Tax-free municipal bonds produced modest positive returns in the first quarter, marginally outperforming taxable bonds. Long-term municipal yields rose with long-term Treasury yields during the quarter amid favorable economic data, reduced U.S. fiscal policy uncertainty, and greater investor willingness to invest in equities and other riskier assets. Shorter-term municipal securities narrowly outperformed longer-term issues. Lower-quality issues with a yield advantage outpaced investment-grade issues, as credit spreads continued to tighten. The U.S. economy was resilient in the first quarter, strengthening after a late 2012 slowdown tied to fiscal policy uncertainty. Despite some tax increases starting in January and automatic budget cuts that took effect in March after a two-month delay, the economy seems to have expanded at a moderate rate during the quarter.
The California Tax-Free Bond Fund returned 0.67% in the quarter compared with 0.55% for the Lipper California Municipal Debt Funds Average. For the 12 months ended March 31, 2013, the fund returned 6.94% versus 7.26% for the Lipper California Municipal Debt Funds Average. The fund's average annual total returns were 6.94%, 6.15%, and 4.84% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 0.51% 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.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
Benchmark Definitions
The hospital and leasing revenue sectors represent the fund's largest overweight sectors, where our fundamental credit research platform allows us to identify attractive risk-adjusted opportunities. On the other hand, the fund is underweight to local general obligation debt due to the difficult outlook facing local governments resulting from reduced state assistance, as well as tobacco bonds. From a credit quality perspective, our largest allocation is to AA rated bonds, but our biggest overweight is to the A rated credit segment. Our A rated overweight is smaller than that in our other municipal funds because we have found that A rated paper in California offers a less attractive spread compared with similar bonds issued by other states. The fund's lack of exposure to real estate development bonds, which have struggled since the 2008-2009 financial crisis, has aided relative performance in recent years. The fund's duration, which measures its sensitivity to interest rate changes, remains slightly longer than that of the benchmark.
While we are pleased with the tremendous performance of municipal bonds over the last two years, we believe that returns in the period ahead will moderate, as the credit environment for municipalities will likely remain challenging and yields are unlikely to fall significantly from current levels. Modest economic growth and improving tax revenues are providing some support for state and local governments. However, cutbacks in state support for municipalities and persistent downward pressure on property tax revenues could keep local municipal issuers vulnerable. In this low-rate environment, we believe long-term bonds and A rated sectors still represent reasonable value relative to taxable fixed income alternatives. However, we are mindful that municipal yields are at or near historical lows and that there is the potential for losses if rates rise in response to stronger economic growth or inflation. Although we expect rates to stay range bound in the period ahead, we are careful with any investment shift that might materially increase the portfolio's interest rate sensitivity.
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