United States
Securities and Exchange Commission
Washington, D.C. 20549
Form N-CSR
Certified Shareholder Report of Registered Management Investment Companies
811-2677
(Investment Company Act File Number)
Federated Municipal Securities Fund, Inc.
_______________________________________________________________
(Exact Name of Registrant as Specified in Charter)
Federated Investors Funds
4000 Ericsson Drive
Warrendale, Pennsylvania 15086-7561
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
(Notices should be sent to the Agent for Service)
Date of Fiscal Year End: 03/31/2013
Date of Reporting Period: 03/31/2013
Item 1. Reports to Stockholders
Annual Shareholder Report
March 31, 2013
Share Class | Ticker |
A | LMSFX |
B | LMSBX |
C | LMSCX |
F | LMFFX |
Federated Municipal Securities Fund, Inc.
Fund Established 1976
Dear Valued Shareholder,
I am pleased to present the Annual Shareholder Report for your fund covering the period from April 1, 2012 through March 31, 2013. This report includes Management's Discussion of Fund Performance, a complete listing of your fund's holdings, performance information and financial statements along with other important fund information.
In addition, our website, FederatedInvestors.com, offers easy access to Federated resources that include timely fund updates, economic and market insights from our investment strategists, and financial planning tools. We invite you to register to take full advantage of its capabilities.
Thank you for investing with Federated. I hope you find this information useful and look forward to keeping you informed.
Sincerely,
J. Christopher Donahue, President
Not FDIC Insured • May Lose Value • No Bank Guarantee
CONTENTS
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Management's Discussion of Fund
Performance (unaudited)
The Fund's total return, based on net asset value, for the 12-month reporting period ended March 31, 2013, was 6.43% for the Fund's Class A Shares and Class F Shares and 5.57% for the Fund's Class B Shares and Class C Shares. The total return for the S&P Municipal Bond Investment Grade Index (SPMBIGI),1 the Fund's broad-based securities market index, was 5.33% during the same period. The total return of the Morningstar Municipal National Long Funds Category Average (MNLFCA),2 a peer group average for the Fund was 6.33%, during the same period.
The Fund's total return for the most recently completed fiscal year reflected actual cash flows, transaction costs and other expenses, which were not reflected in the total return of the SPMBIGI.
During the reporting period, the most significant factors affecting the Fund's performance relative to the SPMBIGI were: (a) the effective duration of its portfolio (which indicates the portfolio's sensitivity to changes in interest rates); 3,4 (b) the allocation of the portfolio among securities of similar issuers (referred to as “sectors”); and (c) the credit rating of portfolio securities.
The following discussion will focus on the performance of the Fund's Class A Shares. The Fund's Class A Shares outperformed the SPMBIGI and the MNLFCA. The 6.43% total return for the Class A Shares for the reporting period consisted of 3.45% of tax-exempt dividends and reinvestments and 2.98% appreciation in the net asset value of the shares.5
Market Overview
During the 12-month reporting period, Treasury yields declined from a high of 2.3% in April 2012 to 1.38% in July 2012, only to rebound to 1.85% at the end of the reporting period. In an attempt to support a stronger economic recovery, the Federal Reserve (the “Fed”) continued to maintain a highly accommodative monetary policy stance during the reporting period. Labor market conditions showed signs of improvement and the housing sector strengthened further. Consumer price inflation was subdued and measures of longer run inflation expectations remained subdued. Developments in Europe continued to be a central focus for investors, as concerns persisted about the prospects for a durable solution to the European fiscal and financial difficulties, which indirectly affected interest rate levels in the tax-exempt municipal bond market. Foreign economic growth continued to be subdued, as fiscal retrenchment in the euro area continued to weigh on economic activity in Europe and factored into the Fed's accommodative policy stance. With regard to Europe, there continued to be downside risks to growth emanating from the region, given its unresolved imbalances and weak economic growth. Also, the amount of municipal bond
Annual Shareholder Report
issuance during the reporting period was muted, which created a favorable technical environment (supply/demand imbalance) within the tax-exempt municipal bond market
Risk-taking and the desire for yield continued for investors during the reporting period as absolute yields in the marketplace remained near lows and investors attempted to add income by reaching into lower credit quality categories. The tax-exempt municipal market dealt with several policy-related issues over the course of the reporting period. These included U.S. fiscal policy decisions that resulted in increases in the top marginal tax rates, which were a positive factor for municipal bond prices and increased the value of the municipal tax exemption. The sequester (automatic spending cuts) was allowed to go into effect as a result of the inability for Congress and the President to come to a resolution over spending cuts, which had a negative impact on municipal government revenues and employment. The fixed income markets were driven more by fiscal policy debates and concerns over tax and spending policy changes than by economic fundamentals. Some positive news about the fiscal position of the states became available; in some cases, revenues rose sufficiently enough to enable increases in state government spending and employment. However, headline risk within the tax-exempt municipal bond market increased as the City of Detroit's governance was taken over by a state appointed manager, and Puerto Rico and its related entities were downgraded as a result of their continuing fiscal and pension underfunding problems. Also, Illinois continued to be unable to come to political terms over a solution for Illinois' underfunded pensions and revenue shortfalls. The risk of a high profile municipal issuer becoming distressed continued to exist. The ongoing pressures on public pension plans and their unfunded liabilities continued to receive significant scrutiny. However, many state and local municipal entities took actions to control pension costs, and this issue continued to be watched.
Duration
As determined at the end of the 12-month reporting period, the Fund's dollar-weighted average duration for the reporting period was 5.43 years. Duration management continued to be a significant component of the Fund's investment strategy. The Fund adjusted duration relative to the SPMBIGI several times during the reporting period. Tax-exempt municipal bond yields continued to decline during the reporting period and decreased more for bonds with longer maturities as the yield curve significantly flattened during the reporting period. The yield curve became flatter as a result of yields on longer maturity bonds declining more than bonds with shorter maturities. Bonds with a longer duration generally outperformed bonds with a shorter duration due to their differences in interest rate volatility. As a result of the Fund's allocation to bonds with shorter durations than those included in the SPMBIGI, duration detracted from Fund performance relative to the SPMBIGI.
Annual Shareholder Report
Sector ALLOCATION
During the course of the 12-month reporting period, the Fund maintained a higher portfolio allocation, relative to the SPMBIGI, to securities issued by hospitals and continuing care retirement centers and industrial development revenue bonds. These allocations helped the Fund's performance due to the narrowing of credit spreads within the essential service revenue bond sectors. Tobacco settlement bonds also performed very well over the reporting period, and the Fund's exposure to this sector added positive excess return. The Fund's exposure to highly rated general obligation bonds issued by states had a negative performance impact during the reporting period as higher quality municipal debt underperformed. The Fund was underweight, relative to the SPMBIBI, transportation financings such as airports and toll roads. These sectors outperformed over the reporting period relative to the SPMBIGI, which hurt Fund performance.
Credit Quality6
Given investors' risk appetite and desire for yield, the low absolute yields, continued headline risk and the continued risk of a high-profile municipal issuer becoming distressed during the 12-month reporting period, tax-exempt municipal bonds rated “A” or “BBB” (or unrated bonds of comparable quality) outperformed relative to tax-exempt municipal bonds rated in the higher rating categories (or unrated bonds of comparable quality) during the reporting period. With the decline in credit spreads during the reporting period, and the reduction of credit spreads to a lesser extent for “AAA” and “AA” rated (or unrated comparable quality) debt, the Fund's overweight position, relative to the SPMBIGI, in “A” (or unrated comparable quality) debt during the reporting period helped the Fund's performance, as the yield on “A” (or unrated comparable quality) debt decreased to a greater extent than for other investment-grade securities.7 The Fund's exposure to noninvestment-grade debt (rated below “BBB”) also made a large contribution to excess return as this part of the market performed strongly. The Fund continued to be negatively affected by the deterioration in a specific health care bond (Madison Center located in Indiana). The obligor went into default and suffered a significant deterioration in price.
Annual Shareholder Report
1 | Please see the footnotes to the line graphs under “Fund Performance and Growth of a $10,000 Investment” below for the definition of, and more information about, the SPMBIGI. |
2 | Please see the footnotes to the line graphs under “Fund Performance and Growth of a $10,000 Investment” below for the definition of, and more information about, the MNLFCA. |
3 | Duration is a measure of a security's price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities with shorter durations. For purposes of this Management's Discussion of Fund Performance, duration is determined using a third-party analytical system. |
4 | Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices. |
5 | Income may be subject to state and local taxes. The investment adviser normally (except as disclosed in the Fund's Prospectus) will invest the Fund's assets entirely in securities whose interest is not subject to the alternative minimum tax for individuals and corporations (AMT), such that, normally, distributions of annual interest income are exempt from the AMT (in addition to the federal regular income tax). However, in certain circumstances (such as, for example, when there is a lack of supply of non-AMT securities or there are advantageous market conditions, or there is a change in law relating to the AMT), to pursue the Fund's investment objective, the Fund's adviser may invest the Fund's assets in securities that may be subject to the AMT. When there is a lack of supply of non-AMT securities and/or other circumstances that exist, such circumstances may result in the Fund acquiring AMT securities that are consistent with the Fund's investment objective. These acquisitions may occur in the ordinary course or in connection with Fund reorganization transactions (i.e., transactions in which the Fund acquires the portfolio securities of other mutual funds), an issuer bankruptcy or another event or circumstance. In such circumstances, interest from the Fund's investments may be subject to the AMT. |
6 | Credit ratings pertain only to the securities in the portfolio and do not protect Fund shares against market risk. |
7 | Investment-grade securities and noninvestment-grade securities may either be: (a) rated by a nationally recognized statistical ratings organization or rating agency; or (b) unrated securities that the Fund's investment adviser (“Adviser”) believes are of comparable quality. The rating agencies that provided the ratings for rated securities include Standard and Poor's, Moody's Investor Services, Inc. and Fitch Rating Service. When ratings vary, the highest rating is used. Credit ratings of “AA” or better are considered to be high credit quality; credit ratings of “A” are considered high or medium/good quality; and credit ratings of “BBB” are considered to be medium/good credit quality and the lowest category of investment-grade securities; credit ratings of “BB” and below are lower-rated, noninvestment-grade securities or junk bonds; and credit ratings of “CCC” or below are noninvestment-grade securities that have high default risk. Any credit quality breakdown does not give effect to the impact of any credit derivative investments made by the Fund. Credit ratings are an indication of the risk that a security will default. They do not protect a security from credit risk. Lower-rated bonds typically offer higher yields to help compensate investors for the increased risk associated with them. Among these risks are lower creditworthiness, greater price volatility, more risk to principal and income than with higher-rated securities and increased possibilities of default. |
Annual Shareholder Report
FUND PERFORMANCE AND GROWTH OF A $10,000 INVESTMENT
The Average Annual Total Return table below shows returns for each class averaged over the stated periods. The graphs below illustrate the hypothetical investment of $10,0001 in the Federated Municipal Securities Fund, Inc. (the “Fund”) from March 31, 2003 (or later Start of Performance, if applicable) to March 31, 2013, compared to the S&P Municipal Bond Investment Grade Index (SPMBIGI),2 S&P Municipal Bond Investment Grade, 3-year plus, Non-AMT (SPMBIG3)3 and the Morningstar Municipal National Long Funds Category Average (MNLFCA).4
Average Annual Total Returns for the Period Ended 3/31/2013
(returns reflect all applicable sales charges and contingent deferred sales charge as specified below in footnote #1)
Share Class | 1 Year | 5 Years | 10 Years | Start of Performance* |
Class A Shares | 1.65% | 4.48% | 3.72% | — |
Class B Shares | 0.07% | 4.19% | 3.46% | — |
Class C Shares | 4.57% | 4.53% | 3.29% | — |
Class F Shares | 4.33% | 5.23% | — | 4.22% |
* | The Fund's Class F Shares commenced operations on May 31, 2007. |
Performance data quoted represents past performance which is no guarantee of future results. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Mutual fund performance changes over time and current performance may be lower or higher than what is stated. For current to the most recent month-end performance and after-tax returns, visit FederatedInvestors.com or call 1-800-341-7400. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured.
