Long-term municipal bond prices fell and yields rose during the third quarter, although the 30-year yield finished below its highest level for the period. Short- and intermediate-term securities performed better than long-term issues as yields declined. Lower-quality municipals in the investment-grade universe fared worse than higher-quality issues, and high yield munis also struggled. The U.S. economy grew at a moderate 2.5% pace in the second quarter of 2013, overcoming the headwinds stemming from higher tax rates and federal spending reductions that took effect earlier in the year.
The Tax-Free High Yield Fund returned −1.97% in the quarter compared with −1.16% for the Barclays 65% High-Grade/35% High-Yield Index and −2.46% for the Lipper High Yield Municipal Debt Funds Average. For the 12 months ended September 30, 2013, the fund returned −3.38% versus −1.96% for the Barclays 65% High-Grade/35% High-Yield Index and −4.50% for the Lipper High Yield Municipal Debt Funds Average. The fund's average annual total returns were −3.38%, 6.53%, and 4.62% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.67% as of its fiscal year ended February 28, 2013.
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.
Fund performance benefited from our low exposure to Puerto Rico-domiciled borrowers. The commonwealth has repeatedly disappointed municipal investors on the fiscal management front, and market participants are now demanding significant yield premiums to hold those credits. Our minimal exposure reflects our credit research informing us of the commonwealth's increasing long-term credit risks stemming from protracted economic weakness, chronic budget deficits, mounting debts, and underfunded pension plans. We maintained our considerable holdings in corporate-backed industrial development/pollution control revenue bonds. Following the financial crisis of 2008, fundamentals in the corporate bond market improved markedly and remain solid today. Our exposure to the toll road sector detracted from performance. Many of these projects issued debt at extremely low interest rates last spring. As interest rates rose sharply in the summer months, investors actively shed many of these investments.
The decline in municipal bond prices has rattled some investors, but it does not represent a fundamental change in the nature, quality, or risk characteristics of the market. We continue to believe it is a high-quality market, with good investment opportunities for those with a long-term focus looking for attractive tax-free income, particularly for those in the highest tax brackets, in what is still a very low interest rate environment. The recent underperformance of long-term munis makes their nominal and tax-equivalent yields even more attractive, but if market outflows persist and rates resume rising, further price declines are likely. Given the potential for rates to rise further, we are careful about any investment shift that might materially increase the portfolio's interest rate sensitivity. That said, we believe future rate increases will be more modest than those we have seen in recent months.