To avoid trouble, he put 15% of assets in cash and another 15% in AAA-rated securities backed by Fannie Mae ( FNMA) and other government agencies. The safe assets helped cushion the portfolio. Late in the year, Walls put the cash to work, buying investment-grade issues that sold at depressed prices. In 2009, the holdings rebounded, and Ivy returned 32.3% for the year, outdoing peers. These days Walls is concerned that interest rates could rise in coming years, as many economists expect. When rates rise, bond prices tend to fall. For protection, Walls is holding some floating-rate securities. Those raise their payouts as interest rates climb. A steady fund is MFS Municipal High Income ( MMHYX). The portfolio managers stay diversified, often maintaining slightly higher credit quality than typical peers. Most often the cautious approach has succeeded. The fund has finished in the top half of its category for eight consecutive years. During the past five years, MFS returned 7.2% annually. "Some of our aggressive competitors have great years and terrible years," says portfolio manager Geoffrey Schechter. "We want to be above-average in all markets." In the past, the fund often had slight overweight positions in hospitals and other health care issuers. But lately the fund is reducing its positions because of concerns that Congress could cut Medicare, reducing the reimbursements for health providers. MFS is overweight tobacco bonds. Those are backed by payments that tobacco companies make to states to cover health costs of smoking. The bonds have rallied lately as investors have become more confident that the states would receive enough income to cover interest costs.
Another top performer is Delaware National High-Yield Municipal ( CXHYX). During the past five years, the fund returned 8.1% annually. Portfolio manager Steve Czepiel aims to stay broadly diversified. He typically keeps the sector weightings in his portfolio close to the average figure of peers. The goal is to outperform by picking better securities. "We have avoided credit problems, and that has helped our performance," he says. Czepiel is wary of Puerto Rico's general obligation bonds, which are backed by general tax revenue. Moody's recently downgraded the bonds because of budget problems. But he likes Puerto Rican bonds that are backed by sales taxes. Those are unlikely to default, and they sell at bargain prices, he says. Follow @StanLuxenberg This article was written by an independent contributor, separate from TheStreet's regular news coverage.