The Fund returned 2.76% in the second quarter, building on a very strong first quarter for a year-to-date return of 6.96%. The Fund was well-positioned for the rally in municipals from both a duration and yield curve positioning standpoint. In particular, the Fund benefited from a barbelled maturity structure as the yield curve flattened and longer-term issues outperformed. Going forward, we expect to maintain a more neutral duration in the five-year range, with new purchases focused in the seven-year segment.
California holdings were top performers for the quarter, driven by technical factors that fueled demand and an improving state economy that resulted in a credit upgrade for California state general obligation issues. The strong rally so far in 2014 has tightened credit spreads in the municipal market. Given current spreads, the Fund is predominantly positioned in higher investment-grade bonds, with over 90% of holdings rated AAA or AA. An uptick in supply late in the second quarter and potential transactions upcoming may offer opportunities to add quality single-A holdings in sectors such as airports and public power.
If you are an investor who favors current income exempt from regular federal 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. Income from the Fund may be subject to federal alternative minimum tax (AMT), state and local taxes.
- Maintain a dollar-weighted average maturity range, under normal circumstances, between 10 and 30 years. This segment of the municipal market, while potentially more volatile, also may provide higher yields than shorter-term securities.
- Invest in high-quality securities, primarily investment-grade debt.
- Select investments on the basis of their relative value with a focus on total return.