Third Quarter 2008
The municipal bond market experienced its worst quarterly performance in 14 years, as liquidity was drained from the financial system at a feverish pace in the wake of troubles at several financial titans, including Lehman Brothers, AIG, Merrill Lynch, and Wachovia. The unprecedented collapse of confidence in the financial system caused investors to run for the safety of shorter-dated U.S. Treasuries in waves not seen in many years. Investors also started exiting money market funds, helping overnight borrowing rates skyrocket. This inflicted severe pressure on leveraged investors who borrowed money in the overnight market and subsequently purchased longer-dated municipal bonds, which historically had yielded much more than the prevailing rate. The selling pressure was acute in September, and the London Interbank Offered Rate (LIBOR) spiked dramatically as global recession fears mounted.
The Fund’s quarterly underperformance can be attributed primarily to its longer duration and overweight to the 11-to-15-year maturity range. Intermediate maturity bonds experienced more selling pressure relative to shorter-dated municipal assets during the quarter and performance lagged. As confirmation, the LB Municipal Bond 3-Year Index returned +0.95% during the quarter, compared to -1.53% for the LB Municipal Bond 10-Year and -5.00% for the LB Municipal Bond 15-Year.
The economic outlook for the final three months of 2008 has some positive elements. While it can be reasonably assumed that domestic and global growth will slow, the mounting inflationary pressures permeating the economy over the last year are receding rather dramatically. This in turn should ultimately support fixed income in general and municipal bonds in particular. Now that municipal yields have moved significantly higher, investors appear to be adequately compensated for the credit risk currently priced in the market. While the municipal market could suffer further, it seems more likely that market yields will begin to stabilize within a reasonable proximity of where they closed the quarter. The Fund’s holdings in the 11-to-15-year maturity range now have yields at an absolute level that have historically generated substantial amounts of individual demand in the past, and Fund positioning should be advantageous going forward.
While California has made headlines for its high level of foreclosed homes, a proposition passed in 1978 (Proposition 13) has helped local governments alleviate the strain that a declining property market has had on their finances. Proposition 13 limited the ability of local governments to raise taxes and set property taxes at 1% of assessed valuation at the time of sale, with a 2% maximum annual increase. Since Proposition 13 limited the rate at which assessed values could grow during the “boom” years, it has left a large residue of untapped local property tax value to cushion local property tax collections during the downturn.
On an organizational note, the Fund’s Board of Trustees recently approved the removal of Evergreen Investment Management (“Evergreen”) as the subadvisor and the hiring of Miller Tabak Asset Management (“MTAM”). We thank Evergreen for its many years of excellent service. Please visit our Web site at www.managersinvest.com for a full description of MTAM’s investment philosophy and process. Looking forward, MTAM believes municipal investors will benefit from an investment bias towards higher-quality securities as credit access remains tight and the economy slows. MTAM will continue to add selectively to sectors when the opportunity to purchase these securities at attractive levels presents itself.
Disclosure
Investors should carefully consider the fund's investment objectives, risks, charges, and expenses before investing. For this and other information, please call 800.835.3879 or download a free prospectus. Read it carefully before investing or sending money.
The performance shown represents past performance and is not a guarantee of future results. Current performance may be lower or higher than the performance data quoted. The investment return and the principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. From time to time the advisor has waived fees or reimbursed expenses, which may have resulted in higher returns. The listed returns and yields on the Fund are net of expenses and the returns and yields on the indices exclude expenses. Current performance of the Fund may be lower or higher than the performance quoted.
The Fund is subject to the risks associated with investments in debt securities, such as default risk and fluctuations in the perception of the debtor's ability to pay its creditors.
Changing interest rates may adversely affect the value of an investment. An increase in interest rates typically causes the value of bonds and other fixed income securities to fall.
The Fund is subject to risks associated from economic, political, geographic, and demographic conditions of California that could adversely affect the value of the Fund's investment portfolio.
Investment income may be subject to certain state and local taxes, and depending on your tax status, the federal alternative minimum tax. Capital gains are not exempt from federal income tax.
Any sectors, industries, or securities discussed should not be perceived as investment recommendations. The views expressed represent the opinions of Managers Investment Group and are not intended as a forecast or guarantee of future results. Any securities discussed may no longer be held in an account’s portfolio. It should not be assumed that any of the securities transactions discussed were or will prove to be profitable, or that the investment recommendations we make in the future will be profitable.
Unlike the Fund, the Index is unmanaged, is not available for investment and does not incur expenses. Please see Index Definitions for all our funds' benchmarks.
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