Annual Shareholder Report
Growth of a $10,000 Investment–Class A Shares
Federated Municipal Securities Fund, Inc. - | Class A Shares | SPMBIGI | MNLFCA | SPMBIG3 |
3/31/2003 | 9,550 | 10,000 | 10,000 | 10,000 |
3/31/2004 | 10,016 | 10,614 | 10,559 | 10,662 |
3/31/2005 | 10,280 | 10,933 | 10,787 | 11,002 |
3/31/2006 | 10,684 | 11,393 | 11,170 | 11,487 |
3/31/2007 | 11,224 | 12,027 | 11,715 | 12,154 |
3/31/2008 | 11,057 | 12,196 | 11,612 | 12,285 |
3/31/2009 | 10,820 | 12,337 | 11,271 | 12,392 |
3/31/2010 | 11,987 | 13,630 | 12,755 | 13,832 |
3/31/2011 | 11,958 | 13,824 | 12,779 | 14,013 |
3/31/2012 | 13,538 | 15,525 | 14,538 | 16,033 |
3/31/2013 | 14,408 | 16,353 | 15,440 | 17,015 |
41 graphic description end -->
■ | Total returns shown include the maximum sales charge of 4.50% ($10,000 investment minus $450 sales charge = $9,550). |
Growth of a $10,000 Investment–Class B Shares
Federated Municipal Securities Fund, Inc. - | Class B Shares | SPMBIGI | MNLFCA | SPMBIG3 |
3/31/2003 | 10,000 | 10,000 | 10,000 | 10,000 |
3/31/2004 | 10,395 | 10,614 | 10,559 | 10,662 |
3/31/2005 | 10,575 | 10,933 | 10,787 | 11,002 |
3/31/2006 | 10,893 | 11,393 | 11,170 | 11,487 |
3/31/2007 | 11,342 | 12,027 | 11,715 | 12,154 |
3/31/2008 | 11,166 | 12,196 | 11,612 | 12,285 |
3/31/2009 | 10,831 | 12,337 | 11,271 | 12,392 |
3/31/2010 | 11,893 | 13,630 | 12,755 | 13,832 |
3/31/2011 | 11,865 | 13,824 | 12,779 | 14,013 |
3/31/2012 | 13,432 | 15,525 | 14,538 | 16,033 |
3/31/2013 | 14,180 | 16,353 | 15,440 | 17,015 |
41 graphic description end -->
■ | Total returns shown include the maximum contingent deferred sales charge of 5.50% as applicable. |
Annual Shareholder Report
Growth of a $10,000 Investment–Class C Shares
Federated Municipal Securities Fund, Inc. - | Class C Shares | SPMBIGI | MNLFCA | SPMBIG3 |
3/31/2003 | 10,000 | 10,000 | 10,000 | 10,000 |
3/31/2004 | 10,395 | 10,614 | 10,559 | 10,662 |
3/31/2005 | 10,575 | 10,933 | 10,787 | 11,002 |
3/31/2006 | 10,893 | 11,393 | 11,170 | 11,487 |
3/31/2007 | 11,344 | 12,027 | 11,715 | 12,154 |
3/31/2008 | 11,078 | 12,196 | 11,612 | 12,285 |
3/31/2009 | 10,746 | 12,337 | 11,271 | 12,392 |
3/31/2010 | 11,800 | 13,630 | 12,755 | 13,832 |
3/31/2011 | 11,668 | 13,824 | 12,779 | 14,013 |
3/31/2012 | 13,098 | 15,525 | 14,538 | 16,033 |
3/31/2013 | 13,827 | 16,353 | 15,440 | 17,015 |
41 graphic description end -->
■ | Total returns shown include the maximum contingent deferred sales charge of 1.00% as applicable. |
Growth of a $10,000 Investment–Class F Shares
Federated Municipal Securities Fund, Inc. - | Class F Shares | SPMBIGI | MNLFCA | SPMBIG3 |
5/31/2007 | 9,900 | 10,000 | 10,000 | 10,000 |
3/31/2008 | 9,768 | 10,103 | 9,947 | 10,068 |
3/31/2009 | 9,559 | 10,220 | 9,655 | 10,157 |
3/31/2010 | 10,590 | 11,291 | 10,926 | 11,337 |
3/31/2011 | 10,564 | 11,452 | 10,947 | 11,485 |
3/31/2012 | 11,960 | 12,861 | 12,453 | 13,140 |
3/31/2013 | 12,729 | 13,547 | 13,226 | 13,946 |
41 graphic description end -->
■ | Total returns shown include the maximum sales charge of 1.00% ($10,000 investment minus $100 sales charge = $9,900) and the maximum contingent deferred sales charge of 1.00% as applicable. |
Annual Shareholder Report
1 | Represents a hypothetical investment of $10,000 in the Fund after deducting applicable sales charges: For Class A Shares, the maximum sales charge of 4.50% ($10,000 investment minus $450 sales charge = $9,550); For Class B Shares, the maximum contingent deferred sales charge is 5.50% on any redemption less than one year from the purchase date; For Class C Shares, a 1.00% contingent deferred sales charge would be applied to any redemption less than one year from the purchase date; For Class F Shares, the maximum sales charge of 1.00% ($10,000 investment minus $100 sales charge = $9,900) and the maximum contingent deferred sales charge is 1.00% on any redemption less than four years from the purchase date. The Fund's performance assumes the reinvestment of all dividends and distributions. The SPMBIGI, SPMBIG3 and the MNLFCA have been adjusted to reflect reinvestment of dividends on securities in the index and average. |
2 | The SPMBIGI is the investment-grade component of the S&P Municipal Bond Index (“Main Index”). The Main Index is a broad, comprehensive, market value-weighted index composed of approximately 55,000 bond issues that are exempt from U.S. federal income taxes or subject to the alternative minimum tax (AMT). Eligibility criteria for inclusion in the Main Index include, but are not limited to: the bond issuer must be a state (including the Commonwealth of Puerto Rico and U.S. territories) or a local government or a state or local government entity where interest on the bond is exempt from U.S. federal income taxes or subject to the AMT; the bond must be held by a mutual fund for which Standard & Poor's Securities Evaluations, Inc. provides prices; it must be denominated in U.S. dollars and have a minimum par amount of $2 million; and the bond must have a minimum term to maturity and/or call date greater than or equal to one calendar month. The Main Index is rebalanced monthly. The SPMBIGI is not adjusted to reflect sales charges, expenses and other fees that the Securities and Exchange Commission (SEC) requires to be reflected in the Fund's performance. Unlike the Fund, the SPMBIGI is unmanaged and is not affected by cash flows. It is not possible to invest directly in this index. |
3 | The SPMBIG3 represents the portion of the SPMBIGI composed solely of bonds with remaining maturities of three years or more that are not subject to AMT. The SPMBIG3 is not adjusted to reflect sales charges, expenses and other fees that the SEC requires to be reflected in the Fund's performance. Unlike the Fund, the SPMBIG3 is unmanaged and is not affected by cash flows. It is not possible to invest directly in this index. |
4 | Morningstar figures represent the average of the total returns reported by all the mutual funds designated by Morningstar as falling into the respective category indicated. |
Annual Shareholder Report
Portfolio of Investments Summary Table (unaudited)
At March 31, 2013, the Fund's sector composition1 was as follows:
Sector Composition | Percentage of Total Net Assets |
Transportation | 17.6% |
General Obligation—State | 14.6% |
Hospital | 12.5% |
Special Tax | 9.7% |
Public Power | 9.5% |
Education | 8.8% |
Industrial Development Bond/Pollution Control Revenue | 6.0% |
General Obligation—Local | 4.6% |
Water & Sewer | 4.1% |
Pre-refunded | 3.4% |
Other2 | 8.6% |
Derivative Contracts3,4 | 0.0% |
Other Assets and Liabilities—Net5 | 0.6% |
TOTAL | 100.0% |
1 | Sector classifications, and the assignment of holdings to such sectors, are based upon the economic sector and/or revenue source of the underlying obligor, as determined by the Fund's Adviser. For securities that have been enhanced by a third party, including bond insurers and banks, sector classifications are based upon the economic sector and/or revenue source of the underlying obligor, as determined by the Fund's Adviser. Pre-refunded securities are those whose debt service is paid from escrowed assets, usually U.S. government securities. |
2 | For purposes of this table, sector classifications constitute 90.8% of the Fund's total net assets. Remaining sectors have been aggregated under the designation “Other.” |
3 | Based upon net unrealized appreciation (depreciation) or value of the derivative contracts as applicable. Derivative contracts may consist of futures, forwards, options and swaps. The impact of a derivative contract on the Fund's performance may be larger than its unrealized appreciation (depreciation) or value may indicate. In many cases, the notional value or amount of a derivative contract may provide a better indication of the contract's significance to the portfolio. More complete information regarding the Fund's direct investments in derivative contracts, including unrealized appreciation (depreciation), value, and notional values or amounts of such contracts, can be found in the table at the end of the Portfolio of Investments included in this Report. |
4 | Represents less than 0.1%. |
5 | Assets, other than investments in securities and derivative contracts, less liabilities. See Statement of Assets and Liabilities. |
Annual Shareholder Report
Portfolio of Investments
March 31, 2013
Principal Amount | | | Value |
| | MUNICIPAL BONDS—97.9% | |
| | Alabama—0.3% | |
$1,250,000 | | Selma, AL IDB, Gulf Opportunity Zone Bonds (Series 2010A), 5.80% (International Paper Co.), 5/1/2034 | $1,409,475 |
| | Alaska—0.1% | |
595,000 | | Valdez, AK Marine Terminal, Marine Terminal Revenue Refunding Bonds (Series 2003B), 5.00% (BP PLC), 1/1/2014 | 615,052 |
| | Arizona—1.9% | |
1,545,000 | | Apache County, AZ IDA, PCRBs (Series 2012A), 4.50% (Tucson Electric Power Co.), 3/1/2030 | 1,596,603 |
1,000,000 | | Arizona Board of Regents, System Revenue Bonds (Series 2008C), 6.00% (Arizona State University)/(Original Issue Yield: 6.12%), 7/1/2028 | 1,186,860 |
2,000,000 | | Arizona Transportation Board—Excise Tax Revenue, Transportation Excise Tax Revenue Bonds (Series 2009), 5.00% (Maricopa County, AZ Regional Area Road Fund), 7/1/2023 | 2,355,760 |
2,000,000 | | Phoenix, AZ Civic Improvement Corp.—Wastewater System, Senior Lien Wastewater System Revenue Bonds (Series 2008), 5.50%, 7/1/2024 | 2,414,360 |
2,000,000 | | Pima County, AZ IDA, Revenue Bonds (Series 2008B), 5.75% (Tucson Electric Power Co.), 9/1/2029 | 2,108,620 |
| | TOTAL | 9,662,203 |
| | California—11.9% | |
3,000,000 | | Bay Area Toll Authority, CA, San Francisco Bay Area Subordinate Toll Bridge Revenue Bonds (Series 2010 S-2), 5.00%, 10/1/2042 | 3,315,720 |
1,000,000 | | Bay Area Toll Authority, CA, San Francisco Bay Area Toll Bridge Revenue Bonds (Series 2009F-1), 5.625%, 4/1/2044 | 1,142,750 |
425,000 | | California Health Facilities Financing Authority, Health Facility Revenue Bonds (Series 2004I), 4.95% TOBs (Catholic Healthcare West), Mandatory Tender 7/1/2014 | 448,358 |
1,000,000 | | California Health Facilities Financing Authority, Revenue Bonds (Series 1998), 5.40% (Northern California Presbyterian Homes, Inc.)/(Original Issue Yield: 5.417%), 7/1/2028 | 1,000,600 |
2,000,000 | | California State, Various Purpose GO Bonds, 6.00%, 11/1/2039 | 2,417,520 |
1,800,000 | | California State, Various Purpose UT GO Bonds, 5.00%, 2/1/2019 | 2,160,108 |
4,000,000 | | California State, Various Purpose UT GO Bonds, 5.75% (Original Issue Yield: 5.85%), 4/1/2029 | 4,745,600 |
1,000,000 | | California State, Various Purpose UT GO Bonds, 6.50%, 4/1/2033 | 1,238,870 |
1,000,000 | | El Centro, CA Financing Authority, INS Hospital Revenue Bonds (Series 2001), 5.25% (El Centro Regional Medical Center)/(California Mortgage Insurance GTD)/(Original Issue Yield: 5.32%), 3/1/2018 | 1,002,760 |
Annual Shareholder Report
Principal Amount | | | Value |
| | MUNICIPAL BONDS—continued | |
| | California—continued | |
$3,000,000 | | Golden State Tobacco Securitization Corp., CA, Enhanced Tobacco Settlement Asset-Backed Bonds (Series 2005A), 5.00% (California State)/(FGIC INS), 6/1/2035 | $3,145,980 |
1,000,000 | | Long Beach, CA USDT, UT GO Bonds (Series 2008A), 5.75%, 8/1/2033 | 1,183,420 |
1,000,000 | | Los Angeles, CA Department of Water & Power, Power System Revenue Bonds (Series 2009A), 5.00% (Original Issue Yield: 5.10%), 7/1/2039 | 1,121,320 |
2,000,000 | | Los Angeles, CA USDT, UT GO Bonds (Series 2009D), 5.20%, 7/1/2029 | 2,335,560 |
1,000,000 | | Los Angeles, CA Wastewater System, Refunding Revenue Bonds (Series 2009A), 5.75%, 6/1/2034 | 1,207,740 |
1,000,000 | | Metropolitan Water District of Southern California, Water Revenue Refunding Bonds (Series 2009C), 5.00%, 7/1/2031 | 1,169,210 |
2,430,000 | | M-S-R Energy Authority, CA, Gas Revenue Bonds (Series 2009A), 7.00% (Citigroup, Inc. GTD), 11/1/2034 | 3,417,212 |
6,000,000 | | Regents of the University of California Medical Center, Pooled Revenue Bonds (Series 2008D), 5.00%, 5/15/2024 | 6,804,780 |
240,000 | | Regents of the University of California, Revenue Bonds (Series A), 5.125% (United States Treasury PRF 5/15/2013@100), 5/15/2020 | 241,524 |
3,000,000 | | Roseville, CA Natural Gas Financing Authority, Gas Revenue Bonds, 5.00% (Merrill Lynch & Co., Inc. GTD), 2/15/2025 | 3,485,580 |
1,500,000 | | Sacramento County, CA Airport System, Airport System Senior Revenue Bonds (Series 2009B), 5.50% (Assured Guaranty Corp. INS)/(Original Issue Yield: 5.60%), 7/1/2034 | 1,733,175 |
2,665,000 | | Sacramento, CA Municipal Utility District, Electric Revenue Refunding Bonds (Series 2012Y), 5.00%, 8/15/2028 | 3,136,039 |
349,000 | 1 | San Bernardino County, CA Housing Authority, Subordinated Revenue Bonds, 7.25% (Glen Aire Park & Pacific Palms), 4/15/2042 | 173,641 |
5,000,000 | | San Diego County, CA Water Authority, Water Revenue Refunding Bonds (Series 2013A), 5.00%, 5/1/2033 | 5,896,500 |
1,000,000 | | Santa Barbara CCD, CA, UT GO Bonds (Series 2008A), 5.25%, 8/1/2028 | 1,172,760 |
1,000,000 | | Torrance, CA Hospital Revenue Bonds, (Series 2001 A), 5.50% (Torrance Memorial Medical Center)/(Original Issue Yield: 5.65%), 6/1/2031 | 1,002,200 |
1,000,000 | | Trustees of the California State University, Systemwide Revenue Bonds (Series 2009A), 6.00%, 11/1/2040 | 1,189,140 |
3,000,000 | | Trustees of the California State University, Systemwide Revenue Bonds (Series 2011A), 5.00%, 11/1/2037 | 3,381,150 |
1,000,000 | | University of California, General Revenue Bonds (Series 2009O), 5.75%, 5/15/2034 | 1,200,620 |
1,000,000 | | Vista, CA Community Development Commission, Tax Allocation Bonds (Series 2001), 5.80% (Vista Redevelopment Project Area)/(Original Issue Yield: 5.85%), 9/1/2030 | 1,001,170 |
| | TOTAL | 61,471,007 |
Annual Shareholder Report
Principal Amount | | | Value |
| | MUNICIPAL BONDS—continued | |
| | Colorado—2.3% | |
$2,500,000 | | Colorado Health Facilities Authority, Revenue Refunding Bonds (Series 2012A), 5.00% (Covenant Retirement Communities, Inc.), 12/1/2033 | $2,641,225 |
1,445,000 | | Denver (City & County), CO, Revenue Bonds (Series 2012B), 5.00% (Denver, CO City & County Airport Authority), 11/15/2037 | 1,617,085 |
4,250,000 | | University of Colorado Hospital Authority, Revenue Bonds (Series 2012A), 5.00%, 11/15/2036 | 4,734,118 |
