First Quarter 2017

In the first quarter, the Bloomberg Barclays Municipal 3-Year Bond Index gained 1.27 percent, while the fund gained 0.75 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.

The movement of the yield curve between the beginning and end of the quarter saw an overall flattening pattern, as the curve flattened between one and four years while steepening between four and 16 years. Issuance in the first quarter of 2017 was off by -12.1 percent from first quarter 2016, largely due to the 48.7 percent drop in the volume of refunding bonds sold, which offset the 11 percent growth in new money sales. After suffering net cash outflows of $28.47 billion in November and December, municipal bond funds had net inflows of $6.22 billion for the first two months of 2017, according to the Investment Company Institute. In the four weeks through March 28, investors added another $822 million.

While rising real estate values have continued to boost property tax revenue for local governments, the tax receipts of state governments have barely expanded. According to the U.S. Census Bureau, local property tax revenue in calendar year 2016 was 4.5 percent greater than in 2015. On the other hand, the revenue state governments derived from general sales tax and individual and corporate income taxes only grew by 0.3 percent. During calendar year 2016, sales tax receipts expanded by 1.9 percent and individual income tax inched up by 0.1 percent, but taxes paid by corporations dropped by 8.2 percent.  Growth in employment with increases in wages, the 3.6 percent rise in personal income in 2016 and higher equity market valuations are likely to help state collections as people file their returns for 2016. Credit conditions should remain supportive in light of the improving economic environment.

On March 13, the government of Puerto Rico presented a revised fiscal plan, which replaced the one rejected by the Oversight Board in December. The plan estimated that, without any changes, expenses over the next 10 years would exceed revenues by $67 billion, of which approximately $35 billion would be attributable to payments of principal and interest. The plan forecasts increasing revenue by $8 billion and reducing expenditures by $26 billion. This would leave a bit less than $8 billion for debt service, or about 22 percent of the amount owed. One key unknown is how much Puerto Rico will receive from the federal government for health care. The plan assumes that loss of Affordable Care Act funding will reduce revenues by $16 billion over the next 10 years.

Tax reform has become the focus following the inability to pass health care reform, but it could prove to be just as challenging. The initial focus will be on corporate tax reform. However, individual tax reform is more likely to be an issue for 2018, but even then, a complete revamp to the tax code will take time. When this was last done in 1986, the process was at least two years in the making. The tax reform discussions to date have centered on reducing tax rates, but many investors are concerned over possible changes to the tax-exempt status of municipal bonds. This issue arises frequently, mainly because it is viewed as “low-hanging fruit” to aid in deficit reduction. Historically action has rarely if ever been taken due to strong support from federal, state and local legislators. Should this issue again surface, action is unlikely to be taken before 2018. Even then, a more logical approach for lawmakers would be to apply limits to the types of projects that can be financed utilizing the municipal tax exemption rather than eliminating this feature from all state and local government activities.

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.

Net Asset Value
as of 05/23/2017

Global Resources Fund PSPFX $5.39 -0.01 Gold and Precious Metals Fund USERX $7.03 -0.12 World Precious Minerals Fund UNWPX $6.21 -0.08 China Region Fund USCOX $8.83 -0.02 Emerging Europe Fund EUROX $6.41 No Change All American Equity Fund GBTFX $24.08 -0.11 Holmes Macro Trends Fund MEGAX $19.13 0.01 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change