For the quarter, our decisions to increase the Funds duration, or interest rate sensitivity, at the start of 2014 and to utilize a broad maturity structure contributed to performance. Duration was 10%-15% higher than normal, which benefited returns. The Funds broad maturity structure added value with the municipal yield curve flattening as longer interest rates fell substantially more than short/intermediate rates. Our emphasis on higher quality municipals detracted from first-quarter performance as lower quality A and BBB bonds outperformed AAA and AA issues. We continue to focus on higher coupon bonds based on their potential to cushion the effect of increases in interest rates.
Municipal bonds remain an appealing asset class within fixed income as their tax-free yields currently offer attractive value even to investors in very low tax brackets. Going forward, we expect market volatility to continue throughout 2014, a backdrop that can aid a disciplined active relative-value management approach.
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.