2,500,000 | | University of Colorado, University Enterprise Revenue Bonds (Series 2011A), 5.25%, 6/1/2036 | 2,901,075 |
| | TOTAL | 11,893,503 |
| | Connecticut—0.9% | |
4,000,000 | | Connecticut State, Refunding UT GO Bonds (Series 2010C), 5.00%, 12/1/2019 | 4,912,520 |
| | Delaware—0.5% | |
2,380,000 | | Delaware EDA, Gas Facilities Refunding Bonds, 5.40% (Delmarva Power and Light Co.), 2/1/2031 | 2,661,935 |
| | Florida—7.1% | |
2,000,000 | | Atlantic Beach, FL Health Care Facilites, Revenue & Refunding Bonds (Series 2013A), 5.00% (Fleet Landing Project, FL), 11/15/2037 | 2,111,360 |
1,500,000 | | Broward County, FL Airport System, Airport System Revenue Bonds (Series 2012Q-1), 5.00%, 10/1/2037 | 1,669,095 |
1,445,000 | | Broward County, FL Airport System, Airport System Revenue Refunding Bonds (Series 2009O), 5.375% (Original Issue Yield: 5.48%), 10/1/2029 | 1,638,312 |
1,500,000 | | Florida Higher Educational Facilities Financing Authority, (Nova Southeastern University), Revenue Refunding Bonds (Series 2012A), 5.00%, 4/01/2027 | 1,642,815 |
760,000 | | Florida State Board of Education Administration, UT GO Capital Outlay Bonds, 9.125% (Florida State)/(Original Issue Yield: 9.173%), 6/1/2014 | 771,286 |
2,175,000 | | Florida State Board of Education, UT GO Capital Outlay Bonds (Series 2008F), 5.00% (Florida State), 6/1/2025 | 2,605,454 |
2,000,000 | | Jacksonville, FL Sales Tax, Refunding Revenue Bonds (Series 2012), 5.00%, 10/1/2027 | 2,311,760 |
2,000,000 | | Jacksonville, FL Sales Tax, Refunding Revenue Bonds (Series 2012A), 5.00%, 10/1/2029 | 2,286,060 |
2,250,000 | | Miami Beach, FL Health Facilities Authority, Hospital Revenue Refunding Bonds (Series 2012), 5.00% (Mt. Sinai Medical Center, FL), 11/15/2029 | 2,445,143 |
5,000,000 | | Miami-Dade County, FL Aviation, Revenue Bonds (Series 2008B), 5.00% (Assured Guaranty Corp. INS), 10/1/2028 | 5,691,900 |
1,500,000 | | Miami-Dade County, FL Expressway Authority, Toll System Refunding Revenue Bonds (Series 2013A), 5.00%, 7/1/2022 | 1,809,540 |
Annual Shareholder Report
Principal Amount | | | Value |
| | MUNICIPAL BONDS—continued | |
| | Florida—continued | |
$1,250,000 | | Miami-Dade County, FL Expressway Authority, Toll System Revenue Bonds (Series 2010), 5.00% (Original Issue Yield: 5.10%), 7/1/2040 | $1,344,300 |
5,000,000 | | Orlando & Orange County Expressway Authority, FL, Revenue Bonds (Series 2010A), 5.00%, 7/1/2035 | 5,490,250 |
2,000,000 | | Orlando, FL Utilities Commission, Utility System Revenue Refunding Bonds (Series 2013A), 5.00%, 10/1/2025 | 2,539,160 |
2,000,000 | | St. Johns County, FL IDA, Revenue Bonds (Series 2010A), 5.875% (Presbyterian Retirement Communities)/(Original Issue Yield: 5.98%), 8/1/2040 | 2,216,300 |
| | TOTAL | 36,572,735 |
| | Georgia—2.5% | |
2,190,000 | | Atlanta, GA Airport General Revenue, Airport General Revenue Bonds (Series 2010A), 5.00%, 1/1/2035 | 2,404,029 |
2,000,000 | | Atlanta, GA Water & Wastewater, Revenue Bonds (Series 2009A), 6.00%, 11/1/2019 | 2,530,540 |
2,000,000 | | Burke County, GA Development Authority, PCRBs (Series 2008A), 5.50% (Oglethorpe Power Corp.), 1/1/2033 | 2,156,540 |
1,000,000 | | Georgia State, UT GO Bonds (Series 2009B), 5.00%, 1/1/2026 | 1,199,090 |
1,000,000 | | Municipal Electric Authority of Georgia, Project One Subordinated Bonds (Series 2008A), 5.25%, 1/1/2021 | 1,232,450 |
3,000,000 | | Municipal Electric Authority of Georgia, Project One Subordinated Bonds (Series 2008D), 5.50% (Original Issue Yield: 5.80%), 1/1/2026 | 3,552,960 |
| | TOTAL | 13,075,609 |
| | Illinois—4.2% | |
1,875,000 | | Chicago, IL O'Hare International Airport, General Airport Third Lien Revenue Bonds (Series 2011C), 6.50%, 1/1/2041 | 2,405,437 |
2,000,000 | | Chicago, IL O'Hare International Airport, Passenger Facility Charge Revenue Refunding Bonds (Series 2012A), 5.00%, 1/1/2031 | 2,227,700 |
1,500,000 | | Chicago, IL Sales Tax, Revenue Bonds (Series 2011A), 5.25%, 1/1/2038 | 1,696,455 |
1,930,000 | | Illinois Finance Authority, Revenue Refunding Bonds (Series 2007), 5.00% (Loyola University of Chicago), 7/1/2022 | 2,199,891 |
215,000 | | Illinois Finance Authority, Revenue Refunding Bonds (Series 2007), 5.00% (Loyola University of Chicago)/(United States Treasury PRF 7/1/2017@100), 7/1/2022 | 252,679 |
4,000,000 | | Illinois State Toll Highway Authority, Toll Highway Senior Refunding Revenue Bonds (Series 2010 A-1), 5.25%, 1/1/2030 | 4,570,320 |
5,000,000 | | Illinois State, GO Refunding Bonds (Series February 2010), 5.00%, 1/1/2024 | 5,501,350 |
1,500,000 | | Metropolitan Pier & Exposition Authority, IL, McCormick Place Expansion Project Bonds (Series 2010A), 5.50%, 6/15/2050 | 1,654,515 |
Annual Shareholder Report
Principal Amount | | | Value |
| | MUNICIPAL BONDS—continued | |
| | Illinois—continued | |
$1,200,000 | | Railsplitter Tobacco Settlement Authority, IL, Tobacco Settlement Revenue Bonds (Series 2010), 6.00% (Original Issue Yield: 6.10%), 6/1/2028 | $1,435,176 |
| | TOTAL | 21,943,523 |
| | Indiana—3.8% | |
2,200,000 | | Indiana Health Facility Financing Authority, Revenue Bonds (Series 2004A), 5.375% (Deaconess Hospital)/(United States Treasury PRF 3/1/2014@100), 3/1/2029 | 2,302,696 |
1,625,000 | | Indiana Municipal Power Agency, Power Supply System Refunding Revenue Bonds (Series 2012A), 5.00%, 1/1/2028 | 1,883,099 |
1,500,000 | | Indiana State Finance Authority Environmental Revenue, Revenue Refunding Bonds (Series 2010), 6.00% (United States Steel Corp.), 12/1/2026 | 1,584,300 |
1,665,000 | | Indiana State Finance Authority, Midwestern Disaster Relief Revenue Bonds (Series 2012A), 5.00% (Ohio Valley Electric Corp.)/(Original Issue Yield: 5.05%), 6/1/2039 | 1,762,203 |
1,500,000 | | Indiana State Office Building Commission Capitol Complex, Revenue Bonds (Series 1990A: Senate Avenue Parking Facility), 7.40% (United States Treasury COL)/(Original Issue Yield: 7.488%), 7/1/2015 | 1,618,785 |
4,000,000 | | Indianapolis, IN Gas Utility Distribution System, Second Lien Revenue Refunding Bonds (Series 2008C), 5.25% (Assured Guaranty Corp. INS), 6/1/2019 | 4,804,000 |
1,000,000 | | Knox County, IN Economic Development, Revenue & Refunding Bonds (Series 2012A), 5.00% (Good Samaritan Hospital, IN), 4/1/2042 | 1,079,730 |
1,702,776 | 1,2 | St. Joseph County, IN Hospital Authority, Health Facilities Revenue Bonds (Series 2005), 5.375% (Madison Center Obligated Group), 2/15/2034 | 204,520 |
4,000,000 | | Whiting, IN Environmental Facilities, Revenue Bonds (Series 2009), 5.00% (BP PLC), 1/1/2016 | 4,446,920 |
| | TOTAL | 19,686,253 |
| | Iowa—0.4% | |
2,330,000 | | Tobacco Settlement Authority, IA, Tobacco Settlement Asset-Backed Bonds (Series 2005C), 5.50% (Original Issue Yield: 5.78%), 6/1/2042 | 2,244,675 |
| | Kansas—0.2% | |
1,010,000 | | Kansas State Development Finance Authority, Health Facilities Revenue Bonds (Series 2007L), 5.125% (Stormont-Vail HealthCare, Inc.)/(National Public Finance Guarantee Corporation INS), 11/15/2032 | 1,077,781 |
| | Kentucky—1.1% | |
3,000,000 | | Kentucky Turnpike Authority, Economic Development Road Revenue Bonds (Series 2008A), 5.00%, 7/1/2023 | 3,517,500 |
2,000,000 | | Louisville & Jefferson County, KY Metropolitan Government, Revenue Bonds (Series 2012A), 5.00% (Catholic Health Initiatives), 12/1/2031 | 2,267,340 |
| | TOTAL | 5,784,840 |
Annual Shareholder Report
Principal Amount | | | Value |
| | MUNICIPAL BONDS—continued | |
| | Louisiana—0.3% | |
$1,180,000 | | St. Charles Parish, LA Gulf Opportunity Zone, Revenue Bonds (Series 2010), 4.00% TOBs (Valero Energy Corp.), Mandatory Tender 6/1/2022 | $1,291,840 |
| | Maryland—0.7% | |
1,060,000 | | Maryland State EDC., Port Facilities Refunding Revenue Bonds (Series 2010), 5.75% (CONSOL Energy, Inc.), 9/1/2025 | 1,175,604 |
2,320,000 | | Maryland State Health & Higher Educational Facilities Authority, Revenue Bonds (Series 2013A), 5.00% (MedStar Health, Inc.), 8/15/2038 | 2,558,960 |
| | TOTAL | 3,734,564 |
| | Massachusetts—3.3% | |
4,000,000 | | Massachusetts Bay Transportation Authority General Transportation System, Assessment Bonds (Series 2008A), 5.25%, 7/1/2034 | 4,604,680 |
4,330,000 | | Massachusetts Department of Transportation, Metropolitan Highway System Revenue Bonds (Series 2010B), 5.00%, 1/1/2032 | 4,819,593 |
3,000,000 | | Massachusetts Development Finance Agency, Revenue Bonds (Series 2010B-2), 5.00% (Harvard University), 10/15/2020 | 3,776,820 |
2,000,000 | | Massachusetts School Building Authority, Sales Tax Revenue Refunding Bonds (Series 2012A), 5.00%, 8/15/2022 | 2,509,860 |
1,000,000 | | Massachusetts School Building Authority, Senior Dedicated Sales Tax Bonds (Series 2011B), 5.25%, 10/15/2035 | 1,175,100 |
| | TOTAL | 16,886,053 |
| | Michigan—0.8% | |
1,500,000 | | Michigan State Hospital Finance Authority, Hospital Revenue Bonds (Series 2002A), 6.00% (United States Treasury PRF 4/1/2013@100)/(Oakwood Obligated Group), 4/1/2022 | 1,500,735 |
2,470,000 | | Michigan State Housing Development Authority, SFM Revenue Bonds (Series 2009A), 5.35%, 6/1/2022 | 2,743,231 |
| | TOTAL | 4,243,966 |
| | Minnesota—0.2% | |
1,000,000 | | University of Minnesota, GO Bonds (Series 2011A), 5.25%, 12/1/2030 | 1,200,980 |
| | Mississippi—0.2% | |
940,000 | | Warren County, MS Gulf Opportunity Zone, Gulf Opportunity Zone Bonds (Series 2011A), 5.375% (International Paper Co.), 12/1/2035 | 1,031,368 |
| | Missouri—0.6% | |
1,335,000 | | Missouri Development Finance Board, Infrastructure Facilities Revenue Bonds (Series 2005A), 5.00% (Branson, MO), 6/1/2035 | 1,366,666 |
1,500,000 | | St. Louis County, MO IDA, Senior Living Facilities Revenue Bonds (Series 2012), 5.00% (Friendship Village Sunset Hills), 9/1/2042 | 1,565,250 |
| | TOTAL | 2,931,916 |
Annual Shareholder Report
Principal Amount | | | Value |
| | MUNICIPAL BONDS—continued | |
| | Nebraska—0.6% | |
$2,800,000 | | Nebraska Public Power District, General Revenue Bonds (Series 2012A), 5.00%, 1/1/2027 | $3,273,032 |
| | Nevada—0.9% | |
3,000,000 | | Clark County, NV School District, LT GO Building Bonds (Series 2008A), 5.00%, 6/15/2025 | 3,389,760 |
1,000,000 | | Henderson, NV, Health Facility Revenue Bonds (Series 2004A), 5.625% (Dignity Health (Catholic Healthcare West))/(Original Issue Yield: 5.72%), 7/1/2024 | 1,050,620 |
| | TOTAL | 4,440,380 |
| | New Hampshire—0.3% | |
1,685,000 | | New Hampshire Higher Educational & Health Facilities Authority, Healthcare System Revenue Bonds (Series 2004), 5.375% (Covenant Health Systems)/(Original Issue Yield: 5.50%), 7/1/2024 | 1,729,231 |
| | New Jersey—3.5% | |
3,000,000 | | New Jersey EDA, Cigarette Tax Revenue Refunding Bonds (Series 2012), 5.00% (NJ Dedicated Cigarette Excise Tax), 6/15/2020 | 3,506,820 |
3,000,000 | | New Jersey EDA, Revenue Bonds, Series 2004, 5.75% (NJ Dedicated Cigarette Excise Tax)/(Original Issue Yield: 5.89%), 6/15/2029 | 3,199,890 |
5,000,000 | | New Jersey State Transportation Trust Fund Authority, Transportation System Bonds (Series 2011A), 5.50% (New Jersey State), 6/15/2041 | 5,758,350 |
2,000,000 | | New Jersey Turnpike Authority, Revenue Bonds (Series 2009H), 5.00% (Original Issue Yield: 5.069%), 1/1/2036 | 2,177,980 |
1,000,000 | | New Jersey Turnpike Authority, Turnpike Revenue Bonds (Series 2012A), 5.00%, 1/1/2035 | 1,106,690 |
1,000,000 | | New Jersey Turnpike Authority, Turnpike Revenue Bonds (Series 2013A), 5.00%, 1/1/2023 | 1,216,280 |
1,000,000 | | New Jersey Turnpike Authority, Turnpike Revenue Bonds (Series 2013A), 5.00%, 1/1/2024 | 1,186,360 |
| | TOTAL | 18,152,370 |
| | New Mexico—0.4% | |
2,000,000 | | Albuquerque Bernalillo County, NM Water Utility Authority, Joint Water & Sewer System Improvement Revenue Bonds (Series 2009A-1), 5.25% (Original Issue Yield: 5.34%), 7/1/2034 | 2,299,220 |
| | New York—9.4% | |
1,500,000 | | Brooklyn Arena Local Development Corporation, NY, Pilot Revenue Bonds (Series 2009), 6.375% (Original Issue Yield: 6.476%), 7/15/2043 | 1,794,345 |
2,000,000 | | Hempstead (town), NY IDA, Civic Facility Revenue Bonds, 5.25% (Hofstra University), 7/1/2018 | 2,022,600 |
2,500,000 | | Metropolitan Transportation Authority, NY, Transportation Revenue Bonds (Series 2012E), 5.00% (MTA Transportation Revenue), 11/15/2042 | 2,752,675 |
1,500,000 | | New York City Liberty Development Corp., Revenue Bonds (Series 2005), 5.25% (Goldman Sachs Group, Inc.), 10/1/2035 | 1,751,970 |
Annual Shareholder Report
Principal Amount | | | Value |
| | MUNICIPAL BONDS—continued | |
| | New York—continued | |
$4,000,000 | | New York City, NY IDA, CPI Pilot Revenue Bonds (Series 2006), 2.415% (Yankee Stadium LLC)/(FGIC INS), 3/1/2021 | $3,910,360 |
2,725,000 | | New York City, NY TFA, Future Tax Secured Subordinate Bonds (Series 2011C), 5.50%, 11/1/2035 | 3,218,852 |
3,570,000 | | New York City, NY, UT GO Bonds (Series 2009E), 5.00%, 8/1/2026 | 4,283,393 |
5,000,000 | | New York City, NY, UT GO Bonds (Series 2009I-1), 5.375% (Original Issue Yield: 5.55%), 4/1/2036 | 5,873,500 |
2,470,000 | | New York Liberty Development Corporation, Revenue Refunding Bonds (Series 2012 Class 2), 5.00% (7 World Trade Center LLC), 9/15/2043 | 2,693,362 |
2,000,000 | | New York State Dormitory Authority, Revenue Bonds (Series 2008A), 5.00% (New York State Personal Income Tax Revenue Bond Fund), 3/15/2028 | 2,302,600 |
2,780,000 | | New York State Thruway Authority, General Revenue Bonds (Series 2012I), 5.00% (New York State Thruway Authority—General Revenue), 1/1/2028 | 3,214,597 |
2,500,000 | | New York State Thruway Authority, Revenue Bonds (Series 2007A), 5.25% (New York State Personal Income Tax Revenue Bond Fund), 3/15/2026 | 2,921,575 |
3,000,000 | | New York State, UT GO Bonds (Series 2011A), 5.00%, 2/15/2020 | 3,711,810 |
1,985,000 | | Suffolk County, NY Water Authority, Water System Revenue Bonds (Series 1994), 6.00% (Escrowed In Treasuries COL)(National Public Finance Guarantee Corporation INS), 6/1/2014 | 2,076,310 |
4,000,000 | | Triborough Bridge & Tunnel Authority, NY, General Revenue Bonds (Series 2008A) 5.00% (Original Issue Yield: 5.10%), 11/15/2037 | 4,494,600 |
2,000,000 | | TSASC, Inc. NY, Tobacco Settlement Asset-Backed Bonds (Series 2006-1), 5.00% (Original Issue Yield: 5.125%), 6/1/2026 | 1,969,540 |
| | TOTAL | 48,992,089 |
| | North Carolina—3.4% | |
