Manager Commentary as of 12/31/2011 
 

• The Westcore Colorado Tax-Exempt Fund returned 1.92% net of expenses for the quarter ended December 31, 2011, and 8.88% year-to-date.  This underperformed its benchmark, the Barclays Capital 10-Year Municipal Bond Index, which returned 3.22% and 12.32%, respectively.  As has been the case for 2011, the Fund’s relative underperformance for the quarter and year-to-date is directly attributable to the significantly shorter weighted average maturity, shorter modified duration, and a higher than usual cash position due to fund inflows and recent bond calls.

• Yields on municipal debt securities continued their year-long decline during the quarter.  Yields on “AAA” rated 10-year general obligation bonds, for example, ended the quarter at 1.83%, compared to 2.22% as of September 30, 2011 and 2.65% as of June 30, 2011.  The best performing municipal bonds during the quarter were longer duration, lower quality issues, most notably 10-year and longer “BBB” credits in the hospital sector, according to data provided by Barclays Capital.

• Factors contributing to the decline in rates include municipal bond yields in excess of 100% of comparable maturity U.S. Treasury yields.  On average, going back to January 1996, 10-year municipal debt securities have yielded only 85% of 10-year U.S. Treasuries and 30-year municipals have yielded approximately 98% of 30-year U.S. Treasuries.  As of December 31, 2011, those ratios were 101% and 110% respectively.  New issuance was negligible during the quarter, as municipalities continued their budget constraint programs.  Amidst the lack of supply was overwhelming demand by individual investors who saw many bonds being called, maturing, or were seeking yields higher than what could be earned in tax-exempt money market funds.  These technical supply/demand flows play a significant part in the direction of municipal bond yields.  We would anticipate that new debt issuance will be higher in 2012 as municipalities replace higher-coupon debt with lower-coupon debt by pre-refunding issues which have been outstanding.

• The Fund’s modified duration as of December 31, 2011 was 4.68 years.  Going forward, it is the intent of the Fund managers to extend the average maturity and duration.  Arguments to support this view include the lack of new issuance supply in Colorado, an increase in bond calls and pre-refunding, which acts to shorten a bond’s final maturity date, and the relative attractiveness of municipal bond yields vis-à-vis U.S. Treasury securities.  Another compelling factor supporting our strategy to extend is the current relatively steep yield curve between 1-year and 30-year municipal bond yields.  For example, as of December 31, 2011, the yield on a 1-year “AAA” rated general obligation bond was 0.25% compared to 3.56% for a 30-year similar credit.  This yield differential of 331 basis points is significant in an environment of low nominal interest rates, and by extending should lead to an overall higher average yield net of expenses for shareholders.

• A recent purchase highlights the managers’ intentions.  The Fund bought “AA” rated Colorado school district bond with a 5.00% coupon, due 12/1/2029, which is not callable until 12/1/2021.  The bond has a modified duration of 7.93 years, and at time of purchase offered a yield of 3.42%.  For a Colorado resident in the maximum income tax bracket, the taxable equivalent yield was 5.42%.  In our opinion, this bond should perform well for shareholders in either a rising or declining interest rate environment.  We say this because should interest rates fall further, the long duration will allow the price to rise, yet if interest rates rise, the attractive 5.0% coupon provides a high current stream of double tax-exempt income.

• The Fund managers expect to purchase either new Colorado issuance or secondary securities in the 10-20 year range with coupons of 4% or higher.  This strategy, in our opinion, serves both the purpose of maintaining a high income stream in a low interest rate environment and takes advantage of a steep yield curve to capture more yield.  It is not our intent, at this juncture, to lower the overall credit quality of the Fund.