AIM Investments reopens high-yield muni fund

NEW YORK, Sept 10 (Reuters) - Spotting an opportunity to invest in high-yield municipal bonds at cheap levels last seen two years ago, AIM Investments on Monday reopened to new investors its AIM High Income Municipal Fund.

Franklin Ruben, who manages the $610 million fund, said the firm had stopped taking money from new investors in 2005 because of declining interest rates and scarce supply of municipal bonds.

But as concerns over subprime mortgages spilled into the municipal bonds market in August and yields rose in a range of 80 to 125 basis points, the firm spotted new investment opportunities.

"There was a disconnect between the subprime issue that was causing this sell-off and underlying securities that we are dealing with on a regular basis. In my opinion, the baby was being thrown out with the bath water," Ruben said.

The sell-off was caused by leveraged nontraditional investors who unwound their trades rather than by any deterioration in municipal bond credit quality. This created an opportunity to get the same risk exposure at cheaper levels, Ruben said.

For example, hospital bonds now yield about 80 basis points over high-quality "AAA"-rated munis. Rated charter school bonds are priced 60 to 80 basis points over high-grade munis, while non-rated bonds are spread 130 basis points higher.

The spreads were half as wide prior to the sell-off, Ruben said.

Bonds that are backed by payments from tobacco companies to states trade 125 basis points to 140 basis points over triple-A munis compared with a 50 basis point spread at the beginning of the year.

To put more money to work at these levels, AIM High Income Municipal Fund will be accepting new investors until Sept. 21, according to a statement.

Since 30-year muni yields hit a year high on Aug. 22, the high grade market has recovered a lot of ground. The yield fell 4 more basis points on Monday to 4.43 percent, according to Municipal Market Advisors.

But high-yield municipal bond prices are still "much cheaper" than when subprime concerns started, Ruben said, and the fund's net asset value has recovered only a portion of what it lost in August.

All high-yield municipal bond funds were hit hard in August and posted losses as spreads widened and investors redeemed shares, forcing portfolio managers to sell into a deteriorating market.

AIM High Income Municipal Bond fund's Class A shares posted a negative 3.03 percent return in August, according to Lipper. Its year-to-date return was a negative 0.54 percent. The five-year annualized total return was 5.77 percent, Lipper said, ranking it 11th among 75 peer funds.

Ruben said the fund focuses on bonds in essential services areas such as healthcare and education that are relatively immune to economic cycles. He also likes bonds sold by continued care retirement facilities because many wealthy baby boomers are set to retire in coming years.

But the fund has a limited exposure to staple high-yield munis such as tobacco securitization bonds because of a declining number of smokers and high litigation risk, Ruben said.

AIM Investments is a unit of Anglo-U.S. fund manager INVESCO IVZ.TO.