1,000,000 | | Charlotte, NC Water & Sewer System, Water & Sewer Revenue Bonds (Series 2009), 5.25%, 7/1/2030 | 1,190,260 |
500,000 | | Charlotte-Mecklenburg Hospital Authority, NC, Health Care Revenue & Refunding Bonds (Series 2007A), 5.00% (Carolinas HealthCare System)/(Original Issue Yield: 5.09%), 1/15/2031 | 548,725 |
500,000 | | Charlotte-Mecklenburg Hospital Authority, NC, Health Care Revenue Refunding Bonds (Series 2008A), 5.25% (Carolinas HealthCare System), 1/15/2024 | 565,355 |
1,660,000 | | Johnston Memorial Hospital Authority, NC, FHA INS Mortgage Revenue Bonds (Series 2008), 5.25% (Johnston Memorial Hospital)/(Assured Guaranty Municipal Corp. INS), 10/1/2036 | 1,805,101 |
2,000,000 | | North Carolina Capital Facilities Finance Agency, Educational Facilities Revenue Bonds (Series 2009), 5.00% (Wake Forest University), 1/1/2038 | 2,223,420 |
5,000,000 | | North Carolina Capital Facilities Finance Agency, Revenue Bonds (Series 2009B), 5.00% (Duke University), 10/1/2038 | 5,799,150 |
Annual Shareholder Report
Principal Amount | | | Value |
| | MUNICIPAL BONDS—continued | |
| | North Carolina—continued | |
$500,000 | | North Carolina Eastern Municipal Power Agency, Power System Revenue Bonds (Series 2009A), 5.50%, 1/1/2026 | $574,175 |
1,500,000 | | North Carolina Medical Care Commission, Health Care Facilities First Mortgage Revenue Bonds (Series 2006A), 5.00% (The Pines at Davidson), 1/1/2036 | 1,523,820 |
1,000,000 | | North Carolina Medical Care Commission, Health Care Facilities Revenue Bonds (Series 1999), 6.25% (Stanly Memorial Hospital Project)/(Original Issue Yield: 6.40%), 10/1/2019 | 1,002,710 |
1,205,000 | | North Carolina Medical Care Commission, Health Care Facilities Revenue Bonds (Series 2004A), 5.25% (Cleveland Community Healthcare)/(AMBAC INS), 7/1/2021 | 1,246,813 |
500,000 | | University of North Carolina Wilmington, COPs (Series 2008), 5.00% (Assured Guaranty Corp. INS), 6/1/2022 | 586,785 |
525,000 | | University of North Carolina Wilmington, COPs, 5.25% (FGIC and National Public Finance Guarantee Corporation INS), 6/1/2022 | 575,353 |
| | TOTAL | 17,641,667 |
| | Ohio—6.3% | |
5,000,000 | | American Municipal Power-Ohio, Inc., Revenue Bonds (Series 2008A), 5.25% (American Municipal Power, Prairie State Energy Campus Project), 2/15/2028 | 5,685,550 |
4,000,000 | | Buckeye Tobacco Settlement Financing Authority, OH, Tobacco Settlement Asset-Backed Bonds (Series 2007A-2), 5.875% (Original Issue Yield: 5.95%), 6/1/2030 | 3,605,520 |
2,000,000 | | Cleveland, OH Airport System, Revenue Bonds (Series 2012A), 5.00%, 1/1/2029 | 2,227,700 |
1,700,000 | | Cleveland, OH Municipal School District, UT GO Bonds, 5.25% (United States Treasury PRF 6/1/2014 @100), 12/1/2024 | 1,799,722 |
4,000,000 | | Hamilton County, OH, Healthcare Facilities Revenue Bonds (Series 2012), 5.25% (Christ Hospital), 6/1/2032 | 4,439,000 |
5,000,000 | | Ohio State Turnpike Commission, Revenue Refunding Bonds (Series 2010A), 5.00%, 2/15/2031 | 5,620,650 |
1,000,000 | | Ohio State University, Special Purpose General Receipts Bonds (Series 2013A), 5.00%, 6/1/2038 | 1,142,160 |
40,000 | | Ohio State Water Development Authority, Revenue Bonds (Series I) (AMBAC INS), 7.00% (Escrowed In Treasuries COL)/(Original Issue Yield: 7.45%), 12/1/2014 | 42,342 |
3,000,000 | | Ohio State, Common Schools GO Bonds (Series 2012B), 5.00%, 3/15/2022 | 3,750,840 |
1,800,000 | | Ohio State, Hospital Revenue Refunding Bonds (Series 2008A), 5.25% (Cleveland Clinic)/(Original Issue Yield: 98.376%), 1/1/2033 | 1,988,352 |
2,000,000 | | Ohio State, Infrastructure Improvement GO Bonds (Series 2008A), 5.375% (Original Issue Yield: 5.50%), 9/1/2028 | 2,367,000 |
| | TOTAL | 32,668,836 |
Annual Shareholder Report
Principal Amount | | | Value |
| | MUNICIPAL BONDS—continued | |
| | Pennsylvania—9.9% | |
$3,890,000 | | Allegheny County, PA HDA, Hospital Revenue Bonds (Series 2008A), 5.00% (UPMC Health System), 6/15/2018 | $4,623,382 |
1,280,000 | | Allegheny County, PA HDA, Refunding Revenue Bonds (Series 1998A), 5.125% (Jefferson Regional Medical Center, PA)/(Original Issue Yield: 5.40%), 5/1/2029 | 1,280,141 |
1,085,000 | | Allegheny County, PA IDA, Environmental Improvement Refunding Revenue Bonds (Series 2005), 5.50% (United States Steel Corp.), 11/1/2016 | 1,131,340 |
2,570,000 | | Allegheny County, PA Port Authority, Special Revenue Transportation Refunding Bonds (Series 2011), 5.75%, 3/1/2029 | 3,009,778 |
4,935,000 | | Commonwealth of Pennsylvania, UT GO Bonds (Second Series 2010A), 5.00%, 5/1/2017 | 5,783,771 |
5,000,000 | | Delaware Valley, PA Regional Finance Authority, Revenue Bonds, 5.75%, 7/1/2017 | 5,772,600 |
3,000,000 | | Pennsylvania EDFA, Exempt Facilities Revenue Bonds (Series 2009), 7.00% (Allegheny Energy Supply Company LLC), 7/15/2039 | 3,569,010 |
4,000,000 | | Pennsylvania State Higher Education Facilities Authority, Revenue Bonds (First Series of 2012), 5.00% (Temple University), 4/1/2042 | 4,456,880 |
1,500,000 | | Pennsylvania State Higher Education Facilities Authority, Revenue Bonds (Series 2009A), 5.25% (University of Pennsylvania Health System), 8/15/2022 | 1,774,740 |
3,125,000 | | Pennsylvania State Higher Education Facilities Authority, Revenue Bonds (Series 2010E), 5.00% (UPMC Health System)/(Original Issue Yield: 5.10%), 5/15/2031 | 3,428,750 |
1,000,000 | | Pennsylvania State Higher Education Facilities Authority, Revenue Bonds (Series 2012), 5.00% (LaSalle University), 5/1/2042 | 1,079,800 |
3,000,000 | | Pennsylvania State Turnpike Commission, Turnpike Subordinate Revenue Bonds (Series 2008 B-1), 5.50%, 6/1/2033 | 3,421,560 |
1,000,000 | | Pennsylvania State Turnpike Commission, Turnpike Subordinate Revenue Bonds (Series 2008A), 5.00% (Assured Guaranty Corp. INS), 6/1/2033 | 1,096,580 |
2,000,000 | | Pennsylvania State Turnpike Commission-Motor License Fund Enhanced, Motor License Fund-Enhanced Turnpike Subordinate Special Revenue Bonds (Series 2011A), 6.00%, 12/1/2036 | 2,425,320 |
3,185,000 | | Philadelphia, PA Hospitals & Higher Education Facilities Authority, Hospital Revenue Bonds (Series 2012B), 6.25% (Temple University Health System Obligated Group), 7/1/2023 | 3,554,556 |
1,000,000 | | Philadelphia, PA Water & Wastewater System, Water and Wastewater Revenue Bonds (Series 2009A), 5.25% (Original Issue Yield: 5.29%), 1/1/2032 | 1,106,980 |
2,195,000 | | Southeastern, PA Transportation Authority, Capital Grant Receipts Bonds (Series 2011), 5.00%, 6/1/2025 | 2,547,846 |
1,000,000 | | University of Pittsburgh, University Capital Project Bonds (Series 2009B), 5.50%, 9/15/2024 | 1,227,630 |
| | TOTAL | 51,290,664 |
Annual Shareholder Report
Principal Amount | | | Value |
| | MUNICIPAL BONDS—continued | |
| | Puerto Rico—1.0% | |
$1,000,000 | | Commonwealth of Puerto Rico, Public Improvement GO Bonds (Series 2008A), 5.50%, 7/1/2018 | $1,078,790 |
1,000,000 | | Puerto Rico Electric Power Authority, Power Refunding Revenue Bonds (Series 2007VV), 5.25% (National Public Finance Guarantee Corporation INS), 7/1/2029 | 988,080 |
3,000,000 | | Puerto Rico Sales Tax Financing Corp., Sales Tax Revenue Bonds (First Subordinate Series 2010A), 5.50%, 8/1/2037 | 3,091,050 |
| | TOTAL | 5,157,920 |
| | Rhode Island—0.5% | |
2,500,000 | | Rhode Island State Health and Educational Building Corp., Higher Education Facilities Revenue Bonds (Series 2007), 5.00% (Brown University), 9/1/2037 | 2,818,675 |
| | South Carolina—1.1% | |
2,000,000 | | Lexington County, SC Health Services District, Inc., Revenue Refunding Bonds, 5.00%, 11/1/2026 | 2,307,460 |
3,000,000 | | Piedmont Municipal Power Agency, SC, Electric Revenue Refunding Bonds (Series 2009A-3), 5.00%, 1/1/2018 | 3,507,480 |
| | TOTAL | 5,814,940 |
| | Tennessee—1.1% | |
1,000,000 | | Metropolitan Government Nashville & Davidson County, TN Water & Sewer, Subordinate Lien Water & Sewer Revenue Refunding Bonds (Series 2012), 5.00%, 7/1/2021 | 1,221,760 |
2,725,000 | | Tennessee Energy Acquisition Corp., Gas Revenue Bonds (Series 2006A), 5.25% (Goldman Sachs & Co. GTD), 9/1/2023 | 3,177,459 |
1,000,000 | | Tennessee State, GO Bonds (Series 2009A), 5.00% (United States Treasury PRF 5/1/2017@100), 5/1/2027 | 1,176,860 |
| | TOTAL | 5,576,079 |
| | Texas—8.1% | |
2,000,000 | | Austin, TX Electric Utility System, Revenue Refunding Bonds (Series 2012A), 5.00%, 11/15/2037 | 2,278,480 |
2,795,000 | | Bexar County, TX, HFDC, Revenue Bonds (Series 2010), 6.20% (Army Retirement Residence Foundation), 7/1/2045 | 3,145,130 |
5,000,000 | | Dallas, TX Area Rapid Transit, Senior Lien Sales Tax Revenue Bonds, 5.25%, 12/1/2038 | 5,751,100 |
4,000,000 | | Dallas-Fort Worth, TX International Airport, Joint Revenue Refunding Bonds (Series 2012B), 5.00%, 11/1/2035 | 4,441,880 |
2,000,000 | | Harris County, TX, Toll Road Senior Lien Revenue & Refunding Bonds (Series 2008B), 5.00% (Harris County, TX Toll Road Authority)/(Original Issue Yield: 5.08%), 8/15/2033 | 2,267,820 |
2,000,000 | | Houston, TX Airport System, Senior Lien Revenue & Refunding Bonds (Series 2009A), 5.50% (Original Issue Yield: 5.67%), 7/1/2034 | 2,305,560 |
1,000,000 | | Humble, TX ISD, UT GO Bonds, 5.00% (United States Treasury PRF 2/15/2014@100), 2/15/2024 | 1,039,080 |
Annual Shareholder Report
Principal Amount | | | Value |
| | MUNICIPAL BONDS—continued | |
| | Texas—continued | |
$2,500,000 | | North Texas Tollway Authority, System First Tier Revenue Refunding Bonds (Series 2011B), 5.00% (Original Issue Yield: 5.12%), 1/1/2038 | $2,742,050 |
1,000,000 | | Socorro, TX ISD, School Building UT GO Bonds (Series 2006A), 5.00% (PSFG), 8/15/2026 | 1,126,180 |
2,500,000 | | Tarrant County, TX Cultural Education Facilities Finance Corp., Revenue Bonds, Series 2006A, 6.00% (Northwest Senior Housing Corp. Edgemere Project), 11/15/2036 | 2,648,625 |
2,030,000 | | Texas Municipal Gas Acquisition & Supply Corp. I, Gas Supply Senior Lien Revenue Bonds (Series 2006A), 5.25%, 12/15/2026 | 2,392,436 |
1,525,000 | | Texas State Public Finance Authority, GO Bonds (Series 2007), 5.00% (Texas State), 10/1/2027 | 1,764,776 |
5,000,000 | | Texas State Transportation Commission, Mobility Fund Revenue Bonds (Series 2007), 4.75% (Texas State), 4/1/2027 | 5,650,700 |
4,000,000 | | Texas State, Water Financial Assistance UT GO Bonds (Series 2009A), 5.00%, 8/1/2029 | 4,705,000 |
| | TOTAL | 42,258,817 |
| | Virginia—2.5% | |
1,000,000 | | Chesapeake, VA, Senior Toll Road Revenue Bonds (Series 2012A), 5.00% (Chesapeake, VA Transportation System), 7/15/2047 | 1,051,710 |
535,000 | | Henrico County, VA EDA, EDRBs (Series 2013), 5.00% (Bon Secours Health System), 11/1/2030 | 598,039 |
2,650,000 | | Route 460 Funding Corporation of Virginia, Toll Road Senior Lien Revenue Bonds (Series 2012), 5.00%, 7/1/2052 | 2,804,416 |
3,900,000 | | Virginia Peninsula Port Authority, Coal Terminal Revenue Refunding Bonds (Series 2003), 6.00% (Brinks Co. (The)), 4/1/2033 | 3,945,708 |
4,000,000 | | Virginia Resources Authority, Subordinated Revenue Bonds (Series 2008), 5.00% (Virginia State Clean Water Revolving Fund), 10/1/2027 | 4,703,240 |
| | TOTAL | 13,103,113 |
| | Washington—1.5% | |
2,000,000 | | Port of Seattle, WA, Revenue & Refunding Bonds (Series 2010B), 5.00%, 6/1/2040 | 2,231,800 |
3,060,000 | | Tobacco Settlement Authority, WA, Tobacco Settlement Asset Backed Revenue Bonds, 6.625% (Original Issue Yield: 6.875%), 6/1/2032 | 3,124,841 |
2,000,000 | | Washington State Health Care Facilities Authority, Revenue Bonds (Series 2009A), 6.50% (Swedish Health Services)/(United States Treasury PRF 11/15/2014@100)/(Original Issue Yield: 6.73%), 11/15/2033 | 2,199,460 |
| | TOTAL | 7,556,101 |
| | West Virginia—0.6% | |
2,500,000 | | West Virginia University Board of Governors, Refunding and Improvement Revenue Bonds (Series 2013A), 5.00% (West Virginia University), 10/1/2035 | 2,840,050 |
Annual Shareholder Report
Principal Amount | | | Value |
| | MUNICIPAL BONDS—continued | |
| | Wisconsin—3.3% | |
$6,000,000 | | Wisconsin State General Fund Appropriation, Revenue Bonds (Series 2009A), 6.00% (Wisconsin State)/(Original Issue Yield: 6.02%), 5/1/2033 | $7,274,040 |
3,000,000 | | Wisconsin State HEFA, 6.625% (ProHealth Care, Inc.)/(Original Issue Yield: 6.87%), 2/15/2039 | 3,489,030 |
1,510,000 | | Wisconsin State HEFA, Revenue Bonds (previously Synergy Health), 6.00% (Froedtert & Community Health)/(United States Treasury PRF 8/15/2013@100)/(Original Issue Yield: 6.10%), 11/15/2023 | 1,539,777 |
4,000,000 | | Wisconsin State, UT GO Bonds (Series 2008C), 5.00%, 5/1/2028 | 4,682,480 |
| | TOTAL | 16,985,327 |
| | Wyoming—0.2% | |
1,000,000 | | Laramie County, WY, Hospital Revenue Bonds (Series 2012), 5.00% (Cheyenne Regional Medical Center), 5/1/2032 | 1,106,360 |
| | TOTAL MUNICIPAL BONDS (IDENTIFIED COST $469,118,200) | 508,036,669 |
| | SHORT-TERM MUNICIPALS—1.5%3 | |
| | Florida—0.2% | |
1,350,000 | | Manatee County, FL, PCR Refunding Bonds (Series 1994) Daily VRDNs (Florida Power & Light Co.), 0.15%, 4/1/2013 | 1,350,000 |
| | Illinois—0.4% | |
2,150,000 | | Illinois Finance Authority, (Series 2009E-1) Daily VRDNs (University of Chicago Medical Center)/(JPMorgan Chase Bank, N.A. LOC), 0.15%, 4/1/2013 | 2,150,000 |
| | Michigan—0.4% | |
2,000,000 | | Michigan Higher Education Facilities Authority, (Series 2006) Weekly VRDNs (Albion College) , (JPMorgan Chase Bank, N.A. LOC), 0.12%, 4/4/2013 | 2,000,000 |
| | Ohio—0.5% | |
1,450,000 | | Montgomery County, OH, (Series 2011B) Daily VRDNs (Miami Valley Hospital)/(JPMorgan Chase Bank, N.A. LIQ), 0.14%, 4/1/2013 | 1,450,000 |
1,000,000 | | Montgomery County, OH, (Series 2011C) Daily VRDNs (Miami Valley Hospital)/(JPMorgan Chase Bank, N.A. LIQ), 0.13%, 4/1/2013 | 1,000,000 |
| | TOTAL | 2,450,000 |
| | TOTAL SHORT-TERM MUNICIPALS (AT AMORTIZED COST) | 7,950,000 |
| | TOTAL MUNICIPAL INVESTMENTS—99.4% (IDENTIFIED COST $477,068,200)4 | 515,986,669 |
| | OTHER ASSETS AND LIABILITIES - NET—0.6%5 | 2,835,400 |
| | TOTAL NET ASSETS—100% | $518,822,069 |
Annual Shareholder Report
At March 31, 2013, the Fund had the following open futures contracts:
Description | Number of Contracts | Notional Value | Expiration Date | Unrealized Depreciation |
1United States Treasury Notes, 10-Year Short Futures Contract | 50 | $6,599,219 | June 2013 | $(16,519) |
Unrealized Depreciation on Futures Contracts is included in “Other Assets and
Liabilities—Net.”
