The municipal market delivered strong returns during the quarter as it rebounded from its slump over the latter half of 2013. Flows into the municipal market, especially the high-yield sector, reversed course and moved into positive territory given the relative attractiveness of municipals versus other asset classes. Low new-issue volume as well as interest in distressed municipal credits such as Puerto Rico from nontraditional buyers contributed to the outperformance of high-yield municipals as compared with investment-grade tax-exempts.
The Funds return of 3.99% for the quarter modestly underperformed the benchmark. The Fund also underperformed its high-yield municipal fund peer group due to our overweight in higher-coupon holdings which, while cushioning price volatility during periods of rising interest rates, will underperform when interest rates decline. Our underweight in tobacco-related and Puerto Rico securities also hindered performance as more speculative high-yield issues outperformed during the quarter.
If you are an aggressive investor seeking a high level of current income that is largely free from federal income tax, you may find this Fund provides an attractive complement to a well-diversified portfolio. The Fund is best suited for long-term higher income investors willing to assume the additional risks associated with investing in high yield securities including above-average share price fluctuations. Income from the Fund may be subject to federal alternative minimum tax (AMT), state and local taxes.
- Concentrate primarily on municipalities that issue medium (rated A and BBB) and lower-quality debt (rated BBB and below). Lower-quality debt or high-yield securities are also commonly referred to as "non-investment grade" or "junk bonds."
- Manage to a benchmark index of 65% investment grade and 35% non-investment grade bonds.
- Select investments on the basis of their relative value with a focus on total return.