Pioneer AMT-Free Municipal Fund

Transcription

1 Pioneer AMT-Free Municipal Fund COMMENTARY Performance Analysis & Commentary September 2015 Fund Ticker Symbols: PBMFX (Class A); PBYMX (Class Y) us.pioneerinvestments.com Third Quarter Review Pioneer AMT-Free Municipal Fund s Class A shares returned 2.27% at net asset value in the third quarter, and Class Y shares returned 2.27%, while the Fund s benchmark, the Barclays Municipal Bond Index (the Barclays Index), returned 1.65%. The primary contributor to the Fund s benchmark-relative results in the third quarter was the portfolio s longer-than-benchmark duration, which helped performance as Treasuries rallied sharply in both July and September. (Duration is a measure of the sensitivity of the price, or the value of principal, of a fixed-income investment to a change in interest rates, expressed as a number of years.) Municipal bonds turned in their strongest quarter since the second quarter of 2014, as higher-quality fixed-income assets with longer durations outperformed many other investment types. Within the municipal bond market, the investment-grade sector modestly lagged high-yield municipals, which returned 1.99% in the third quarter. Fixed-income market sentiment in the third quarter was dominated by concerns about slower economic growth in China and the impact it would have on demand for oil and hard commodities; and, with that, the spillover effects weaker demand could have on emerging markets and global growth. The market s concerns were exacerbated by the Federal Reserve s (the Fed s) decision in September to defer any rate increases, and the more-dovish-than-expected minutes from the Federal Open Market Committee meeting. U.S. Treasuries rallied during the period, with the 10-year Treasury yield and 30-year Treasury yield declining to 2.06% and 2.88%, respectively, by the end of the third quarter. Investment-grade municipals, as measured by the Fund s benchmark, the Barclays Index, returned a solid 1.65% in the third quarter, though they slightly lagged Treasuries. The yield ratio of 30-year AAA-rated municipals to Treasuries increased slightly during the quarter, from 104% to 105%. The ratio has historically been one of the more reliable measures of municipal bond valuation. Given that U.S. Treasuries are taxed and municipal bonds are not, municipal yields in general should be lower than 100% of U.S. Treasury yields because investors typically require higher yields as an incentive to put their money in Treasuries. With the ratio still at above 100%, municipals have continued to yield more than Treasuries. According to Barclays, municipal bond supply was at $88.1 billion in the third quarter, which represented a decline from the second quarter of 2015, but was still higher by 14% relative to the same period in The increased supply relative to a year ago is a function of issuers engaging in refundings as they look to capitalize upon the persistently low-interest-rate environment. Refundings accounted for 67% of the new-issue activity in the municipal market during the third quarter. Demand was modestly negative in July, but began to further weaken in August as some investors left the municipal asset class due to concerns about the pace of global economic growth and the potential for a Fed interest-rate increase. Demand was only modestly negative in September, however, as investors returned to the asset class following the Fed s decision to not move on interest rates. For the third quarter, the Investment Company Institute reported outflows from retail funds of $2.3 billion, but the year-to-date retail municipal fund flows have remained in positive territory, at +$4.5 billion. In addition, the market catalysts for improved demand such as the low default rate and the attractive tax-equivalent yields of municipal bonds remained largely intact as of quarter end. Sector Allocation and Security Selection The Fund outperformed the Barclays Index benchmark in the third quarter. The primary contributor to the Fund s benchmark-relative results in the third quarter was the portfolio s longer-than-benchmark duration, which helped performance as Treasuries rallied sharply in both July and September. The Fund s yield-curve positioning, with a bias toward the longer end of the curve, also contributed to relative returns.