At March 31, 2013, the Fund holds no securities that are subject to the federal alternative minimum tax (AMT) (unaudited).
1 | Non-income producing security. |
2 | Security in default. |
3 | Current rate and next reset date shown for Variable Rate Demand Notes. |
4 | The cost of investments for federal tax purposes amounts to $476,919,188. |
5 | Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities. |
Note: The categories of investments are shown as a percentage of total net assets at March 31, 2013.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below:
Level 1— quoted prices in active markets for identical securities, including investment companies with daily net asset values, if applicable.
Level 2— other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). Also includes securities valued at amortized cost.
Level 3— significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments).
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used, as of March 31, 2013, in valuing the Fund's assets carried at fair value:
Valuation Inputs | | | | |
| Level 1— Quoted Prices and Investments in Mutual Funds | Level 2— Other Significant Observable Inputs | Level 3— Significant Unobservable Inputs | Total |
Debt Securities: |
Municipal Bonds | $— | $508,036,669 | $— | $508,036,669 |
Short-Term Municipals | — | 7,950,000 | — | 7,950,000 |
TOTAL SECURITIES | $— | $515,986,669 | $— | $515,986,669 |
OTHER FINANCIAL INSTRUMENTS* | $(16,519) | $— | $— | $(16,519) |
* | Other financial instruments include futures contracts. |
Annual Shareholder Report
The following acronyms are used throughout this portfolio:
AMBAC | —American Municipal Bond Assurance Corporation |
COL | —Collateralized |
COPs | —Certificates of Participation |
EDA | —Economic Development Authority |
EDC | —Economic Development Corporation |
EDFA | —Economic Development Finance Authority |
EDRBs | —Economic Development Revenue Bonds |
FGIC | —Financial Guaranty Insurance Company |
FHA | —Federal Housing Administration |
GO | —General Obligation |
GTD | —Guaranteed |
HDA | —Hospital Development Authority |
HEFA | —Health and Education Facilities Authority |
HFDC | —Health Facility Development Corporation |
IDA | —Industrial Development Authority |
IDB | —Industrial Development Bond |
INS | —Insured |
ISD | —Independent School District |
LIQ | —Liquidity Agreement |
LOC | —Letter of Credit |
LT | —Limited Tax |
PCR | —Pollution Control Revenue |
PCRBs | —Pollution Control Revenue Bonds |
PRF | —Pre-refunded |
PSFG | —Public School Fund Guaranteed |
SFM | —Single Family Mortgage |
TFA | —Transitional Finance Authority |
TOBs | —Tender Option Bonds |
USDT | —Unified School District |
UT | —Unlimited Tax |
VRDNs | —Variable Rate Demand Notes |
See Notes which are an integral part of the Financial Statements
Annual Shareholder Report
Financial Highlights–Class A Shares
(For a Share Outstanding Throughout Each Period)
Year Ended March 31 | 2013 | 2012 | 2011 | 2010 | 2009 |
Net Asset Value, Beginning of Period | $10.42 | $9.56 | $9.99 | $9.41 | $10.05 |
Income From Investment Operations: | | | | | |
Net investment income1 | 0.36 | 0.38 | 0.42 | 0.41 | 0.43 |
Net realized and unrealized gain (loss) on investments, futures contracts and swap contracts | 0.30 | 0.86 | (0.44) | 0.59 | (0.64) |
TOTAL FROM INVESTMENT OPERATIONS | 0.66 | 1.24 | (0.02) | 1.00 | (0.21) |
Less Distributions: | | | | | |
Distributions from net investment income | (0.35) | (0.38) | (0.41) | (0.42) | (0.43) |
Net Asset Value, End of Period | $10.73 | $10.42 | $9.56 | $9.99 | $9.41 |
Total Return2 | 6.43% | 13.21% | (0.24)% | 10.78% | (2.14)% |
Ratios to Average Net Assets: | | | | | |
Net expenses | 0.87% | 0.87% | 0.87% | 0.87% | 0.87%3 |
Net investment income | 3.33% | 3.79% | 4.16% | 4.20% | 4.40% |
Expense waiver/reimbursement4 | 0.07% | 0.09% | 0.10% | 0.09% | 0.15% |
Supplemental Data: | | | | | |
Net assets, end of period (000 omitted) | $454,722 | $437,968 | $438,344 | $511,709 | $396,603 |
Portfolio turnover | 22% | 14% | 21% | 23% | 52% |
1 | Per share numbers have been calculated using the average shares method. |
2 | Based on net asset value, which does not reflect the sales charge, redemption fee or contingent deferred sales charge, if applicable. |
3 | The net expense ratio is calculated without reduction for expense offset arrangements. The net expense ratio is 0.87% for the year ended March 31, 2009, after taking into account this expense reduction. |
4 | This expense decrease is reflected in both the net expense and net investment income ratios shown above. |
See Notes which are an integral part of the Financial Statements
Annual Shareholder Report
Financial Highlights–Class B Shares
(For a Share Outstanding Throughout Each Period)
Year Ended March 31 | 2013 | 2012 | 2011 | 2010 | 2009 |
Net Asset Value, Beginning of Period | $10.42 | $9.56 | $9.99 | $9.41 | $10.05 |
Income From Investment Operations: | | | | | |
Net investment income1 | 0.27 | 0.30 | 0.33 | 0.33 | 0.34 |
Net realized and unrealized gain (loss) on investments, futures contracts and swap contracts | 0.31 | 0.86 | (0.43) | 0.58 | (0.64) |
TOTAL FROM INVESTMENT OPERATIONS | 0.58 | 1.16 | (0.10) | 0.91 | (0.30) |
Less Distributions: | | | | | |
Distributions from net investment income | (0.27) | (0.30) | (0.33) | (0.33) | (0.34) |
Net Asset Value, End of Period | $10.73 | $10.42 | $9.56 | $9.99 | $9.41 |
Total Return2 | 5.57% | 12.25% | (1.12)% | 9.81% | (3.01)% |
Ratios to Average Net Assets: | | | | | |
Net expenses | 1.69% | 1.72% | 1.73% | 1.73% | 1.76%3 |
Net investment income | 2.52% | 2.95% | 3.31% | 3.35% | 3.52% |
Expense waiver/reimbursement4 | 0.00%5 | 0.00%5 | 0.00%5 | 0.00%5 | 0.01% |
Supplemental Data: | | | | | |
Net assets, end of period (000 omitted) | $11,434 | $11,174 | $13,402 | $19,606 | $15,105 |
Portfolio turnover | 22% | 14% | 21% | 23% | 52% |
1 | Per share numbers have been calculated using the average shares method. |
2 | Based on net asset value, which does not reflect the sales charge, redemption fee or contingent deferred sales charge, if applicable. |
3 | The net expense ratio is calculated without reduction for expense offset arrangements. The net expense ratio is 1.76% for the year ended March 31, 2009, after taking into account this expense reduction. |
4 | This expense decrease is reflected in both the net expense and net investment income ratios shown above. |
5 | Represents less than 0.01%. |
See Notes which are an integral part of the Financial Statements
Annual Shareholder Report
Financial Highlights–Class C Shares
(For a Share Outstanding Throughout Each Period)
Year Ended March 31 | 2013 | 2012 | 2011 | 2010 | 2009 |
Net Asset Value, Beginning of Period | $10.42 | $9.56 | $9.99 | $9.41 | $10.05 |
Income From Investment Operations: | | | | | |
Net investment income1 | 0.27 | 0.30 | 0.33 | 0.33 | 0.34 |
Net realized and unrealized gain (loss) on investments, futures contracts and swap contracts | 0.31 | 0.86 | (0.43) | 0.58 | (0.64) |
TOTAL FROM INVESTMENT OPERATIONS | 0.58 | 1.16 | (0.10) | 0.91 | (0.30) |
Less Distributions: | | | | | |
Distributions from net investment income | (0.27) | (0.30) | (0.33) | (0.33) | (0.34) |
Net Asset Value, End of Period | $10.73 | $10.42 | $9.56 | $9.99 | $9.41 |
Total Return2 | 5.57% | 12.25% | (1.12)% | 9.81% | (3.00)% |
Ratios to Average Net Assets: | | | | | |
Net expenses | 1.69% | 1.72% | 1.73% | 1.73% | 1.76%3 |
Net investment income | 2.52% | 2.95% | 3.31% | 3.35% | 3.54% |
Expense waiver/reimbursement4 | 0.00%5 | 0.00%5 | 0.00%5 | 0.00%5 | 0.01% |
Supplemental Data: | | | | | |
Net assets, end of period (000 omitted) | $27,246 | $25,267 | $24,635 | $26,570 | $20,376 |
Portfolio turnover | 22% | 14% | 21% | 23% | 52% |
1 | Per share numbers have been calculated using the average shares method. |
2 | Based on net asset value, which does not reflect the sales charge, redemption fee or contingent deferred sales charge, if applicable. |
3 | The net expense ratio is calculated without reduction for expense offset arrangements. The net expense ratio is 1.76% for the year ended March 31, 2009, after taking into account this expense reduction. |
4 | This expense decrease is reflected in both the net expense and net investment income ratios shown above. |
5 | Represents less than 0.01%. |
See Notes which are an integral part of the Financial Statements
Annual Shareholder Report
Financial Highlights–Class F Shares
(For a Share Outstanding Throughout Each Period)
Year Ended March 31 | 2013 | 2012 | 2011 | 2010 | 2009 |
Net Asset Value, Beginning of Period | $10.42 | $9.56 | $9.99 | $9.41 | $10.05 |
Income From Investment Operations: | | | | | |
Net investment income1 | 0.36 | 0.38 | 0.42 | 0.41 | 0.43 |
Net realized and unrealized gain (loss) on investments, futures contracts and swap contracts | 0.30 | 0.86 | (0.44) | 0.59 | (0.64) |
TOTAL FROM INVESTMENT OPERATIONS | 0.66 | 1.24 | (0.02) | 1.00 | (0.21) |
Less Distributions: | | | | | |
Distributions from net investment income | (0.35) | (0.38) | (0.41) | (0.42) | (0.43) |
Net Asset Value, End of Period | $10.73 | $10.42 | $9.56 | $9.99 | $9.41 |
Total Return2 | 6.43% | 13.21% | (0.24)% | 10.78% | (2.14)% |
Ratios to Average Net Assets: | | | | | |
Net expenses | 0.87% | 0.87% | 0.87% | 0.87% | 0.87%3 |
Net investment income | 3.33% | 3.79% | 4.17% | 4.20% | 4.46% |
Expense waiver/reimbursement4 | 0.07% | 0.09% | 0.11% | 0.11% | 0.11% |
Supplemental Data: | | | | | |
Net assets, end of period (000 omitted) | $25,420 | $19,575 | $17,739 | $18,298 | $11,361 |
Portfolio turnover | 22% | 14% | 21% | 23% | 52% |
1 | Per share numbers have been calculated using the average shares method. |
2 | Based on net asset value, which does not reflect the sales charge, redemption fee or contingent deferred sales charge, if applicable. |
3 | The net expense ratio is calculated without reduction for expense offset arrangements. The net expense ratio is 0.87% for the year ended March 31, 2009, after taking into account this expense reduction. |
4 | This expense decrease is reflected in both the net expense and net investment income ratios shown above. |
See Notes which are an integral part of the Financial Statements
Annual Shareholder Report
Statement of Assets and Liabilities
March 31, 2013
Assets: | | |
Total investment in securities, at value (identified cost $477,068,200) | | $515,986,669 |
Cash | | 71,009 |
Restricted cash (Note 2) | | 55,000 |
Income receivable | | 6,946,317 |
Receivable for investments sold | | 3,275,518 |
Receivable for shares sold | | 113,203 |
Receivable for daily variation margin | | 7,031 |
TOTAL ASSETS | | 526,454,747 |
Liabilities: | | |
Payable for investments purchased | $6,303,292 | |
Payable for shares redeemed | 754,364 | |
Income distribution payable | 235,306 | |
Payable for shareholder services fee (Note 5) | 171,746 | |
Payable for distribution services fee (Note 5) | 24,897 | |
Payable for Directors'/Trustees' fees (Note 5) | 1,363 | |
Accrued expenses (Note 5) | 141,710 | |
TOTAL LIABILITIES | | 7,632,678 |
Net assets for 48,340,782 shares outstanding | | $518,822,069 |
Net Assets Consist of: | | |
Paid-in capital | | $495,517,872 |
Net unrealized appreciation of investments and futures contracts | | 38,901,950 |
Accumulated net realized loss on investments | | (15,442,620) |
Distributions in excess of net investment income | | (155,133) |
TOTAL NET ASSETS | | $518,822,069 |
Annual Shareholder Report
Statement of Assets and Liabilities–continued
Net Asset Value, Offering Price and Redemption Proceeds Per Share | | |
Class A Shares: | | |
Net asset value per share ($454,722,269 ÷ 42,368,532 shares outstanding), $0.01 par value, 375,000,000 shares authorized | | $10.73 |
Offering price per share (100/95.50 of $10.73) | | $11.24 |
Redemption proceeds per share | | $10.73 |
Class B Shares: | | |
Net asset value per share ($11,433,677 ÷ 1,065,282 shares outstanding), $0.01 par value, 250,000,000 shares authorized | | $10.73 |
Offering price per share | | $10.73 |
Redemption proceeds per share (94.50/100 of $10.73) | | $10.14 |
Class C Shares: | | |
Net asset value per share ($27,246,400 ÷ 2,538,655 shares outstanding), $0.01 par value, 375,000,000 shares authorized | | $10.73 |
Offering price per share | | $10.73 |
Redemption proceeds per share (99.00/100 of $10.73) | | $10.62 |
Class F Shares: | | |
Net asset value per share ($25,419,723 ÷ 2,368,313 shares outstanding), $0.01 par value, 150,000,000 shares authorized | | $10.73 |
Offering price per share (100/99.00 of $10.73) | | $10.84 |
Redemption proceeds per share (99.00/100 of $10.73) | | $10.62 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder Report
Statement of Operations
Year Ended March 31, 2013
Investment Income: | | | |
Interest | | | $21,820,042 |
Expenses: | | | |
Investment adviser fee (Note 5) | | $2,545,706 | |
Administrative fee (Note 5) | | 404,099 | |
Custodian fees | | 25,480 | |
Transfer and dividend disbursing agent fees and expenses | | 303,423 | |
Directors'/Trustees' fees (Note 5) | | 9,765 | |
Auditing fees | | 24,450 | |
Legal fees | | 8,164 | |
Portfolio accounting fees | | 120,140 | |
Distribution services fee (Note 5) | | 290,176 | |
Shareholder services fee (Note 5) | | 1,269,487 | |
Account administration fee (Note 2) | | 5,138 | |
Share registration costs | | 65,416 | |
Printing and postage | | 31,970 | |
Insurance premiums (Note 5) | | 4,102 | |
Taxes | | 40,950 | |
Miscellaneous (Note 5) | | 11,409 | |
TOTAL EXPENSES | | 5,159,875 | |
Waiver and Reimbursement (Note 5): | | | |
Waiver of administrative fee | $(4,094) | | |
Reimbursement of shareholder services fee | (308,008) | | |
TOTAL WAIVER AND REIMBURSEMENT | | (312,102) | |
Net expenses | | | 4,847,773 |
Net investment income | | | 16,972,269 |
Realized and Unrealized Gain (Loss) on Investments and Futures Contracts: | | | |
Net realized gain on investments | | | 9,617,675 |
Net change in unrealized appreciation of investments | | | 5,177,815 |
Net change in unrealized depreciation of futures contracts | | | (16,519) |
Net realized and unrealized gain on investments and futures contracts | | | 14,778,971 |
Change in net assets resulting from operations | | | $31,751,240 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder Report
Statement of Changes in Net Assets
Year Ended March 31 | 2013 | 2012 |
Increase (Decrease) in Net Assets | | |
Operations: | | |
Net investment income | $16,972,269 | $18,341,592 |
Net realized gain on investments | 9,617,675 | 923,967 |
Net change in unrealized appreciation/depreciation of investments and futures contracts | 5,161,296 | 41,260,880 |
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS | 31,751,240 | 60,526,439 |
