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 Short-Intermediate Fund returned 0.75% in the quarter compared with 0.69% for the Barclays 1−5 Year Blend (1−6 Year Maturity) Index and 0.18% for the Lipper Short-Intermediate Municipal Debt Funds Average. For the 12 months ended September 30, 2013, the fund returned 0.02% versus 0.38% for the Barclays 1−5 Year Blend (1−6 Year Maturity) Index and −0.71% for the Lipper Short-Intermediate Municipal Debt Funds Average. The fund's average annual total returns were 0.02%, 3.53%, and 2.90% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.49% as of its fiscal year ended February 28, 2013.
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Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
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Our security selection helped performance during the past three months, as our holdings in prepaid gas, power, and health care were the main drivers of fund results. We increased our investment in higher-quality state general obligation (GO) bonds, although transportation bonds remained the fund's major allocation. One GO we are negative on is Puerto Rico. Puerto Rico's fiscal issues have recently occupied the headlines and led to wider spreads and underperformance of Puerto Rico bonds. We maintained only a minimal exposure to these securities. More recently, credit spreads have widened to a point where we believe they provide some opportunities to move out of our GOs into more appealing segments of the revenue bond sectors.
The decline in municipal bond prices has rattled some investors, but we do not believe it represents 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.