2 With regard to sector allocation, the portfolio s exposures to education and IDR/PCR (industrial development revenue/pollution control revenue) bonds were strong contributors to the Fund s benchmark-relative performance in the quarter, while allocations to transportation and water/sewer bonds detracted from performance. The portfolio s quality allocation aided relative returns in the third quarter, and the Fund s performance was particularly helped by an overweight to the single-b-rated credit quality tier. The best-performing states in the Fund s portfolio compared with the Barclays Index over the three-month period were Massachusetts, Texas, Virginia and Ohio. New York and Louisiana were among the weakest performers. Individual holdings that contributed the most to the Fund s benchmark-relative returns in the third quarter were bonds issued by Golden State (California) Tobacco Securitization Corp., Buckeye (Ohio) Tobacco Settlement, Tobacco Settlement Financing Corporation of Virginia, Massachusetts State Health & Educational Facilities Authority, and Mesa (Arizona) Utility System. Holdings that detracted from the Fund s performance this quarter included bonds issued by Jefferson Parish (Louisiana) Hospital Services, Delaware State Economic Development Authority, Louisiana Public Facilities Authority, Indiana State Finance Authority, and Warren County (Mississippi) Gulf Opportunity Zone. We continued to favor holding revenue bonds in the Fund s portfolio during the quarter. Revenue bonds are by definition secured by income-producing facilities of the borrower. General obligation bonds, which are bonds financed by municipal tax revenue, comprised 20% of the Fund s portfolio as of September 30, The Fund s duration was largely unchanged during the three-month period, and remained longer than that of the benchmark (8.29 years for the Fund compared with 6.43 years for the Barclays Index). Current Outlook and Positioning We continue to expect solid gross domestic product (GDP) growth of 2.7% to 3.0% over the next year in the U.S., led by consumption, improved government spending, and the housing sector. Employment continues to be strong and the labor market is nearing what is considered to be full employment at which point, wage inflation may increase. While investors may see a short-term flight to quality in the future with spread sectors suffering some outflows we believe that the effects on the broader market will be transitory and that supportive global monetary policies and, in the U.S. in particular, improving economic fundamentals will drive market performance. (Spread sectors represent non-governmental fixed-income investments with higher yields at greater risk than governmental investments.) With that said, renewed uncertainty surrounding the timing of the Fed s interest-rate hike may create additional market volatility. We continue to believe that the remainder of 2015 looks bright for the investment-grade municipal market s longer-term duration bonds, for several reasons. First, default rates are expected to remain low in the municipal bond market overall. The 25-year default average for investmentgrade municipal bonds is very low, at just 0.6%, second only to U.S. Treasuries. Many market observers expect this number to decrease as the U.S. economy improves. Second, we believe investment-grade municipal bonds remain undervalued versus Treasuries and corporate bonds. We expect prices in the investment-grade municipal market to improve going into the fourth quarter of 2015 and the early part of 2016, and believe that investment-grade municipals with strong fundamentals should continue to be preferred by investors. Third, the investment-grade municipal new-issue calendar is expected to rebalance for the remainder of the year. Issuance through May of 2015 had increased by 53% year-over-year, cheapening bond prices as supply outpaced demand. Alternately, with more than $115 billion of municipal bond debt having matured between June and August of 2015, and with less supply coming from refunding bonds, we expect demand for investment-grade municipal bonds to outweigh supply in the fourth quarter of In addition, U.S. municipalities have seen increasing revenues year-over-year, a factor that could lead to stronger credit quality as the domestic economy continues to improve. We believe that economic and inflation fundamentals are still too weak for yields to remain elevated. Therefore, in our view, continuing to hold longer-duration positions should provide positive results for the remainder of Finally, the municipal market has continued to serve as a tax-exempt investment instrument for more affluent investors. More recently, however, investors who normally focus on the taxable bond markets (both domestic and global) have also been taking advantage of the unusually cheap ration imbalance between Treasuries and municipals. As of September 30, 2015, the largest sector allocations in the Fund were to education (20%), health care (17%), IDR/PCR (11%) and transportation (8%).

3 The portfolio s state exposures were led by Massachusetts, Texas, California, Washington and Virginia. As of quarter end, approximately 74% of the Fund s assets were invested in bonds rated A or higher by Moody s. The Fund normally will not invest in securities that pay interest which could be susceptible to the Federal Alternative Minimum Tax (AMT), and did not own any bonds that may be subject to the AMT as of September 30, 2015.

