Tax-free municipal bonds outperformed taxable bonds in the fourth quarter. Intermediate- and long-term Treasury interest rates increased as the economy continued expanding and as Congress agreed late in the year on a two-year budget deal that could add slightly to 2014 economic growth. More significantly, the Federal Reserve announced in mid-December that it will begin to curtail its $85 billion monthly asset purchases in January. The 10-year Treasury note yield rose to 3.03% by the end of 2013, the highest level in about two and a half years. In the municipal market, long-term interest rates increased, but not as much as Treasury yields, while shorter-term yields declined or were flat. BBB rated municipals in the investment-grade universe fared worse than higher-quality tiers.
The Virginia Tax-Free Bond Fund returned 0.67% in the quarter compared with −0.37% for the Lipper Virginia Municipal Debt Funds Average. For the 12 months ended December 31, 2013, the fund returned −3.50% versus −5.69% for the Lipper Virginia Municipal Debt Funds Average. The fund's average annual total returns were −3.50%, 5.80%, and 3.89% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.47% 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.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
We continue to conduct thorough research and assign our own independent credit ratings before making investment decisions. As always, we are on the lookout for attractively valued bonds issued by municipalities with good long-term fundamentals, an investment strategy that we believe will continue to serve our long-term investors well. Our most significant allocations are to transportation and hospital bonds, and within the latter, we prefer essential service revenue bonds, particularly airports and toll roads. We are trying to take advantage of the limited opportunities available in lower-quality investment grade bonds, but we have been avoiding Puerto Rico debt, particularly general obligation issues, of which we own none. Given the high quality of most Virginia issuers, our peers tend to have heavier ownership of Puerto Rico-related debt in an attempt to add yield.
The decline in municipal bond prices in 2013 has rattled some investors, but it does not represent a fundamental change in the nature, quality, or risk characteristics of the market. We continue to believe that it is a high-quality market, with good investment opportunities for those with a long-term focus and attractive tax-free income, particularly for those in the highest tax brackets, in what is still a very low interest rate environment. The underperformance of long-term municipals in 2013 makes their nominal and taxable-equivalent yields more attractive, but if market outflows persist and rates resume rising, further price declines are likely.