Distributions to Shareholders: | | |
Distributions from net investment income | | |
Class A Shares | (15,077,433) | (16,697,429) |
Class B Shares | (285,186) | (337,056) |
Class C Shares | (677,852) | (725,968) |
Class F Shares | (778,964) | (691,391) |
CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS | (16,819,435) | (18,451,844) |
Share Transactions: | | |
Proceeds from sale of shares | 75,596,465 | 32,447,007 |
Net asset value of shares issued to shareholders in payment of distributions declared | 13,706,804 | 14,205,707 |
Cost of shares redeemed | (79,397,616) | (88,863,953) |
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS | 9,905,653 | (42,211,239) |
Change in net assets | 24,837,458 | (136,644) |
Net Assets: | | |
Beginning of period | 493,984,611 | 494,121,255 |
End of period (including distributions in excess of net investment income of $(155,133) and $(161,724), respectively) | $518,822,069 | $493,984,611 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder Report
Notes to Financial Statements
March 31, 2013
1. Organization
Federated Municipal Securities Fund, Inc. (the “Fund”) is registered under the Investment Company Act of 1940, as amended (the “Act”), as a diversified, open-end management investment company. The Fund offers four classes of shares: Class A Shares, Class B Shares, Class C Shares and Class F Shares. All shares of the Fund have equal rights with respect to voting, except on class-specific matters. The investment objective of the Fund is to provide for its shareholders a high level of current income which is exempt from federal regular income tax. Interest income from the Fund's investments normally will not be subject to federal AMT for individuals and corporations, but may be subject to state and local taxes.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with U.S. generally accepted accounting principles (GAAP).
Investment Valuation
In calculating its net asset value (NAV), the Fund generally values investments as follows:
■ | Fixed-income securities acquired with remaining maturities greater than 60 days are fair valued using price evaluations provided by a pricing service approved by the Fund's Board of Directors (the “ Directors”). |
■ | Fixed-income securities acquired with remaining maturities of 60 days or less are valued at their cost (adjusted for the accretion of any discount or amortization of any premium), which approximates market value. |
■ | Shares of other mutual funds are valued based upon their reported NAVs. |
■ | Derivative contracts listed on exchanges are valued at their reported settlement or closing price. |
■ | Over-the-counter (OTC) derivative contracts are fair valued using price evaluations provided by a pricing service approved by the Directors. |
■ | For securities that are fair valued in accordance with procedures established by and under the general supervision of the Directors, certain factors may be considered such as: the purchase price of the security, information obtained by contacting the issuer, analysis of the issuer's financial statements or other available documents, fundamental analytical data, the nature and duration of restrictions on disposition, the movement of the market in which the security is normally traded and public trading in similar securities of the issuer or comparable issuers. |
If the Fund cannot obtain a price or price evaluation from a pricing service for an investment, the Fund may attempt to value the investment based upon the mean of bid and asked quotations or fair value the investment based on price evaluations, from one or more dealers. If any price, quotation, price evaluation or other pricing source is not readily available when the NAV is calculated, or if the Fund cannot obtain price evaluations from a pricing service or from more than one dealer for an investment within a reasonable time (for example, within five business days after a new security is delivered to the Fund), the Fund uses the fair value of the investment determined in accordance with the procedures described below. There can be no assurance that the Fund could purchase or sell an investment at the price used to calculate the Fund's NAV.
Annual Shareholder Report
Fair Valuation and Significant Events Procedures
The Directors have appointed a Valuation Committee comprised of officers of the Fund, Federated Investment Management Company (“Adviser”) and the Adviser's affiliated companies to determine fair value of securities and in overseeing the calculation of the NAV. The Directors have also authorized the use of pricing services recommended by the Valuation Committee to provide fair value evaluations of the current value of certain investments for purposes of calculating the NAV. The Valuation Committee employs various methods for reviewing third-party pricing service evaluations including periodic reviews of third-party pricing services' policies, procedures and valuation methods (including key inputs and assumptions), transactional back-testing, comparisons of evaluations of different pricing services and review of price challenges by the Adviser based on recent market activity. In the event that market quotations and price evaluations are not available for an investment, the Valuation Committee determines the fair value of the investment in accordance with procedures adopted by the Directors. The Directors periodically review and approve the fair valuations made by the Valuation Committee and any changes made to the procedures.
Factors considered by pricing services in evaluating an investment include the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers and general market conditions. Some pricing services provide a single price evaluation reflecting the bid-side of the market for an investment (a “bid” evaluation). Other pricing services offer both bid evaluations and price evaluations indicative of a price between the prices bid and asked for the investment (a “mid” evaluation). The Fund normally uses bid evaluations for U.S. Treasury and Agency securities, mortgage-backed securities and municipal securities. The Fund normally uses mid evaluations for other types of fixed-income securities and OTC derivative contracts. In the event that market quotations and price evaluations are not available for an investment, the fair value of the investment is determined in accordance with procedures adopted by the Directors.
Investment Income, Gains and Losses, Expenses and Distributions
Investment transactions are accounted for on a trade-date basis. Realized gains and losses from investment transactions are recorded on an identified-cost basis. Interest income and expenses are accrued daily. Distributions to shareholders are recorded on the ex-dividend date. Distributions of net investment income are declared daily and paid monthly. Non-cash dividends included in dividend income, if any, are recorded at fair value. Investment income, realized and unrealized gains and losses and certain fund-level expenses are allocated to each class based on relative average daily net assets, except that Class A Shares, Class B Shares, Class C Shares and Class F Shares may bear account administration fees, distribution services fees and shareholder services fees unique to those classes. For the year ended March 31, 2013, account administration fees for the Fund were as follows:
| Account Administration Fees Incurred |
Class A Shares | $5,130 |
Class F Shares | 8 |
TOTAL | $5,138 |
Annual Shareholder Report
Dividends are declared separately for each class. No class has preferential dividend rights; differences in per share dividend rates are generally due to differences in separate class expenses.
Premium and Discount Amortization
All premiums and discounts on fixed-income securities are amortized/accreted using the effective interest rate method.
Federal Taxes
It is the Fund's policy to comply with the Subchapter M provision of the Internal Revenue Code (the “Code”) and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal income tax is necessary. As of and during the year ended March 31, 2013, the Fund did not have a liability for any uncertain tax positions. The Fund recognizes interest and penalties, if any, related to tax liabilities as income tax expense in the Statement of Operations. As of March 31, 2013, tax years 2010 through 2013 remain subject to examination by the Fund's major tax jurisdictions, which include the United States of America, the state of Maryland and the Commonwealth of Pennsylvania.
Other Taxes
As an open-end management investment company incorporated in the state of Maryland but domiciled in the Commonwealth of Pennsylvania, the Fund is subject to the Pennsylvania Franchise Tax. This franchise tax is assessed annually on the value of the Fund, as represented by average net assets for the tax year.
When-Issued and Delayed-Delivery Transactions
The Fund may engage in when-issued or delayed-delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed-delivery basis are marked to market daily and begin earning interest on the settlement date. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
Futures Contracts
The Fund purchases and sells financial futures contracts to manage duration. Upon entering into a financial futures contract with a broker, the Fund is required to deposit in a segregated account a specified amount of cash or U.S. government securities which is shown as Restricted Cash in the Statement of Assets and Liabilities. Futures contracts are valued daily and unrealized gains or losses are recorded in a “variation margin” account. Daily, the Fund receives from or pays to the broker a specified amount of cash based upon changes in the variation margin account. When a contract is closed, the Fund recognizes a realized gain or loss. Futures contracts have market risks, including the risk that the change in the value of the contract may not correlate with the changes in the value of the underlying securities. There is minimal counterparty risk to the Fund since futures are exchange traded and the exchange's clearing house, as counterparty to all exchange traded futures, guarantees the futures against default.
Futures contracts outstanding at period end are listed after the Fund's Portfolio of Investments.
The average notional value of futures contracts held by the Fund throughout the period was $507,632. This is based on amounts held as of each month-end throughout the fiscal period.
Annual Shareholder Report
Additional Disclosure Related to Derivative Instruments
Fair Value of Derivative Instruments |
| Asset |
| Statement of Assets and Liabilities Location | Fair Value |
Derivatives not accounted for as hedging instruments under ASC Topic 815 | | |
Interest rate contracts | Receivable for daily variation margin | $(16,519)* |
* | Includes cumulative depreciation of futures contracts as reported in the footnotes to the Portfolio of Investments. Only the current day's variation margin is reported within the Statement of Assets and Liabilities. |
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended March 31, 2013
Change in Unrealized Appreciation or (Depreciation) on Derivatives Recognized in Income |
| Futures |
Interest rate contracts | $(16,519) |
Other
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated.
3. Capital Stock
The following tables summarize capital stock activity:
Year Ended March 31 | 2013 | 2012 |
Class A Shares: | Shares | Amount | Shares | Amount |
Shares sold | 5,596,096 | $59,764,082 | 2,296,357 | $23,253,976 |
Shares issued to shareholders in payment of distributions declared | 1,135,524 | 12,186,770 | 1,261,216 | 12,753,519 |
Shares redeemed | (6,391,226) | (68,434,604) | (7,358,564) | (73,817,657) |
NET CHANGE RESULTING FROM CLASS A SHARE TRANSACTIONS | 340,394 | $3,516,248 | (3,800,991) | $(37,810,162) |
Annual Shareholder Report
Year Ended March 31 | 2013 | 2012 |
Class B Shares: | Shares | Amount | Shares | Amount |
Shares sold | 234,460 | $2,516,182 | 209,433 | $2,140,026 |
Shares issued to shareholders in payment of distributions declared | 23,669 | 253,993 | 28,317 | 285,868 |
Shares redeemed | (265,235) | (2,836,200) | (566,554) | (5,649,883) |
NET CHANGE RESULTING FROM CLASS B SHARE TRANSACTIONS | (7,106) | $(66,025) | (328,804) | $(3,223,989) |
Year Ended March 31 | 2013 | 2012 |
Class C Shares: | Shares | Amount | Shares | Amount |
Shares sold | 535,674 | $5,756,088 | 327,525 | $3,332,887 |
Shares issued to shareholders in payment of distributions declared | 48,555 | 521,049 | 53,857 | 544,478 |
Shares redeemed | (470,275) | (5,057,881) | (532,278) | (5,360,142) |
NET CHANGE RESULTING FROM CLASS C SHARE TRANSACTIONS | 113,954 | $1,219,256 | (150,896) | $(1,482,777) |
Year Ended March 31 | 2013 | 2012 |
Class F Shares: | Shares | Amount | Shares | Amount |
Shares sold | 707,061 | $7,560,113 | 366,181 | $3,720,118 |
Shares issued to shareholders in payment of distributions declared | 69,382 | 744,992 | 61,385 | 621,842 |
Shares redeemed | (286,452) | (3,068,931) | (403,858) | (4,036,271) |
NET CHANGE RESULTING FROM CLASS F SHARE TRANSACTIONS | 489,991 | $5,236,174 | 23,708 | $305,689 |
NET CHANGE RESULTING FROM TOTAL FUND SHARE TRANSACTIONS | 937,233 | $9,905,653 | (4,256,983) | $(42,211,239) |
4. Federal Tax Information
The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. These differences are due to differing treatments for discount accretion/premium amortization on debt securities, regulatory settlement proceeds and interest on a defaulted security.
For the year ended March 31, 2013, permanent differences identified and reclassified among the components of net assets were as follows:
Increase (Decrease) |
Paid-In Capital | Undistributed Net Investment Income (Loss) | Accumulated Net Realized Gain (Loss) |
$(40,759) | $(146,243) | $187,002 |
Net investment income (loss), net realized gains (losses) and net assets were not affected by this reclassification.
Annual Shareholder Report
The tax character of distributions as reported on the Statement of Changes in Net Assets for the years ended March 31, 2013 and 2012, was as follows:
| 2013 | 2012 |
Tax-exempt income | $16,819,435 | $18,451,844 |
As of March 31, 2013, the components of distributable earnings on a tax basis were as follows:
Undistributed tax-exempt income | $46,565 |
Net unrealized appreciation | $38,865,783 |
Capital loss carryforwards and deferral | $(15,608,151) |
The difference between book-basis and tax-basis net unrealized appreciation/depreciation is attributable to differing treatments for discount accretion/premium amortization on debt securities and defaulted securities.
