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 Short-Intermediate Fund returned 0.18% in the quarter compared with 0.43% for the Barclays 1−5 Year Blend (1−6 Year Maturity) Index and 0.45% for the Lipper Short-Intermediate Municipal Debt Funds Average. For the 12 months ended September 30, 2014, the fund returned 2.09% versus 2.38% for the Barclays 1−5 Year Blend (1−6 Year Maturity) Index and 2.68% for the Lipper Short-Intermediate Municipal Debt Funds Average. The fund's average annual total returns were 2.09%, 2.30%, and 2.96% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.50% as of its fiscal year ended February 28, 2014.
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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.
Our duration strategy reflected our expectations for an increase in long-term interest rates. A year ago, long-term interest rates moved significantly higher as investors contemplated the eventual termination of the Fed's monthly asset-purchase program. At the same time, yields on bonds with maturities shorter than five years were little changed. With longer rates rising and prices declining, we became wary of the longer-term prospects for the short-intermediate bond market. Consequently, we maintained a short duration relative to our peers, which trimmed fund results as long-term rates subsequently declined. We also reduced our cash levels and increased our holdings in securities with one- to three-year maturities. This strategy allowed us to marginally increase returns by earning a bit more income than was available on cash.
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.