During third quarter, the tax-exempt bond market was volatile but ended with a strong rebound in September. The period was marked by concern regarding when the U.S. Federal Reserve would begin to taper its quantitative easing program. Reacting to a sharp rise in rates and resulting declines in net asset value, many retail investors sold out of tax-free mutual funds. In addition, market watchers reacted negatively to credit concerns surrounding Detroits bankruptcy filing and the health of Puerto Ricos economy. Longer-term tax-free rates remain substantially higher than comparable U.S. Treasury rates on a pre-tax basis, a relative positive.
For the period, the Tax-Exempt Fund returned -0.14%. During the period, the Fund benefited from a lack of direct exposure to negative credit events nationally, but was nevertheless affected by the general market selling pressure from redemptions across the mutual fund industry. The Fund has a much higher credit profile than the overall market, which helped performance during the period. In contrast, the Funds maturities are more broadly structured than the general market, which detracted from returns as the yield curve steepened. We maintained a modified duration of 5.75 years during the quarter. In addition, we added California and Texas issues during the three-month period as new tax-exempt supply in those states brought opportunity.
Higher rates and a steeper yield curve have created improved reinvestment opportunities and the potential for year-end seasonal benefits. Both factors will be an upcoming focus for the Fund, as we strive to maintain our high quality bias.
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.