Neuberger Berman Municipal Fund: A Tax-Advantaged Income Play in a High-Rate World

The Federal Reserve's aggressive tightening cycle since 2022 has reshaped the landscape for income investors. With bond yields climbing and tax rates remaining elevated, the search for tax-advantaged income strategies has intensified. Among the contenders, the Neuberger Berman Municipal Fund (NBH) stands out as a compelling option for high-net-worth investors seeking to balance yield preservation with tax efficiency. This article evaluates NBH's role in a rising rate environment, its historical performance, and the risks that warrant scrutiny.

The Tax-Exempt Allure of Municipal Bonds

Municipal bonds, which fund public projects like schools and infrastructure, offer income exempt from federal taxes and often state taxes for in-state investors. This makes them particularly attractive for high-income individuals facing marginal tax rates exceeding 35%. NBH, a closed-end fund, leverages this structure to deliver monthly dividends while actively managing its portfolio to mitigate interest rate risks.

Despite the Fed's rate hikes—which typically depress bond prices—NBH has maintained a consistent monthly dividend of $0.0542 per share since early 2025. A notable June 2025 dividend increase (from $0.63 to $0.65 annually) signals management's confidence in the fund's ability to sustain payouts. Historical backtesting from 2020 to 2025 shows investors who bought shares on quarterly dividend dates and held for 30 trading days achieved a 6.90% compound annual growth rate (CAGR), with a Sharpe ratio of 0.68. This suggests a balanced risk-return profile, even in volatile markets.

Navigating Rate Risks: Duration and Liquidity

A critical concern for bond funds in a rising rate environment is duration risk—the sensitivity of bond prices to interest rate changes. While NBH's portfolio duration is not publicly disclosed, its consistent dividend performance implies a strategic emphasis on shorter-duration bonds or hedging mechanisms. Shorter-duration holdings are less volatile in rate hikes, preserving both income and capital.

Liquidity management is another strength. NBH's management team, led by James L. Iselin and Blake Miller, has decades of experience navigating municipal bond markets. Their access to 100+ broker/dealers ensures robust secondary market liquidity, a crucial advantage as bond prices fluctuate. This expertise has allowed the fund to avoid significant credit deterioration, a risk that could exacerbate liquidity issues during market stress.

The Return of Capital Conundrum

A shadow looms over NBH's dividend sustainability: the potential use of return of capital (ROC). ROC occurs when a fund returns a portion of an investor's principal as part of a distribution, which reduces the fund's net asset value (NAV) and the investor's cost basis. While ROC is not inherently negative, it can signal that the fund is struggling to generate income from its bond portfolio.

The fund's 2025 tax documents indicate that distributions may include ROC, with final allocations to be determined post-year-end. Investors should scrutinize year-end Form 1099s to assess the proportion of ROC in their payouts. A high ROC component could erode long-term value, particularly if bond yields remain compressed.

Strategic Allocation and Tax Alpha

For high-income investors, NBH's tax-exempt income is a key differentiator. However, its effectiveness hinges on tax-loss harvesting and deferring capital gains. Neuberger Berman emphasizes that active tax management can generate “Tax Alpha”—the difference between pre-tax and post-tax returns. Hypothetical backtesting over 10 years suggests such strategies can enhance after-tax returns by 1–3%, a significant edge in a high-tax environment.

Investment Takeaways

1. Niche Role in a Portfolio: NBH is best suited as a 5–10% allocation in a diversified fixed-income portfolio. Its tax advantages make it ideal for high-income investors, but its rate sensitivity and ROC risks necessitate caution.
2. Monitor Tax Disclosures: Investors should track year-end tax statements to assess ROC involvement and ensure distributions remain asset-backed.
3. Pair with AMT-Free Alternatives: For those concerned about Alternative Minimum Tax (AMT) exposure, pairing NBH with AMT-free options like the SPDR Portfolio Municipal Bond ETF (SMB) can mitigate risks.
4. Duration Transparency: While NBH's duration is not disclosed, investors should evaluate its bond maturity profile to gauge rate resilience.

Conclusion

The Neuberger Berman Municipal Fund offers a compelling blend of tax efficiency and income resilience in a rising rate environment. Its June 2025 dividend hike and strong historical performance underscore its appeal. However, the potential for ROC and duration risk require careful monitoring. For investors prioritizing tax-advantaged income and willing to accept moderate volatility, NBH can be a strategic addition—provided it is used judiciously and in conjunction with broader tax-aware portfolio management techniques.