At March 31, 2013, the cost of investments for federal tax purposes was $476,919,188. The net unrealized appreciation of investments for federal tax purposes excluding any unrealized depreciation resulting from futures contracts was $39,067,481. This consists of net unrealized appreciation from investments for those securities having an excess of value over cost of $41,848,304 and net unrealized depreciation from investments for those securities having an excess of cost over value of $2,780,823.
At March 31, 2013, the Fund had a capital loss carryforward of $15,410,786 which will reduce the Fund's taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Code, thereby reducing the amount of distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal income tax. Pursuant to the Code, a net capital loss incurred in taxable years beginning on or before December 22, 2010, is characterized as short-term and may be carried forward for a maximum of eight tax years (“Carryforward Limit”), whereas a net capital loss incurred in taxable years beginning after December 22, 2010, retains its character as either short-term or long-term, does not expire and is required to be utilized prior to the losses which have a Carryforward Limit.
The following schedule summarizes the Fund's capital loss carryforwards and expiration years:
Expiration Year | Short-Term | Long-Term | Total |
2017 | $8,342,327 | NA | $8,342,327 |
2018 | $7,068,459 | NA | $7,068,459 |
The Fund used capital loss carryforwards of $9,868,744 to offset taxable capital gains realized during the year ended March 31, 2013.
Under current tax regulations, capital losses on securities transactions realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. As of March 31, 2013, for federal income tax purposes, post-October losses of $197,365 were deferred to April 1, 2013.
Annual Shareholder Report
5. Investment Adviser Fee and Other Transactions with Affiliates
Investment Adviser Fee
The advisory agreement between the Fund and the Adviser provides for an annual fee equal to: (a) 0.30% of the Fund's average daily net assets; and (b) 4.50% of the gross income of the Fund, excluding capital gains or losses. Subject to the terms described in the Expense Limitation note, the Adviser may voluntarily choose to waive any portion of its fee.
Administrative Fee
Federated Administrative Services (FAS), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. For purposes of determining the appropriate rate breakpoint, “Investment Complex” is defined as all of the Federated Funds subject to a fee under the Administrative Services Agreement. The fee paid to FAS is based on the average daily net assets of the Investment Complex as specified below, plus certain out-of-pocket expenses:
Administrative Fee | Average Daily Net Assets of the Investment Complex |
0.150% | on the first $5 billion |
0.125% | on the next $5 billion |
0.100% | on the next $10 billion |
0.075% | on assets in excess of $20 billion |
Prior to September 1, 2012, the administrative fee received during any fiscal year was at least $150,000 per portfolio and $40,000 per each additional class of Shares. Subject to the terms described in the Expense Limitation note, FAS may voluntarily choose to waive any portion of its fee. For the year ended March 31, 2013, FAS waived $4,094 of its fee. The net fee paid to FAS was 0.078% of average daily net assets of the Fund.
Distribution Services Fee
The Fund has adopted a Distribution Plan (the “Plan”) pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. (FSC), the principal distributor, from the daily net assets of the Fund's Class B Shares and Class C Shares to finance activities intended to result in the sale of these shares. The Plan provides that the Fund may incur distribution expenses at the following percentages of average daily net assets annually, to compensate FSC:
Share Class Name | Percentage of Average Daily Net Assets of Class |
Class B Shares | 0.75% |
Class C Shares | 0.75% |
Annual Shareholder Report
Subject to the terms described in the Expense Limitation note, FSC may voluntarily choose to waive any portion of its fee. For the year ended March 31, 2013, distribution services fees for the Fund were as follows:
| Distribution Services Fees Incurred |
Class B Shares | $85,958 |
Class C Shares | 204,218 |
TOTAL | $290,176 |
When FSC receives fees, it may pay some or all of them to financial intermediaries whose customers purchase shares. For the year ended March 31, 2013, FSC retained $52,099 of fees paid by the Fund.
Sales Charges
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Fund. They are deducted from the proceeds of sales of Fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. For the year ended March 31, 2013, FSC retained $42,099 in sales charges from the sale of Class A Shares and $1,327 from the sale of Class F Shares. FSC also retained $3,062, $12,552, $4,603 and $13,222 of CDSC relating to redemptions of Class A Shares, Class B Shares, Class C Shares and Class F Shares, respectively.
Shareholder Services Fee
The Fund may pay fees (“ Service Fees”) up to 0.25% of the average daily net assets of the Fund's Class A Shares, Class B Shares, Class C Shares and Class F Shares to financial intermediaries or to Federated Shareholder Services Company (FSSC) for providing services to shareholders and maintaining shareholder accounts. Subject to the terms described in the Expense Limitation note, FSSC may voluntarily reimburse the Fund for Service Fees. For the year ended March 31, 2013, Service Fees for the Fund were as follows:
| Service Fees Incurred | Service Fees Reimbursed |
Class A Shares | $1,113,697 | $(291,927) |
Class B Shares | 28,653 | — |
Class C Shares | 68,072 | — |
Class F Shares | 59,065 | (16,081) |
TOTAL | $1,269,487 | $(308,008) |
For the year ended March 31, 2013, FSSC retained $77,655 of Service Fees paid by the Fund.
Interfund Transactions
During the year ended March 31, 2013, the Fund engaged in purchase and sales transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees and/or common Officers. These purchase and sales transactions complied with Rule 17a-7 under the Act and amounted to $87,800,000 and $109,210,000, respectively.
Annual Shareholder Report
Expense Limitation
The Adviser and its affiliates (which may include FSC, FAS and FSSC) have voluntarily agreed to waive their fees and/or reimburse expenses so that the total annual fund operating expenses (as shown in the financial highlights) paid by the Fund's Class A Shares and Class F Shares (after the voluntary waivers and reimbursements) will not exceed 0.87% and 0.87% (the “Fee Limit”), respectively, up to but not including the later of (the “ Termination Date”): (a) June 1, 2014; or (b) the date of the Fund's next effective Prospectus. While the Adviser and its affiliates currently do not anticipate terminating or increasing these arrangements prior to the Termination Date, these arrangements may only be terminated or the Fee Limit increased prior to the Termination Date with the agreement of the Directors.
General
Certain Officers and Directors of the Fund are Officers and Directors or Trustees of the above companies. To efficiently facilitate payment, Directors'/Trustees' fees and certain expenses related to conducting meetings of the Directors/Trustees and other miscellaneous expenses are paid by an affiliate of the Adviser which in due course are reimbursed by the Fund.
6. Investment Transactions
Purchases and sales of investments, excluding long-term U.S. government securities and short-term obligations, for the year ended March 31, 2013, were as follows:
Purchases | $119,498,480 |
Sales | $111,735,702 |
7. Line of Credit
The Fund participates in a $100,000,000 unsecured, uncommitted revolving line of credit (LOC) agreement with PNC Bank. The LOC was made available for extraordinary or emergency purposes, primarily for financing redemption payments. Borrowings are charged interest at a rate offered to the Fund by PNC Bank at the time of the borrowing. As of March 31, 2013, there were no outstanding loans. During the year ended March 31, 2013, the Fund did not utilize the LOC.
8. Interfund Lending
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other funds advised by subsidiaries of Federated Investors, Inc., may participate in an interfund lending program. This program provides an alternative credit facility allowing the Fund to borrow from other participating affiliated funds. As of March 31, 2013, there were no outstanding loans. During the year ended March 31, 2013, the program was not utilized.
9. federal tax information (unaudited)
For the year ended March 31, 2013, 100% of the distributions from net investment income is exempt from federal income tax, other than the federal AMT.
Annual Shareholder Report
Report of Independent Registered Public
Accounting Firm
TO THE Board OF Directors AND Shareholders of Federated Municipal Securities Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of Federated Municipal Securities Fund, Inc. (the “Fund”), including the portfolio of investments, as of March 31, 2013, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of March 31, 2013, by correspondence with the custodian and others or by other appropriate auditing procedures where replies from others were not received. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Federated Municipal Securities Fund, Inc. at March 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts
May 23, 2013
Annual Shareholder Report
Shareholder Expense Example (unaudited)
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase or redemption payments; and (2) ongoing costs, including management fees and to the extent applicable, distribution (12b-1) fees and/or shareholder services fees and other Fund expenses. This Example is intended to help you to understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. It is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from October 1, 2012 to March 31, 2013.
ACTUAL EXPENSES
The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you incurred over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses attributable to your investment during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. Thus, you should not use the hypothetical account values and expenses to estimate the actual ending account balance or your expenses for the period. Rather, these figures are required to be provided to enable you to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Annual Shareholder Report
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as sales charges (loads) on purchase or redemption payments. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| Beginning Account Value 10/1/2012 | Ending Account Value 3/31/2013 | Expenses Paid During Period1 |
Actual: | | | |
Class A Shares | $1,000 | $1,011.00 | $4.36 |
Class B Shares | $1,000 | $1,006.90 | $8.46 | | |
Class C Shares | $1,000 | $1,006.90 | $8.46 | | |
Class F Shares | $1,000 | $1,011.00 | $4.36 | | |
Hypothetical (assuming a 5% return before expenses): | | | |
Class A Shares | $1,000 | $1,020.59 | $4.38 |
Class B Shares | $1,000 | $1,016.50 | $8.50 | | |
Class C Shares | $1,000 | $1,016.50 | $8.50 | | |
Class F Shares | $1,000 | $1,020.59 | $4.38 |
1 | Expenses are equal to the Fund's annualized net expense ratios, multiplied by the average account value over the period, multiplied by 182/365 (to reflect the one-half-year period). The annualized net expense ratios are as follows: |
Class A Shares | 0.87% |
Class B Shares | 1.69% |
Class C Shares | 1.69% |
Class F Shares | 0.87% |
Annual Shareholder Report
Board of Directors and Fund Officers
The Board of Directors is responsible for managing the Fund's business affairs and for exercising all the Fund's powers except those reserved for the shareholders. The following tables give information about each Director and the senior officers of the Fund. Where required, the tables separately list Directors who are “interested persons” of the Fund (i.e., “Interested” Directors) and those who are not (i.e., “ Independent” Directors). Unless otherwise noted, the address of each person listed is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222. The address of all Independent Directors listed is 4000 Ericsson Drive, Warrendale, PA 15086-7561; Attention: Mutual Fund Board. As of December 31, 2012, the Fund comprised one portfolio(s), and the Federated Fund Family consisted of 42 investment companies (comprising 137 portfolios). Unless otherwise noted, each Officer is elected annually. Unless otherwise noted, each Director oversees all portfolios in the Federated Fund Family and serves for an indefinite term. The Fund's Statement of Additional Information includes additional information about Fund Directors and is available, without charge and upon request, by calling 1-800-341-7400.
Interested DIRECTORS Background
Name Birth Date Positions Held with Fund Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
John F. Donahue* Birth Date: July 28, 1924 Director Began serving: September 1976 | Principal Occupations: Director or Trustee of the Federated Fund Family; Chairman and Director, Federated Investors, Inc.; Chairman of the Federated Fund Family's Executive Committee. Previous Positions: Chairman of the Federated Fund Family; Trustee, Federated Investment Management Company; Chairman and Director, Federated Investment Counseling. |
J. Christopher Donahue* Birth Date: April 11, 1949 President and Director Began serving: December 1986 | Principal Occupations: Principal Executive Officer and President of certain of the Funds in the Federated Fund Family; Director or Trustee of certain of the Funds in the Federated Fund Family; President, Chief Executive Officer and Director, Federated Investors, Inc.; Chairman and Trustee, Federated Investment Management Company; Trustee, Federated Investment Counseling; Chairman and Director, Federated Global Investment Management Corp.; Chairman, Federated Equity Management Company of Pennsylvania and Passport Research, Ltd. (investment advisory subsidiary of Federated); Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Previous Positions: President, Federated Investment Counseling; President and Chief Executive Officer, Federated Investment Management Company, Federated Global Investment Management Corp. and Passport Research, Ltd. |
* | Family relationships and reasons for “interested” status: John F. Donahue is the father of J. Christopher Donahue; both are “interested” due to their beneficial ownership of shares of Federated Investors, Inc. and the positions they hold with Federated and its subsidiaries. |
Annual Shareholder Report
INDEPENDENT DIRECTORS Background
Name Birth Date Positions Held with Fund Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held, Previous Position(s) and Qualifications |
John F. Cunningham Birth Date: March 5, 1943 Director Began serving: June 1999 | Principal Occupation: Director or Trustee of the Federated Fund Family. Other Directorships Held: Chairman, President and Chief Executive Officer, Cunningham & Co., Inc. (strategic business consulting); Trustee Associate, Boston College. Previous Positions: President and Chief Operating Officer, Wang Laboratories; Chairman of the Board and Chief Executive Officer, Computer Consoles, Inc.; Director, First National Bank of Boston; Director, EMC Corporation (computer storage systems); Director, Apollo Computer, Inc.; Director, Redgate Communications. Qualifications: Business management and director experience. |
Maureen Lally-Green Birth Date: July 5, 1949 Director Began serving: August 2009 | Principal Occupations: Director or Trustee of the Federated Fund Family; Director, Office of Church Relations, and Associate General Secretary, Diocese of Pittsburgh; Adjunct Professor of Law, Duquesne University School of Law. Other Directorships Held: Director, Auberle; Member, Pennsylvania State Board of Education; Director, Saint Vincent College; Director, Ireland Institute of Pittsburgh; Chair and Director, UPMC Mercy Hospital; Regent, St. Vincent Seminary; Director, Epilepsy Foundation of Western and Central Pennsylvania; Director, Saint Thomas More Society, Allegheny County; Director, Our Campaign for the Church Alive, Inc. Previous Position: Pennsylvania Superior Court Judge. Qualifications: Legal and director experience. |
Peter E. Madden Birth Date: March 16, 1942 Director Began serving: August 1991 | Principal Occupation: Director or Trustee, and Chairman of the Board of Directors or Trustees, of the Federated Fund Family. Previous Positions: Representative, Commonwealth of Massachusetts General Court; President, Chief Operating Officer and Director, State Street Bank and Trust Company and State Street Corporation (retired); Director, VISA USA and VISA International; Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation; Director, The Boston Stock Exchange. Qualifications: Business management, mutual fund services and director experience. |
Annual Shareholder Report
Name Birth Date Positions Held with Fund Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held, Previous Position(s) and Qualifications |
Charles F. Mansfield, Jr. Birth Date: April 10, 1945 Director Began serving: June 1999 | Principal Occupations: Director or Trustee of the Federated Fund Family; Management Consultant. Previous Positions: Chief Executive Officer, PBTC International Bank; Partner, Arthur Young & Company (now Ernst & Young LLP); Chief Financial Officer of Retail Banking Sector, Chase Manhattan Bank; Senior Vice President, HSBC Bank USA (formerly Marine Midland Bank); Vice President, Citibank; Assistant Professor of Banking and Finance, Frank G. Zarb School of Business, Hofstra University; Executive Vice President, DVC Group, Inc. (marketing, communications and technology). Qualifications: Banking, business management, education and director experience. |
Thomas M. O'Neill Birth Date: June 14, 1951 Director Began serving: October 2006 | Principal Occupations: Director or Trustee, Vice Chairman of the Audit Committee of the Federated Fund Family; Sole Proprietor, Navigator Management Company (investment and strategic consulting). Other Directorships Held: Board of Overseers, Children's Hospital of Boston; Visiting Committee on Athletics, Harvard College; Board of Directors, Medicines for Humanity; Board of Directors, The Golisano Children's Museum of Naples, Florida. Previous Positions: Chief Executive Officer and President, Managing Director and Chief Investment Officer, Fleet Investment Advisors; President and Chief Executive Officer, Aeltus Investment Management, Inc.; General Partner, Hellman, Jordan Management Co., Boston, MA; Chief Investment Officer, The Putnam Companies, Boston, MA; Credit Analyst and Lending Officer, Fleet Bank; Director and Consultant, EZE Castle Software (investment order management software); Director, Midway Pacific (lumber). Qualifications: Business management, mutual fund, director and investment experience. |
John S. Walsh Birth Date: November 28, 1957 Director Began serving: January 1999 | Principal Occupations: Director or Trustee, Chairman of the Audit Committee of the Federated Fund Family; President and Director, Heat Wagon, Inc. (manufacturer of construction temporary heaters); President and Director, Manufacturers Products, Inc. (distributor of portable construction heaters); President, Portable Heater Parts, a division of Manufacturers Products, Inc. Previous Position: Vice President, Walsh & Kelly, Inc. Qualifications: Business management and director experience. |
