In this supercharged world of quick profits in the stock market, who has time to think about investing in bonds?
Bonds are dull. They finance mundane projects such as solid waste removal, landfills, airports, hospitals and roadways. And bonds generally don't make investors rich the way 1,000 shares of Microsoft Corp. has over the years.
But plenty of investors are beginning to think that bonds aren't so drab after all, especially tax-free municipal bond funds.
"The returns of the stock market for the last four years would prove a little daunting, but we have seen some pretty good cash flow coming toward our funds," said Mary Miller, who runs the municipal bond department at T. Rowe Price Associates Inc.
Since the year began, investors have put more than $100 million into Price's tax-free municipal bond funds. And in February and March, the amount of money flowing into them exceeded the money going into the Baltimore-based mutual fund company's 30 domestic equity funds.
What's behind this sudden change?
Miller believes that after making healthy profits in the stock market, investors are seeing a large portion of their gains go to Uncle Sam, and they are looking for ways to preserve their money. The beauty of tax-free municipal bond funds is that gains are not federally taxed, and in some cases, they are exempt from state taxes.
"Tax season is often a time where there is a heightened interest [in] tax-free issues," Miller said. "People are extra sensitive to their tax bill."
She also thinks investors who have done well in the stock market are diversifying their portfolios by moving some of their money out of stocks and into the traditionally less volatile bond market.
Finally, yields on municipal bonds late last year started rising and were returning nearly as much as Treasury bonds. So, investors said, " 'Why don't we buy them,' " Miller said. "The trade made sense."
Price has 15 tax-free municipal bond funds, and nearly all rank among the top performers when stacked up against the competition.
One of the best-performing municipal bond funds is Price's Maryland Tax-Free Bond Fund, which manages about $1 billion in assets. It returned 6.17 percent on average over the five years that ended Feb. 28, and ranked as the 143rd-best-performing fund of 830, according to Wiesenberger, a Rockville-based company that tracks mutual fund performance.
Morningstar, a Chicago-based company that rates mutual funds, gave the Maryland Tax-Free Bond Fund four out of five stars, and called it "a giant among its peers" with "solid returns."
The fund invests in general obligation debt in cities, water and sewer bonds, transportation bonds and hospital revenue bonds.
"The basic infrastructure, that is what we do," Miller said. "I look out the window and see the airport and the harbor, that is what we do. It is the basic fabric of where we live and work."
Miller, who manages the fund, acknowledges that it should do well since it invests in projects that are in Price's home state. Price analysts can easily visit projects, and they have first-hand knowledge of the bond issues that are coming to market here.
Other strong performers include the T. Rowe Price Summit Municipal Income Fund, which returned an average of 7.20 percent over five years that ended Feb. 28, and ranked eighth out of 303 funds, according to Wiesenberger.
Another is the T. Rowe Price Tax-Free Income Fund, which returned an average 6.33 percent over five years and ranked 44 of 303 funds; and the T. Rowe Price California Tax-Free Bond Fund, which returned an average of 6.51 percent over the past five years and ranked 55 of 830 funds.
Miller's philosophy is to seek "above average returns with less volatility than the market," she said.
"We don't make big bets on rates. We tend to make more small measured moves over time. If you look at the funds as a group their performance is pretty similar," she said.
One fund that has shuffled managers has been the T. Rowe Price Tax-Free High-Yield Fund, which invests in lower-quality municipal bonds. C. Stephen Wolfe II, who has run it for five years, recently stepped down because he wanted to be an analyst with the fund. He was replaced by Patricia Deford and Bill Snider, who began running the fund this month.
Under Wolfe, the fund amassed about $1.4 billion in assets, and has done well, returning 6.61 percent on average over five years with a rank of 12 of 43 funds.
Although investors seem to be embracing Price's municipal bond funds, Miller isn't getting swept away by this sudden burst in popularity.
"I never try to forecast things," Miller said. "Markets don't often do what you expect them to do."