After two months of negative returns to start the quarter, which added to a difficult market environment since May, bonds posted healthy gains during September.
Fixed-income markets rallied as the Federal Reserve, eyeing weaker economic conditions, surprised investors by maintaining their current level of monthly asset purchases. In addition, debt markets were buoyed by the prospect of another accommodative central bank chairman. Despite facing continued outflows in
tax-exempt mutual funds, and isolated but well-publicized credit events, municipals participated in the market upswing.
The Arizona Tax-Exempt Fund generated a return of 0.16% for the quarter, though the Fund remains in negative territory for the year-to-date. We reduced the Funds modified duration during the period but kept duration overweight versus the benchmark. To take advantage of an historically steep yield curve, we increased positions in longer-intermediate maturities. With regard to structure, we sold
lower-coupon bonds that had fallen in value and added higher-coupon securities with shorter calls to improve the Funds yield. The Fund is significantly overweight in higher-quality Arizona tax-exempt securities, with no holdings of BBB-rated bonds and zero exposure to Puerto Rico.
At the national level, we will continue to focus on the fiscal debate, the debt ceiling deliberations and the outlook for action by the Federal Reserve. At the state level, we will pay particular attention to technical conditions, as the Arizona market encounters steady demand from in-state residents and limited new issuance in light of the fact that refunding supply has slowed in 2013.
If you are an investor who favors high current income exempt from federal income tax and who is looking for an investment intended to be exempt from Arizona state personal income tax, this Fund may be ideal for you. It is particularly well suited for income-oriented investors in higher tax brackets willing to assume some risk of principal in exchange for higher yield potential. Income from the Fund may be subject to federal alternative minimum tax (AMT), state and local taxes.
- Concentrate on investments in Arizona state-specific, investment-grade municipal bonds which are exempt from federal income tax and Arizona state personal income tax while maintaining an average maturity, under normal circumstances, between 10 and 30 years.
- Invest in high-quality securities, primarily investment-grade debt.
- Select investments on the basis of their relative value with a focus on total return.