Nebraska Tax-Free Income Fund : Commentary

Portfolio Manager: Thomas D. Carney

As of 3/31/2016

Investment Style: Municipal Income

The Nebraska Tax-Free Income Fund returned +0.6% in the first calendar quarter, compared to a +1.1% return for the Barclays 5-Year Municipal Bond Index, our Fund’s primary benchmark.  For the fiscal year ended March 31, 2016, the Nebraska Tax-Free Income Fund’s total return was +1.2%, compared to a +2.8% return for our benchmark.  Our decision to continue shortening the Fund’s average life and duration metrics is the principal reason for the Fund’s underperformance compared to its primary benchmark.  The Fund’s 2.1 year duration at March 31 is meaningfully less than the benchmark’s 3.8 year duration.

Fiscal 2016 Review

2016 jumped off to the most volatile start since 2009, as a selloff in China’s stock market sparked fears of a global growth slowdown or contraction.  Energy prices followed worldwide stock prices down the rabbit hole, with oil prices dropping nearly 30% in the first three weeks of the year.  By the time Fed Chair Yellen sat before Congress in early February, global markets were jittery enough to push the intraday 10-year Treasury yield down to 1.5% on the mere mention of the potential possibility of the US following other central banks (namely, the European Central Bank and Japan) in implementing negative interest rates.  Calmer heads prevailed, however, when US payroll data continued to show solid growth and resilience in the US economy.  By the end of the first calendar quarter of the year, stocks and oil rebounded meaningfully as fears of recession receded. 

During the past fiscal year (March 31, 2015 to March 31, 2016), US Treasury bond yields continued their relentless march lower.  For example, 5- and 10-year US Treasury bond yields declined approximately 16 basis points each to 1.2% and 1.8%, respectively (a basis point equals 1/100 of a percent).  Municipal bonds generated reasonable results in the past fiscal year, as they benefited from the solid performance of US Treasury bonds, which tend to have a gravitational effect on all other fixed-income assets.  Declining interest rates resulted in price gains for existing bonds (bond prices and changes in interest rates are inversely related), adding to the coupon returns for most fixed-income investors, our Fund included.

Municipal bonds kept pace with their taxable government counterparts, as the yield relationship between tax-free municipal bonds and taxable alternatives was generally unchanged in the past year.  High quality 5-year municipal bonds, for example, ended the current fiscal year (March 31) with a yield representing approximately 95% of US Treasuries, unchanged from a year ago.  Historically, municipal bonds have yielded less than taxable alternatives given the tax advantages (federally and, typically, state exempt) of municipal bonds.  With municipal bonds yielding nearly as much as a comparable Treasury security, municipals possess relative value versus Treasuries.  However, the still abnormally low overall interest-rate environment leaves the municipal marketplace with little absolute value, even less than was present a year ago given the decline in interest rates.

Our Fund’s results in the past year were acceptable considering our defensive positioning.  Income returns were modestly boosted by (unrealized) price gains from declining interest rates.  Investment activity in the past year remained focused on bonds with shorter maturities (primarily under seven years). 

Turning to portfolio metrics, over the past year the average duration of our Fund declined to 2.1 from 2.3 years, and the average maturity of our bonds decreased to 3.7 from 4.7 years.  Overall asset quality of our portfolio remains high, with approximately 88% rated A or better by a number of nationally recognized statistical rating organizations (NRSROs), credit rating agencies recognized by the U.S. Securities and Exchange Commission (SEC). 

Please see the Portfolio Page for additional details regarding the breakdown of our investment holdings by state, sector and rating.  Our investments may be wide-ranging, but our analysis is the same.  We strive to own only those investments we believe compensate us for the incremental credit risk we assume.  Our overall goal is to invest in a portfolio of bonds of varying maturities that we believe represents attractive risk-adjusted returns, taking into consideration the general level of interest rates and the credit quality of each investment.

We expect to continue to position the Fund defensively relative to interest rate exposure while we patiently seek out areas of opportunity.  We will invest one security at a time, relying on a fundamental, research-based investment approach and are well positioned to take advantage of any market weakness.
The Fund seeks income that is exempt from federal and Nebraska personal income taxes, but income from the Fund may be subject to federal alternative minimum tax and capital gains taxes.

Past performance does not guarantee future results. The investment return and the principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Average annual total returns for the Fund’s one, five and ten year periods ending March 31, 2016 were 1.20%, 2.35% and 2.94%, respectively. The returns above assume reinvestment of dividends and redemption at the end of each period, and reflect the deduction of annual operating expenses, which as stated in the most recent Prospectus are 0.75% of the Fund’s net assets. The returns above also include fee waivers and/or expense reimbursements, if any; total returns would have been lower had there been no waivers or reimbursements. Current performance may be higher or lower than the performance data quoted. Performance data current to the most recent month end may be obtained here.
On the last business day of 2006 the Fund succeeded to substantially all of the assets of Weitz Income Partners Limited Partnership (the "Partnership"). The investment objectives, policies and restrictions of the Fund are materially equivalent to those of the Partnership, and the Partnership was managed at all times with full investment authority by the Investment Adviser. The performance information includes performance for the Partnership. The Partnership was not registered under the Investment Company Act of 1940 and, therefore, was not subject to certain investment or other restrictions or requirements imposed by the 1940 Act or the Internal Revenue Code. If the Partnership had been registered under the 1940 Act, the Partnership's performance might have been adversely affected.

Comparative returns are the average returns for the applicable period of the Barclays 5-Year Municipal Bond Index. The Barclays 5 Year Municipal Bond Index is a capitalization weighted bond index created by Barclays intended to be representative of major municipal bonds of all quality ratings with an average maturity of approximately five years. Index performance is hypothetical and is shown for illustrative purposes only.
Investors should consider carefully the investment objectives, risks and charges and expenses of the Fund before investing. The Fund's Prospectus contains this and other information about the Fund and should be read carefully before investing. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk.
Weitz Securities, Inc. is the distributor of the Weitz Funds.