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 Income Fund returned 1.95% in the quarter compared with 1.49% for the Barclays Municipal Bond Index and 1.76% for the Lipper General & Insured Municipal Debt Funds Average. For the 12 months ended September 30, 2014, the fund returned 9.40% versus 7.93% for the Barclays Municipal Bond Index and 8.85% for the Lipper General & Insured Municipal Debt Funds Average. The fund's average annual total returns were 9.40%, 4.90%, and 4.67% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.52% 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.
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We slightly increased our exposure to 20-year maturities, which proved beneficial as long-term bonds outperformed. In the coming months, we plan to continue this strategy since short-term yields are quite low, rendering those bonds fully valued in the marketplace. Overall, we made only minimal shifts in our sector weightings. Our two largest exposures are to health care and transportation. We remain overweight in revenue bonds as opposed to general obligation debt since we are concerned about unfunded pension obligations for many state and local governments. While lower-rated securities generally did well, even high-quality long-term bonds benefited portfolio results, as investors sought incremental yield above that available on short-term bonds.
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.