Third Quarter 2017

In the third quarter, the Barclays Municipal 3-Year Bond Index gained 0.53 percent, while the Near-Term Tax Free Fund gained 0.71 percent. See complete fund performance here.

Past performance does not guarantee future results. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost.

During the third quarter, yields fell overall, generating a positive return for bonds. The yield curve was whipsawed during the quarter as yields fell in July and August, but bounced higher in September. The result was a mixed bag, with yields declining on maturities of two to four and 11 to 19 years, and rising or remaining unchanged on the other maturities. Among investment grade bonds, those with lower ratings had higher total returns than bonds with higher ratings. Bonds rated BBB and Baa returned 2.08 percent, versus 1.48 percent for bonds rated A, 0.97 percent for AA bonds, and 0.72 percent for AAA munis.

Tax revenue for state and local governments has continued to increase, although the rate of increase for state revenues has been tepid. During the 12 months through June 2017, state revenue from individual income tax increased 2.0 percent, and by 2.8 percent from sales tax, but receipts from corporate income tax fell 4.3 percent. Local governments, which depend heavily on property taxes, have fared better, as their property tax revenue grew 4.0 percent in the 12 months through June 2017 compared to the 12 months through June 2016.

In light of the increased interest in Puerto Rico’s situation following the latest wave of hurricanes, one of the most critical conflicts that must be settled is the relative claims of those who hold the commonwealth’s general obligation (GO) bonds versus the claims of those who hold the bonds backed by pledged sales taxes (known by the acronym COFINA). To secure the COFINA bonds, the legislation that instituted the commonwealth’s first sales tax in 2006 also created a special fund “separate and apart from the Commonwealth’s General Fund” to receive the sales tax receipts and apply the first receipts to the payment of COFINA bonds. As opinions about the relative claims have varied, returns have varied with them. For example, during the second quarter, Puerto Rico GOs returned negative 0.27 percent while COFINA bonds returned negative 15.75 percent, but during the third quarter, GOs posted a return of negative 17.70 percent, while COFINAs returned negative 3.67 percent.

A study released by the Center for Retirement Research at Boston College found that the ratio of assets to liabilities for 170 state and local pension plans slipped from 73 percent to 72 percent in 2016 based on prior accounting rules, and from 73 percent to 68 percent under the new rules (which do not allow for the value of assets to be smoothed, and which apply a lower discount rate in cases where assets are projected to be exhausted at some future date). The value of assets was $3.4 billion at both the beginning and end of fiscal 2016, while liabilities under the new rules increased from $4.7 to $5.0 billion. If plans used a discount rate of 6 percent instead of the average rate of 7.6 percent, the funded ratio would drop from 72 percent to 56 percent, and a rate of 4 percent would drive down the funded ratio to 43 percent. The funding ratios for fiscal 2017 may look better as a result of strong returns. According to Callan Associates, the median return of 107 public plans with assets of more than $1 billion was 13.06 percent for the year ended June 30, 2017. The use of lower discount rates for severely underfunded plans magnified the degree of underfunding. For example, The New Jersey Teachers plan had a 47.0 percent funded ratio using an assumed 7.6 percent return, but was only 22.3 percent funded using the penalty rate of 3.2 percent. Comparable numbers were 30.5 percent and 19.0 percent for Chicago Municipal Employees, 53.1 percent and 27.6 percent for Dallas Police/Fire, and 54.6 percent and 35.2 percent for Kentucky Teachers.

The Barclays 3-Year Municipal Bond Index is a total return benchmark designed for short-term municipal assets. The index includes bonds with a minimum credit rating BAA3, are issued as part of a deal of at least $50 million, have an amount outstanding of at least $5 million and have a maturity of 2 to 4 years.

A bond’s credit quality is determined by private independent rating agencies such as Standard & Poor’s, Moody’s and Fitch. Credit quality designations range from high (AAA to AA) to medium (A to BBB) to low (BB, B, CCC, CC to C).

The Near-Term Tax Free Fund invests at least 80 percent of its net assets in investment-grade municipal securities. At the time of purchase for the fund's portfolio, the ratings on the bonds must be one of the four highest ratings by Moody's Investors Services (Aaa, Aa, A, Baa) or Standard & Poor's Corporation (AAA, AA, A, BBB). Credit quality designations range from high (AAA to AA) to medium (A to BBB) to low (BB, B, CCC, CC to C). In the event a bond is rated by more than one of the ratings organizations, the highest rating is shown.

Net Asset Value
as of 03/16/2018

Global Resources Fund PSPFX $6.09 -0.03 Gold and Precious Metals Fund USERX $6.76 0.02 World Precious Minerals Fund UNWPX $4.08 0.04 China Region Fund USCOX $12.27 0.09 Emerging Europe Fund EUROX $7.63 No Change All American Equity Fund GBTFX $25.48 0.08 Holmes Macro Trends Fund MEGAX $19.86 0.05 Near-Term Tax Free Fund NEARX $2.20 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $1.99 No Change