4 Performance Review Pioneer AMT-Free Municipal Fund s Class A shares returned 2.27% at net asset value in the third quarter, and Class Y shares returned 2.27%, while the Fund s benchmark, the Barclays Municipal Bond Index, returned 1.65%. Average Annual Total Return (Class A shares) Average Annual Total Return (Class Y shares) September 30, 2015 (at NAV) (at POP) Barclays Municipal Bond Index September 30, 2015 (at NAV) Barclays Municipal Bond Index 1 year 4.08% 0.62% 3.16% 1 year 4.37% 3.16% 3 years 3.89% 2.31% 2.88% 3 years 4.15% 2.88% 5 years 5.19% 4.23% 4.14% 5 years 5.44% 4.14% 10 years 4.88% 4.40% 4.63% 10 years 5.11% 4.63% Expense Ratios As of prospectus dated April 1, 2015) Class A shares: Gross, 0.85% Class Y shares: Gross, 0.65% Call or visit us.pioneerinvestments.com for the most recent month-end performance results. Current performance may be lower or higher than the performance data quoted. The performance data quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. NAV results represent the percent change in net asset value per share. Returns would have been lower had sales charges been reflected. POP returns reflect deduction of the maximum 4.50% sales charge at the beginning of the period. All results are historical and assume the reinvestment of dividends and capital gains. Other share classes are available for which performance and expenses will differ. Performance shown for periods prior to the inception of Class Y shares on November 10, 2006, reflects the NAV performance of the Fund s Class A shares. The performance does not reflect differences in expenses, including the Rule 12b-1 fees applicable to Class A shares. Since fees for Class A shares are generally higher than those of Class Y shares, the performance of Class Y shares for periods prior to the inception of Class Y shares on November 10, 2006, would have been higher than that shown. Class Y shares are not subject to sales charges and are available for limited groups of eligible investors, including institutional investors. All results are historical and assume the reinvestment of dividends and capital gains. Other share classes are available for which performance and expenses will differ. Performance results reflect any applicable expense waivers in effect during the periods shown. Without such waivers Fund performance would be lower. Waivers may not be in effect for all funds. Certain fee waivers are contractual through a specified period. Otherwise, fee waivers can be rescinded at any time. See the prospectus for more information. A Word about Risk: When interest rates rise, the prices of fixed-income securities in the Fund will generally fall. Conversely, when interest rates fall, the prices of fixed-income securities in the Fund will generally rise. Investments in the Fund are subject to possible loss due to the financial failure of issuers of underlying securities and their inability to meet their debt obligations. At times, the Fund s investments may represent industries or industry sectors that are interrelated or have common risks, making it more susceptible to any economic, political, or regulatory developments or other risks affecting those industries and sectors. The value of municipal securities can be adversely affected by changes in the financial condition of municipal issuers, lower revenues, and regulatory and political developments. A portion of income may be subject to local, state, federal, and/or alternative minimum tax. Capital gains, if any, are subject to a capital gains tax. These risks may increase share price volatility. The Barclays Municipal Bond Index is an unmanaged, broad measure of the municipal bond market. Index returns are calculated monthly, assume reinvestment of dividends and, unlike Fund returns, do not reflect any fees,expenses or sales charges. It is not possible to invest directly in an index. The views expressed in this commentary are those of the portfolio manager, and are subject to change at any time. These views do not necessarily reflect the views of Pioneer or others in the Pioneer organization, and should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any Pioneer investment product.

5 Securities Discussed % of Portfolio as of September 30, 2015 Top 10 Holdings % of Portfolio as of September 30, 2015 Golden State (CA) Tobacco Securitization Corp., 5.25%, 6/1/47 Buckeye (OH) Tobacco Settlement, 5.75%, 6/1/34 Tobacco Settlement Financing Corp. (Virginia), 5.00%, 6/1/47 Massachusetts State Health & Educational Facilities Auth., 5.50%, 7/1/32 City of Mesa (AZ) Utility System, 3.25%, 7/1/29 Jefferson Parish (LA) Hospital Services, 6.375%, 7/1/41 Delaware State Economic Development Auth., 5.375%, 10/1/45 Louisiana Public Facilities Authority, 5.50%, 5/15/47 Indiana Finance Authority (Environmental), 6.00%, 12/1/26 Warren Country (MS), Gulf Opportunity Zone, 5.80%, 5/1/ % 0.84% 1.11% 1.63% 1.01% 0.69% 0.53% 0.30% 0.21% 0.58% 1. Massachusetts Health & Educational Facilities Auth., 5.50%, 7/1/ % 2. Dallas (TX) Area Rapid Transit, 5.00%, 12/1/ % Golden State (CA) Tobacco Securitization Corp., 5.125%, 6/1/47 Texas Private Activity Bond Surface Transportation Corp., 7.00%, 6/30/ % 1.25% 5. State of Washington, 5.00%, 7/1/ % 6. State of Maryland, 5.00%, 3/1/ % Forsyth County (GA) Water & Sewerage Auth., 5.00%, 4/1/41 Massachusetts Development Finance Agency, 5.00%, 7/1/ % 1.16% 9. County of Fairfax, Virginia, 4.00%, 10/1/ % 10. FYI Properties (Washington State), 5.50%, 6/1/ % The portfolio is actively managed, and current holdings may be different. The holdings listed should not be considered recommendations to buy or sell any security listed. Before investing, consider the Fund s investment objectives, risks, charges and expenses. Contact your advisor or Pioneer Investments for a prospectus or summary prospectus containing this information. Read it carefully. Neither Pioneer, nor its representatives are legal or tax advisors. In addition, Pioneer does not provide advice or recommendations. The investments you choose should correspond to your needs, goals, and risk tolerance. For assistance in determining your financial situation, please consult an investment professional.

6 Not FDIC insured May lose value No bank guarantee Securities offered through Pioneer Funds Distributor, Inc., 60 State Street, Boston, MA Underwriter of Pioneer mutual funds, Member SIPC 2015 Pioneer Investments us.pioneerinvestments.com