MFS Investment Management has historically been best known for its equity funds—but it’s the firm’s Municipal High-Income Fund (MMHYX) that stands out as a gem of consistency.

In late December of 2010, the fund was sporting a 4.36% year-to-date return—good enough to lead the average performance of its peers by three-quarters of a percentage point, according to Morningstar, Inc. With that return came a yield of 5.58%, according to Morningstar.

But outperformance is nothing new for Municipal High Income, which has about $1.8 billion of assets under management. The fund’s impressive 2010 results came on the heels of 11 straight years of outpacing funds in its peer group, according to Morningstar.

The fund’s success comes as MFS and other fund groups that were long associated with equity funds are successfully broadening their images to include fixed-income management, notes Burton Greenwald, a mutual fund consultant in Philadelphia.

For many years, MFS was associated with its first fund, the well-respected Massachusetts Investors Trust, said Greenwald. “But that sort of thing was true of the entire fund industry, except for PIMCO,” he added. “In the last five years, things have changed.”

MFS Municipal High Income’s top holding recently was New York City Industrial Development Agency Bonds. But within the diverse world of muni bonds, its management team has long found hospitals to be an especially rewarding category.

The fund’s analysts look for hospitals that meet a few simple criteria, said co-manager Gary Lasman. They have dominant market share and are situated within economically and demographically solid areas. Those that are adding doctors are attractive, as are those that employ the sorts of specialists who can drive up admissions, he added. Solid fundamentals are especially important when it comes to small hospitals, said Lasman, who has helped manage the fund since April of 2006.

In addition, MFS’ fixed-income legal team reviews the security features of each hospital’s debt to ensure that the fund is well-positioned in the event of financial trouble, noted co-manager Geoffrey Schechter.

The fund’s research, in other words, is aimed at playing the hospital industry safe. “We want to make sure the hospital is a long-term survivor,” said Lasman. “The best thing that could happen with any of these bonds is that we get par back at our coupon.”

Even within a fixed-income category as specific as hospitals, there is plenty of room for diversification, explained Lasman. There are large, multi-state hospitals and small community institutions, for example. And each one’s revenue stream derives from a different mix of payers, including government and state reimbursements.

The fund’s analysts play an unusually prominent role in its investment selection, said Schechter, who has helped to manage the fund since August of 2002. At many fund shops, analysts present bonds to the managers, along with their opinion of them, and little more, he said. 

High-Yield Municipal Bond’s analysts, on the other hand, are expected to tell the managers which sectors they like and to actively recommend bonds for the portfolio.

“Our job is more to quarterback the process, then work with the traders to make sure we overweight the sectors that the analysts like,” Schechter said. “I think that teamwork has been a significant part of our long-term track record.”

The fund may be most appropriate for high-net-worth investors, said Schechter. They’re often the ones seeking a source of tax-exempt income, he noted. And they are likely to be sophisticated enough to understand what they’re buying into, he added.

“This is not a AAA- rated muni bond fund,” he said.

Municipal High-Income’s managers’ risk-management approach includes picking securities rather than trying to predict interest rates, said Lasman. And the fund is heavily diversified, holding paper from approximately 700 issuers, he adds.

A suite of quant tools plays an important role for the fund, according to Schechter. One is a duration tool, which allows the fund’s management to evaluate its duration relative to its peer group.

The managers’ outlook is for stabilizing credit quality in the muni-bond industry. Economic growth is firming up, and many expect the extension of the Bush-era tax cuts to spur the economy’s growth, Schechter noted.

Municipal High Income’s A shares carry a 4.75% front-end sales charge, and require a minimum investment of $1,000.