Long-term tax-free municipal bond prices rose and yields fell during the past few months. Municipal debt moved roughly in tandem with long-term Treasuries, whose interest rates declined-despite the Federal Reserve's tapering of its asset purchases-due to increased geopolitical risks and concerns about sluggish global economic growth. Steady demand for munis and limited supply were also favorable factors. Lower-quality municipals fared better than higher-quality issues in both the investment-grade and high yield markets, as investors continued to seek attractive yields.
The Tax-Free High Yield Fund returned 2.27% in the quarter compared with 2.57% for the Barclays 65% High-Grade/35% High-Yield Index and 2.40% for the Lipper High Yield Municipal Debt Funds Average. For the 12 months ended September 30, 2014, the fund returned 12.93% versus 9.33% for the Barclays 65% High-Grade/35% High-Yield Index and 12.09% for the Lipper High Yield Municipal Debt Funds Average. The fund's average annual total returns were 12.93%, 6.97%, and 5.19% for the 1-, 5-, and 10-year periods, respectively, as of September 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.
We added to our health care holdings throughout the period. Hospital revenue bonds continue to offer robust yield premiums versus similarly rated municipal credits in other sectors due to uncertainty surrounding the implementation of the Affordable Care Act and tight state budgets. We still view life care revenue bonds as an outstanding source of incremental yield. The sector was hit hard during the financial crisis, due to its close ties to the real estate market, but it has recovered in recent years. We also maintained significant exposure to industrial development and pollution control bonds, backed by corporations. These credits offer a valued combination of attractive yield premiums and excellent liquidity rarely found in lower-rated municipals.
Fundamentally, the credit environment for municipalities is generally sound and should improve with the economy. Economic growth and higher income and sales tax revenues are providing some support for state and local governments, and a healthier real estate market should lead to higher property tax revenues for local governments. Taking a longer view, we are concerned about state and local government liabilities such as pension benefits and retiree health care costs. While most municipal governments maintain balanced budgets, fewer municipalities have addressed these longer-term liabilities in a meaningful way. States will need to continue these efforts on their own, as a federal bailout of state and local governments without some losses to bondholders seems unlikely.