the weakening economy will lead to gaping budget deficits at state and local governments, hurting the credit quality of municipal debt. Investors can take comfort, however, in the fact that munis historically have had much better credit performance than corporate bonds. Even during the Great Depression, no state defaulted on its general-obligation bonds, and overall muni default rates remained very low.

Just last week, 30-year bonds backed by the triple-A-rated Texas Permanent School Fund (PSF), one of the premier muni guarantors, were sold at a yield of 6.25%. Double-A-rated New York City issued $500 million of general-obligation bonds at a top yield of 6.40%. Top-grade 10-year debt recently has been yielding 5% or more.


Lars Leetaru for Barron's
"The yields are staggering," says Jim Evans, who heads the muni investment group at M.D. Sass in New York. Evans points to the top yield on the Texas PSF bonds and to recent secondary-market offerings in which 20-year pre-refunded California GOs traded at a yield of 5.85%. Pre-refunded bonds probably are the safest bonds in the muni market because they're secured by U.S. Treasuries. Long-term debt from other top issuers, like Harvard University, yields nearly 6%

A 6% muni yield is equivalent to a 10% taxable yield for residents of high income-tax states like California, New Jersey and New York. This assumes that residents buy in-state bonds. Tax-equivalent yields for out-of-state bonds are around 9%. The allure of munis could grow if presidential front-runner Barack Obama wins the election because he has vowed to raise taxes on Americans making more than $250,000 a year. Some analysts expect Obama to seek to lift the maximum income-tax rate to 40% from the current 35%, which now applies to married couples earning over $357,700 a year.



The 5.9% yield on 30-year, AAA-rated munis now is roughly 135% of the 4.3% yield on the 30-year Treasury. That's by far the highest ratio in the past 20 years, exceeding the prior peak of 115% set early this year. Long-term municipals historically have yielded slightly less than Treasuries because of the tax benefits.

Despite weak demand for long-term issues, California just sold $5 billion of short-term revenue-anticipation notes maturing in 2009, including $3.8 billion of eight-month notes at a 4.25% yield. That yield is very attractive, relative to the 1% rate on Treasury bills. The interest is tax-free to California residents, who face a punishing state income-tax rate of 9.3% for couples earnings over $93,000 annually and 10.3% for income above $1 million.

Muni issuance has slowed dramatically this month as state and local governments have heeded the advice of investment bankers to wait for a more receptive market. If demand picks up -- and high yields could create demand -- supply might be easily absorbed, and market conditions could improve quickly, as they did after a sell-off in February and March.

Investors have plenty of ways to play the muni market, including individual bonds, open-end mutual funds, closed-end funds and relatively new exchange-traded funds like the iShares S&P National Muni Bond (MUB). Well-run open-end funds include the $19 billlion Vanguard Intermediate-Term Tax-Exempt (VWITX) and the Bernstein Diversified Municipal (SNDPX), which have held up well this year, as well as Legg Mason Partners Managed Municipals (SMMOX), co-run by veteran Joe Deane, one of the best managers in the business.

CLOSED-END MUNI FUNDS BECKON because they came under extreme selling pressure early this month, with many finishing Friday, Oct. 10, at record discounts of 30% or more to their net asset values, way above the typical level of no more than 10% or 15%. Exchange-traded closed-ends rallied sharply last Monday, and their discounts now generally are below 20%.

The accompanying table lists a few closed-end funds now trading at double-digit discounts and yielding more than 7%. The high closed-end yields reflect the discounts and leverage. Many funds buy $3 of bonds using $2 of investor funds and $1 of borrowings. The leverage results in higher volatility than is common at open-end funds; year-to-date total returns of many closed-ends were a negative 20% or worse at mid-week, according to Morningstar, versus declines of around 10% for many long-term open-end funds. The losses to closed-end investors have been even greater than 20% because market prices often slip more than NAVs, on which the reported performance data are based. There's a risk that some closed-ends will reduce leverage, diminishing their yields.

PROBABLY THE HARDEST-HIT big municipal fund this year is the $5.9 billion Oppenheimer Rochester National Municipals (ORNAX), which was off 37% through Thursday, by far the worst showing among the 50 largest open-end muni funds.

The aggressive fund aims to generate high yields through ownership of low-rated or unrated munis. It buys gamier securities like land-development bonds, tobacco bonds backed by state revenues from the 1998 mass settlement with major cigarette companies, airport-revenue bonds and "inverse floaters," whose yields move in the opposite direction of short-term rates. With muni short rates elevated, prices of inverse floaters have come under pressure.

Prices of bonds in the Rochester portfolio have fallen sharply as investors favor high-grade munis with ratings of AA and higher. "I've been doing this since the late 1970s, and this is by far the worst I've seen it. It's an ugly market out there," says Ron Fielding, senior portfolio manager of the fund. Because of recent investor redemptions, Oppenheimer's Rochester has been forced to sell bonds in an illiquid market.

Fielding says the good news is that the credit quality of both the Oppenheimer Rochester National Municipals fund and the larger $9 billion New York-oriented Rochester Fund Municipals (RMUNX) is strong with minimal defaults. The main near-term risk is that the funds will need to sell more bonds to meet additional redemptions. The national fund's current yield now stands at 10%.

Reflecting the investor preference for high-grade munis, the yield gap between triple-A and triple-B munis has widened to a near-record two percentage points.

Even among highly rated bonds, investors are showing a preference for general-obligation bonds and revenue bonds from well-regarded issuers like the Los Angeles Department of Water and Power and the Port Authority of New York and New Jersey.

The Bottom Line:

Municipal bonds are trading at unusually low prices and rare yields. They've almost never looked as attractive when compared with U.S. Treasury securities.A BLOCK OF BONDS issued by Goldman Sachs for construction of its new headquarters in lower Manhattan traded recently at a yield of about 7.75%. Those New York Liberty 5¼s of 2035 are backed by Goldman and have double-A credit ratings.

With the municipal-bond market roiled by liquidity problems, investors now can get 5% on intermediate-term debt and 6% on long-term issues. That seems awfully attractive with inflation likely waning and the presidential front-runner vowing to boost taxes on anyone making $250,000 or more a year.


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