Market Sector Update

• The long end of the high yield municipal market was relatively unchanged for the first quarter of 2018. In January the market sold off, resulting in negative returns before recovering by quarter’s end. While the market liked the passage of tax legislation, we believe the changes made are mildly negative for the municipal market. Lower absolute tax rates are normally negative to the municipal market as tax-adjusted returns decrease, therefore making them less attractive than their taxable counterparts. The first quarter of 2018 saw flat yields overall except for the shorter maturities which were down in the three year part of the curve. We did see some big positive moves in certain sectors driven by Puerto Rico-backed bonds. Two of the sectors which saw positive returns were water & sewer revenue and electric revenue bonds, which had positive returns of 13.78% and 3.29% for the quarter. Puerto Rico debt now only makes up 3.53% of the Bloomberg Barclay’s High Yield Municipal Index, as downgrades have resulted in these bonds failing out of the index. Much of the debt is now own by nontraditional investors, as municipal bond mutual funds have greatly reduced exposure to the territory. We believe that Puerto Rico bonds are dead money, meaning investors will receive no income from the bonds for the foreseeable future. With the Funds’ primary mission of creating high levels of tax-exempt income for clients we feel we would be remiss to chase something with a very high likelihood of offering no income for investors. The Fund being underweight tobacco negatively contributed to performance for the quarter as bonds continued to approach par. With several tobacco refundings on the calendar, we will continue to look at opportunities to add names we like at discounts to par.
• With the rally in rates through 2017 and into early 2018 we have become less constructive on the high yield municipal space, as new issues come to market with historically low absolute yields and weak collateral for investors.
• Going forward we still believe the municipal market is attractive vs. other fixed income asset classes based on continued low supply. We do feel like debt issuance for the remainder of 2018 will be higher than most estimates, however it will still remain in a normal range. We have turned more bearish as passage of tax legislation, in our view, will result in more downside than upside on a total return basis.

Portfolio Strategy

• The Fund has been reducing exposure in non-rated bonds. As of the end of the first quarter, exposure to non-rated bonds exposure was below 35%. With non-rated bond spreads at record lows we feel it is prudent to own more liquid rated bonds in order to provide us the opportunity to exploit any credit widening. It is important to note that about 4% of the non-rated bonds we hold are pre-refunded, meaning that although non-rated, these bonds are highly liquid.
• We will continue to hold over 9% of the portfolio in pre-refunded bonds as a source of additional liquidity moving forward. It is important to note that the book yields of most of these bonds are well north of 6%, allowing us to maintain a strong and stable dividend.
• We continue to favor revenue bonds over tax backed debt as revenue bonds, in our view, provide higher yields and better diversification from general tax and pension issues currently affecting many municipalities. Historically, General Obligations have been favored in Chapter 9 bankruptcies; however, this was turned onto its head post-Detroit and we expect the same outcome in the Title IV filing in Puerto Rico.
• Going forward, we will look for opportunities in bonds with more defensive structures, as interest rates continue to hover around historically low levels and credit spreads continue to be tight. We feel at this time it makes sense to remain at a shorter duration than the benchmark, as we view the sector as fully priced.

Outlook

• In the near term, we believe volatility will continue as the prospects of a U.S. vs. China trade war has created uncertainty for markets. It is important investors realize prudent managers diversify across states and sectors and always limit the amount of exposure to those variables as well as any individual bond.
• We believe investors will continue to search for tax-exempt yield even after the tax legislation was passed. We view the tax cuts as favoring lower income brackets and with the top rate at 37 percent, municipal bonds are still highly attractive. Although we see demand for municipal bonds staying consistent with normal levels, one big outlier would be additional issuance caused by a large infrastructure spending bill getting passed in Congress and signed by the President. That being said, we believe that supply in the municipal market will remain at normal levels which should present opportunities for investors. In our view, municipal bonds will continue to be one of the most attractive fixed income asset classes from a relative valuation standpoint.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Mar. 31, 2018, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Diversification is an investment strategy that attempts to manage risk within your portfolio but it does not guarantee profits or protect against loss in declining markets.

Risk factors: The value of the Fund's shares will change, and you could lose money by investing. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may include a significant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax (AMT). Exempt interest dividends the Fund pays may be subject to state and local income taxes. The portion of the dividends the Fund pays that is attributable to interest earned on U.S. government securities generally is not subject to those taxes, although distributions by the Fund to its shareholders of net realized gains on the sale of those securities are fully subject to those taxes. The municipal securities market generally, or certain municipal securities in particular, may be significantly affected by adverse political, legislative or regulatory changes or litigation at the Federal or state level. These and other risks are more fully described in the fund’s prospectus. Not all funds or fund classes may be offered at all broker/ dealers.