Municipal-bond funds are not only the best performers, but another group of municipal-bond funds were also the most highly rated closed-end funds in February.

Instead of focusing on the short term, Ratings identified 10 muni closed-end funds with superior risk-adjusted returns over multiple time periods. All funds listed in this article scored A-plus ratings last month.

The best-rated closed-end fund, Morgan Stanley Insured California Municipal Securites ( ICS), collects current income exempt from federal income tax. Some, but not all, of the securities held also are exempt from California income taxes. The fund will invest at least 80% of its net assets in a portfolio of municipal obligations covered by insurance guarantees on the timely payment of interest and principal.

As this is a closed-end fund, it can trade above or below the value of its underlying assets based on supply and demand for the shares. Currently, the fund is being offered at a 12.4% discount to its net asset value (NAV), a wider discount than the 7% average discount over the past year.

Of the best-rated closed-end funds, Morgan Stanley New York Quality Municipal Securities ( IQN) is trading at the largest discount to its net assets, at 21% below NAV. The one-year average discount of 15.2% shows room for improvement.

The Morgan Stanley New York Quality Municipal Securities is a closed-end, non-diversified management investment company providing current income from high-quality municipal securities exempt from federal, New York state and New York city income taxes.

Nuveen California Select Tax-Free Income Portfolio ( NXC) has an investment objective of providing stable dividends exempt from both regular federal income tax and California personal income tax, consistent with preservation of capital. The current discount to NAV of 8.8% appears attractive considering the one-year average discount of 2.4%.

Best-Rated Closed-End Funds
Fund (Ticker) Rating
Total Return 3 Years
Total Return 1 Year
Morgan Stanley Ins CA Muni Sec (ICS) A+
Municipal Single State
Nuveen NY Select Tax-Free Inc Port (NXN) A+
Municipal Single State
Neuberger Berman CA Inter Muni Fund (NBW) A+
Municipal Single State
Morgan Stanley NY Qual Muni Sec (IQN) A+
Municipal Single State
BlackRock NY Inv Qual Muni Tr (RNY) A+
Municipal Single State
Nuveen CA Select Tax-Free Inc Port (NXC) A+
Municipal Single State
Nuveen CA Muni Value (NCA) A+
Municipal Single State
Nuveen Select Tax-Free Inc 3 (NXR) A+
Municipal - National
Morgan Stanley Insured Muni Tr (IMT) A+
Municipal - National
Western Asset Municipal High Inc (MHF) A+
Municipal - High Yield
Source: Ratings

For an explanation of our ratings, see this methodology statement.
Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.