Interest rates in the United
States are at, or near, historic lows, which may increase the Funds exposure to risks associated
with rising interest rates. Moreover, rising interest rates or lack of market participants may lead to
decreased liquidity in the bond markets, making it more difficult for the Fund to sell its bond holdings
at a time when the Subadvisor might wish to sell. Decreased liquidity in the bond markets also may make
it more difficult to value some or all of the Funds bond holdings.
Tax Risk:
Income from municipal bonds held by
the Fund could be declared taxable because of unfavorable changes in tax law, adverse interpretations
by the Internal Revenue Service or noncompliant conduct of a bond issuer.
High-Yield Securities Risk:
Investments in high-yield securities or non-investment
grade securities (commonly referred to as "junk bonds") are sometimes considered speculative because
they present a greater risk of loss than higher quality securities. Such securities may, under certain
circumstances, be less liquid than higher rated securities. These securities pay investors a premium
(a high interest rate or yield) because of the increased risk of loss. These securities can also be subject
to greater price volatility. In times of unusual or adverse market, economic or political conditions,
these securities may experience higher than normal default rates.
Municipal Bond Risk:
Municipal bond risks include the ability of the issuer
to repay the obligation, the relative lack of information about certain issuers, and the possibility
of future tax and legislative changes, which could affect the market for and value of municipal securities.
These risks include:
·
General Obligation Bonds Risk
timely
payments depend on the issuer's credit quality, ability to raise tax revenues and ability to maintain
an adequate tax base;
·
Revenue Bonds (including Industrial
Development Bonds) Risk
timely payments depend on the money earned by the particular facility
or class of facilities, or the amount of revenues derived from another source, and may be negatively
impacted by the general credit of the user of the facility;
·
Private Activity Bonds Risk
municipalities and other public authorities
issue private activity bonds to finance development of industrial facilities for use by a private enterprise,
which is solely responsible for paying the principal and interest on the bond, and payment under these
bonds depends on the private enterprises ability to do so;
·
Moral Obligation Bonds Risk
moral obligation bonds are generally issued
by special purpose public authorities of a state or municipality. If the issuer is unable to meet its
obligations, repayment of these bonds becomes a moral commitment, but not a legal obligation, of the
state or municipality;
·
Municipal Notes Risk
municipal
notes are shorter-term municipal debt obligations that pay interest that is, in the opinion of bond counsel,
generally excludable from gross income for federal income tax purposes (except that the interest may
be includable in taxable income for purposes of the federal alternative minimum tax) and that have a
maturity that is generally one year or less. If there is a shortfall in the anticipated proceeds, the
notes may not be fully repaid and the Fund may lose money; and
·
Municipal Lease Obligations Risk
in a municipal lease obligation, the
issuer agrees to make payments when due on the lease obligation. Although the issuer does not pledge
its unlimited taxing power for payment of the lease obligation, the lease obligation is secured by the
leased property.
Municipalities continue to experience economic and financial difficulties in the current
economic environment. The ability of a municipal issuer to make payments and the value of municipal bonds
can be affected by uncertainties in the municipal securities market. Such uncertainties could cause increased
volatility in the municipal securities market and could negatively impact the Fund's net asset value
and/or the distributions paid by the Fund.
High-Yield
Municipal Bond Risk:
High-yield or non-investment grade municipal bonds may be subject to increased
liquidity risk as compared to other high-yield debt securities. There may be little or no active trading
market for certain high-yield municipal bonds, which may make it difficult for the Fund to sell such
securities at or near their perceived value. In such cases, the value of a high-yield municipal bond
may decline dramatically, even during periods of declining interest rates. The high-yield municipal bonds
in which the Fund intends to invest may be more likely to pay interest that is includable in taxable
income for purposes of the federal alternative minimum tax than other municipal bonds.
To be tax exempt, municipal
bonds must meet certain regulatory requirements. If a municipal bond fails to meet such requirements,
the interest received by the Fund from its investment in such bonds and distributed to shareholders may
be taxable. It is possible that interest on a municipal bond may be declared taxable after the issuance
of the bond, and this determination may apply retroactively to the date of the issuance of the bond,
which could cause a portion of prior distributions made by the Fund to be taxable to shareholders in
the year of receipt.
Municipal Bond Concentration
Risk:
From time to time the Fund may invest a substantial amount of its assets in municipal bonds
whose interest is paid solely from revenues of similar projects. If the Fund concentrates its investments
in this manner, it assumes the legal and economic risks relating to such projects and this may have a
significant impact on the Funds investment performance. In addition, the Fund may invest more heavily
in bonds from certain cities, states or regions than others, which may increase the Funds exposure
to losses resulting from economic, political, or regulatory occurrences impacting these particular cities,
states or regions.
Derivatives Risk:
Derivatives
are investments whose value depends on (or is derived from) the value of an underlying instrument, such
as a security, asset, reference rate or index. Derivative strategies often involve leverage, which may
exaggerate a loss, potentially causing the Fund to lose more money than it would have lost had it invested
in the underlying instrument. Derivatives may be difficult to sell, unwind or value. Derivatives may
also be subject to counterparty risk, which is the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be unable to honor its contractual obligations
to the Fund. Swap transactions tend to shift the Fund's investment exposure from one type of investment
to another, and therefore entail the risk that a party will default on its payment obligations to the
Fund. Futures may be more volatile than direct investments in the instrument underlying the futures,
and may not correlate perfectly to the underlying instrument. Futures also may involve a small initial
investment relative to the risk assumed, which could result in losses greater than if they had not been
used. Due to fluctuations in the price of the underlying security, the Fund may not be able to profitably
exercise an option and may lose its entire investment in an option.
Distressed Securities Risk:
Investments in distressed securities are subject
to substantial risks in addition to the risks of investing in other types of high-yield securities. Distressed
securities are speculative and involve substantial risk that principal will not be repaid. Generally,
the Fund will not receive interest payments on such securities and may incur costs to protect its investment.
In addition, the Fund's ability to sell distressed securities and any securities received in exchange
for such securities may be restricted.
3
Liquidity and Valuation Risk:
Securities purchased
by the Fund that are liquid at the time of purchase may subsequently become illiquid due to, among other
things, events relating to the issuer of the securities, market events, economic conditions, investor
perceptions or lack of market participants. The lack of an active trading market may make it difficult
to obtain an accurate price for a security. If market conditions make it difficult to value securities,
the Fund may value these securities using more subjective methods, such as fair value pricing. In such
cases, the value determined for a security could be different than the value realized upon such security's
sale. As a result, an investor could pay more than the market value when buying Fund shares or receive
less than the market value when selling Fund shares. Liquidity risk may also refer to the risk that the
Fund may not be able to pay redemption proceeds within the allowable time period because of unusual market
conditions, unusually high volume of redemptions, or other reasons. To meet redemption requests, the
Fund may be forced to sell securities at an unfavorable time and/or under unfavorable conditions.