Maryland municipal bonds produced modest positive returns in the first quarter of 2013. Municipal yields rose along with Treasuries amid favorable economic data, reduced uncertainty about U.S. fiscal policy, and increased investor willingness to invest in equities and other risk assets. Shorter-term municipal securities narrowly outperformed longer-term issues, and lower-quality issues outpaced investment-grade issues. With municipal and Treasury yields about the same across the yield curve, tax-free securities are an attractive alternative for fixed income investors.
The Maryland Short-Term Tax-Free Bond Fund returned 0.60% in the quarter compared with 0.35% for the Lipper Short Municipal Debt Funds Average. For the 12 months ended March 31, 2013, the fund returned 1.08% versus 1.27% for the Lipper Short Municipal Debt Funds Average. The fund's average annual total returns were 1.08%, 1.76%, and 2.03% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 0.53% as of its fiscal year ended February 29, 2012.
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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 strategy changed very little during the quarter. We have limited opportunities to buy lower-rated, high-yielding Maryland debt, given the state's high-quality rating, and at the end of the period, nearly the entire portfolio was invested in investment-quality holdings. We are also focused on extending the fund's maturity profile to generate more yield and capture appreciation in bonds that are approaching their maturity dates. Our new purchases were primarily in state general obligations, education, and health care bonds. We intend to maintain a longer- maturity and duration position relative to the benchmark because we believe that short-term interest rates will stay low for a long time.
With many high-quality, short-term Maryland municipal bonds yielding more than comparable-maturity Treasuries, the fund's after-tax yield is attractive, particularly for investors in the highest tax brackets. Unfortunately, returns are likely to remain muted because we believe short-term rates will stay low for a long time. Our goal is to maintain a significant allocation to revenue-backed debt, which yields more than general obligations and prerefunded debt. However, we will not take undue risk in our quest for yield. Our unwavering focus is on providing triple-tax-exempt (federal, state, and local) income for Maryland residents while allowing only moderate fluctuation of principal. In these difficult economic times, the fundamental research that is at the foundation of our investment process has never been more important.