Tax-free municipal bonds produced solid gains in the second quarter. Longer-term Treasury yields extended their first-quarter decline amid concerns about a sharp weather-related first-quarter U.S. economic contraction, lingering geopolitical tensions with Russia over Ukraine, and a sharp increase in sectarian violence in Iraq. Intermediate- and long-term municipal rates declined more than comparable Treasury yields, but short-term yields in both markets were little changed. Longer-term and lower-quality municipals outperformed shorter-term and higher-quality issues.
The Tax-Free High Yield Fund returned 3.90% in the quarter compared with 2.22% for the Barclays 65% High-Grade/35% High-Yield Index and 3.75% for the Lipper High Yield Municipal Debt Funds Average. For the 12 months ended June 30, 2014, the fund returned 8.26% versus 5.34% for the Barclays 65% High-Grade/35% High-Yield Index and 6.68% for the Lipper High Yield Municipal Debt Funds Average. The fund's average annual total returns were 8.26%, 9.15%, and 5.29% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.68% as of its fiscal year ended February 28, 2014.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
The Tax-Free High Yield Fund charges a 2%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
Municipal high yield returns were good during the quarter, but problems in Puerto Rico restrained results. Our revenue bonds, including industrial revenue, hospitals, life care, and transportation securities, drove performance. We were overweight in health care bonds and underweight in electric utilities. We maintained a relatively long duration, which measures a bond fund's sensitivity to changes in interest rates. On a negative note, our specific holdings in the health care sector impaired performance to some extent, but this was offset to a great degree by our positions in the prepaid gas and transportation sectors.
We remain concerned about the potential for rising rates, but we believe that further rate increases will be at a more measured pace than what we witnessed in 2013-in part because the economy's weakness in the first quarter of 2014 is tempering full-year growth expectations. We also believe that short- and intermediate-term rates could be more volatile than long-term rates as we approach the first Fed rate hike. When making investment decisions, we consider the forward-looking projections of rates and yield curves by our interest rate strategy and economics teams, and we will continue to be careful with any portfolio changes that might materially increase our portfolio's interest rate sensitivity.