Annual Shareholder Report
OFFICERS
Name Birth Date Positions Held with Fund Date Service Began | Principal Occupation(s) for Past Five Years and Previous Position(s) |
John W. McGonigle Birth Date: October 26, 1938 EXECUTIVE VICE PRESIDENT AND SECRETARY Officer since: September 1976 | Principal Occupations: Executive Vice President and Secretary of the Federated Fund Family; Vice Chairman, Executive Vice President, Secretary and Director, Federated Investors, Inc. Previous Positions: Trustee, Federated Investment Management Company and Federated Investment Counseling; Director, Federated Global Investment Management Corp., Federated Services Company and Federated Securities Corp. |
Lori A. Hensler, CPA Birth Date: January 6, 1967 TREASURER Officer since: April 2013 | Principal Occupations: Principal Financial Officer and Treasurer of the Federated Fund Family; Senior Vice President, Federated Administrative Services; Financial and Operations Principal for Federated Securities Corp. and Edgewood Services, Inc.; and Assistant Treasurer, Federated Investors Trust Company. Previous Positions: Controller of Federated Investors, Inc.; Senior Vice President and Assistant Treasurer, Federated Investors Management Company; Treasurer, Federated Investors Trust Company; Assistant Treasurer, Federated Administrative Services, Federated Administrative Services, Inc., Federated Securities Corp., Edgewood Services, Inc., Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, Federated Global Investment Management Corp., Federated Investment Counseling, Federated Investment Management Company, Passport Research, Ltd., and Federated MDTA, LLC; Financial and Operations Principal for Federated Securities Corp., Edgewood Services, Inc. and Southpointe Distribution Services, Inc. |
Peter J. Germain Birth Date: September 3, 1959 CHIEF LEGAL OFFICER Officer since: January 2005 | Principal Occupations: Mr. Germain is Chief Legal Officer of the Federated Fund Family. He is General Counsel and Vice President, Federated Investors, Inc.; President, Federated Administrative Services and Federated Administrative Services, Inc.; Vice President, Federated Securities Corp.; Secretary, Federated Private Asset Management, Inc.; and Secretary, Retirement Plan Service Company of America. Mr. Germain joined Federated in 1984 and is a member of the Pennsylvania Bar Association. Previous Positions: Deputy General Counsel, Special Counsel, Managing Director of Mutual Fund Services, Federated Investors, Inc.; Senior Vice President, Federated Services Company; and Senior Corporate Counsel, Federated Investors, Inc. |
Richard B. Fisher Birth Date: May 17, 1923 VICE PRESIDENT Officer since: January 1985 | Principal Occupations: Vice Chairman or Vice President of some of the Funds in the Federated Fund Family; Vice Chairman, Federated Investors, Inc.; Chairman, Federated Securities Corp. Previous Positions: President and Director or Trustee of some of the Funds in the Federated Fund Family; Executive Vice President, Federated Investors, Inc.; Director and Chief Executive Officer, Federated Securities Corp. |
Annual Shareholder Report
Name Birth Date Positions Held with Fund Date Service Began | Principal Occupation(s) for Past Five Years and Previous Position(s) |
Brian P. Bouda Birth Date: February 28, 1947 CHIEF COMPLIANCE OFFICER AND SENIOR VICE PRESIDENT Officer since: August 2004 | Principal Occupations: Senior Vice President and Chief Compliance Officer of the Federated Fund Family; Vice President and Chief Compliance Officer of Federated Investors, Inc. and Chief Compliance Officer of its subsidiaries. Mr. Bouda joined Federated in 1999 and is a member of the American Bar Association and the State Bar Association of Wisconsin. Previous Positions: Served in Senior Management positions with a large regional banking organization. |
Robert J. Ostrowski Birth Date: April 26, 1963 Chief Investment Officer Officer since: February 2010 | Principal Occupations: Robert J. Ostrowski joined Federated in 1987 as an Investment Analyst and became a Portfolio Manager in 1990. He was named Chief Investment Officer of taxable fixed-income products in 2004 and also serves as a Senior Portfolio Manager. Mr. Ostrowski became an Executive Vice President of the Fund's Adviser in 2009 and served as a Senior Vice President of the Fund's Adviser from 1997 to 2009. Mr. Ostrowski has received the Chartered Financial Analyst designation. He received his M.S. in Industrial Administration from Carnegie Mellon University. |
J. Scott Albrecht Birth Date: June 1, 1960 VICE PRESIDENT Officer since: May 2004 Portfolio Manager since: May 1996 | Principal Occupations: J. Scott Albrecht has been the Fund's portfolio manager since May 1996. He is Vice President of the Corporation with respect to the Fund. Mr. Albrecht joined Federated in 1989. He became a Senior Vice President of the Fund's Adviser in January 2005 and served as a Vice President of the Fund's Adviser from 1994 through 2004. He has been a Senior Portfolio Manager since 1997 and was a Portfolio Manager from 1994 to 1996. Mr. Albrecht has received the Chartered Financial Analyst designation and holds an M.S. in Public Management from Carnegie Mellon University. |
Annual Shareholder Report
Evaluation and Approval of Advisory
Contract–May 2012
Federated Municpal Securities Fund, Inc. (the “Fund”)
Following a review and recommendation of approval by the Fund's independent directors, the Fund's Board reviewed and approved at its May 2012 meetings the Fund's investment advisory contract for an additional one-year term. The Board's decision regarding the contract reflects the exercise of its business judgment on whether to continue the existing arrangements.
In this connection, the Federated Funds' Board had previously appointed a Senior Officer, whose duties include specified responsibilities relating to the process by which advisory fees are to be charged to a Federated fund. The Senior Officer has the authority to retain consultants, experts, or staff as may be reasonably necessary to assist in the performance of his duties, reports directly to the Board, and may be terminated only with the approval of a majority of the independent members of the Board. The Senior Officer prepared and furnished to the Board an independent, written evaluation that covered topics discussed below (the “Evaluation”). The Board considered that Evaluation, along with other information, in deciding to approve the advisory contract.
The Board is also familiar with and considered judicial decisions concerning allegedly excessive investment advisory fees, which have indicated that the following factors may be relevant to an Adviser's fiduciary duty with respect to its receipt of compensation from a fund: the nature and quality of the services provided by the Adviser to a fund and its shareholders, including the performance and expenses of the fund and of comparable funds; the Adviser's cost of providing the services, including the profitability to the Adviser of providing advisory services to a fund; the extent to which the Adviser may realize “economies of scale” as a fund grows larger and, if such economies exist, whether they have been shared with a fund and its shareholders; any “fall-out financial benefits” that accrue to the Adviser because of its relationship with a fund (including research services received from brokers that execute fund trades and any fees paid to affiliates of the Adviser for services rendered to a fund); comparative fee structures, including a comparison of fees paid to the Adviser with those paid by similar funds; and the extent to which the Board members are fully informed about all facts the Board deems relevant to its consideration of the Adviser's services and fees. Consistent with these judicial decisions, the Board also considered management fees (including any components thereof) charged to institutional and other clients of the Adviser for what might be viewed as like services. The Board was aware of these factors and was guided by them in its review of the Fund's advisory contract to the extent it considered them to be appropriate and relevant, as discussed further below.
Annual Shareholder Report
The Board considered and weighed these circumstances in light of its substantial accumulated experience in governing the Fund and working with Federated on matters relating to the Federated funds, and was assisted in its deliberations by independent legal counsel. Throughout the year, and in connection with its May meetings, the Board requested and received substantial and detailed information about the Fund and the Federated organization that was in addition to the extensive materials that comprise and accompany the Senior Officer's Evaluation. Federated provided much of this information at each regular meeting of the Board, and furnished additional substantial information in connection with the May meeting at which the Board's formal review of the advisory contract occurred. At this May meeting, senior management of the Adviser also met with the independent directors and their counsel to discuss the materials presented and any other matters thought relevant by the Adviser or the directors. Between regularly scheduled meetings, the Board also received information on particular matters as the need arose. Thus, the Board's consideration of the advisory contract included review of the Senior Officer's Evaluation, accompanying data and additional information covering such matters as: the Adviser's investment philosophy, revenue, profitability, personnel and processes; investment and operating strategies; the Fund's short- and long-term performance (in absolute terms, both on a gross basis and net of expenses, as well as in relationship to its particular investment program and certain competitor or “peer group” funds and/or other benchmarks, as appropriate), and comments on the reasons for performance; the Fund's investment objectives; the Fund's expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund's portfolio securities (if any); and the nature, quality and extent of the advisory and other services provided to the Fund by the Adviser and its affiliates. The Board also considered the preferences and expectations of Fund shareholders; the entrepreneurial risk assumed by the Adviser in sponsoring the funds; the continuing state of competition in the mutual fund industry and market practices; the range of comparable fees for similar funds in the mutual fund industry; the Fund's relationship to the Federated family of funds which include a comprehensive array of funds with different investment objectives, policies and strategies which are available for exchange without the incurrence of additional sales charges; compliance and audit reports concerning the Federated funds and the Federated companies that service them (including communications from regulatory agencies), as well as Federated's responses to any issues raised therein; and relevant developments in the mutual fund industry and how the Federated funds and/or Federated are responding to them. The Board's evaluation process is evolutionary. The criteria considered and the emphasis placed on relevant criteria change in recognition of changing circumstances in the mutual fund marketplace.
Annual Shareholder Report
While mindful that courts have cautioned against giving such comparisons too much weight, the Board has found the use of comparisons of the Fund's fees and expenses to other mutual funds with comparable investment programs to be relevant, given the high degree of competition in the mutual fund business. The Board focused on comparisons with other similar mutual funds more heavily than non-mutual fund products or services because it is believed that they are more relevant. For example, other mutual funds are the products most like the Fund, they are readily available to Fund shareholders as alternative investment vehicles, and they are the type of investment vehicle in fact chosen and maintained by the Fund's investors. The range of their fees and expenses therefore appears to be a generally reliable indication of what consumers have found to be reasonable in the precise marketplace in which the Fund competes. In this regard, the Senior Officer has reviewed Federated's fees for providing advisory services to products outside the Federated family of funds (e.g., institutional and separate accounts). He concluded that mutual funds and institutional accounts are inherently different products. Those differences include, but are not limited to, different types of targeted investors; being subject to different laws and regulations; different legal structures; different average account sizes; different associated costs; different portfolio management techniques made necessary by different cash flows; and portfolio manager time spent in review of securities pricing. The Senior Officer did not consider these fee schedules to be determinative in judging the appropriateness of mutual fund advisory contracts.
The Fund's ability to deliver competitive performance when compared to its peer group was also deemed to be relevant by the Board as a useful indicator of how the Adviser is executing the Fund's investment program, which in turn assisted the Board in reaching a conclusion that the nature, extent, and quality of the Adviser's investment management services were such as to warrant continuation of the advisory contract.
The Senior Officer reviewed information compiled by Federated, using data supplied by independent fund ranking organizations, regarding the performance of, and fees charged by, other mutual funds, noting his view that comparisons to fund peer groups are relevant in judging the reasonableness of proposed fees.
For the periods covered by the Evaluation, the Fund's performance for the one-year period was above the median of the relevant peer group, and the Fund's performance fell below the median of the relevant peer group for the three-year and five-year periods. The Board discussed the Fund's performance with the Adviser and recognized the efforts being undertaken by the Adviser. The Board will continue to monitor these efforts and the performance of the Fund.
The Board also received financial information about Federated, including information regarding the compensation and benefits Federated derived from its relationships with the Federated funds. This information covered not only the fees under the advisory contracts, but also fees received by Federated's
Annual Shareholder Report
subsidiaries for providing other services to the Federated funds under separate contracts (e.g., for serving as the Federated funds' administrator). The information also detailed any indirect benefit Federated may derive from its receipt of research services from brokers who execute Federated fund trades. In addition, the Board considered the fact that, in order for a fund to be competitive in the marketplace, Federated and its affiliates frequently waived fees and/or reimbursed expenses and have disclosed to fund investors and/or indicated to the Board their intention to do so in the future, where appropriate. Moreover, the Board receives regular reporting as to the institution or elimination of these voluntary waivers.
Federated furnished information, requested by the Senior Officer, that reported revenues on a fund-by-fund basis and made estimates of the allocation of expenses on a fund-by-fund basis, using allocation methodologies specified by the Senior Officer. The Senior Officer noted that, although they may apply consistent allocation processes, the inherent difficulties in allocating costs (and the unavoidable arbitrary aspects of that exercise) and the lack of consensus on how to allocate those costs may render such allocation information unreliable. The allocation information was considered in the analysis by the Board but was determined to be of limited use.
The Board and the Senior Officer also reviewed information compiled by Federated comparing profitability information for Federated to other publicly held fund management companies. In this regard, the Senior Officer noted the limited availability of such information, but nonetheless concluded that Federated's profit margins did not appear to be excessive.
The Senior Officer's Evaluation also discussed the notion of possible realization of “economies of scale” as a fund grows larger. The Board considered in this regard that the Adviser has made significant and long-term investments in areas that support all of the Federated funds, such as personnel and processes for the portfolio management, shareholder services, compliance, internal audit, and risk management functions; and systems technology; and that the benefits of these efforts (as well as any economies, should they exist) were likely to be enjoyed by the fund complex as a whole. Finally, the Board also noted the absence of any applicable regulatory or industry guidelines on this subject, which (as discussed in the Senior Officer's Evaluation) is compounded by the lack of any common industry practice or general pattern with respect to structuring fund advisory fees with “breakpoints” that serve to reduce the fee as the fund attains a certain size. The Senior Officer did not recommend institution of breakpoints in pricing Federated's fund advisory services at this time.
Annual Shareholder Report
It was noted in the materials for the Board meeting that for the period covered by the Evaluation, the Fund's investment advisory fee, after waivers and expense reimbursements, if any, was above the median of the relevant peer group. The Board reviewed the fees and other expenses of the Fund with the Adviser and was satisfied that the overall expense structure of the Fund remained competitive. The Board will continue to monitor advisory fees and other expenses borne by the Fund.
The Senior Officer noted that, considering the totality of the circumstances, and all of the factors referenced within his Evaluation, he had concluded that, subject to comments and recommendations made within his Evaluation, his observations and the information accompanying the Evaluation supported a finding by the Board that the management fees for each of the funds was reasonable and that Federated appeared to provide appropriate advisory and administrative services to the Fund for the fees paid. Under these circumstances, no changes were recommended to, and no objection was raised to, the continuation of the Fund's advisory contract.
In its decision to continue an existing investment advisory contract, the Board was mindful of the potential disruptions of the Fund's operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew an advisory contract. In particular, the Board recognized that many shareholders have invested in the Fund on the strength of the Adviser's industry standing and reputation and with the expectation that the Adviser will have a continuing role in providing advisory services to the Fund. Thus, the Board's approval of the advisory contract reflected the fact that it is the shareholders who have effectively selected the Adviser by virtue of having invested in the Fund. The Board concluded that, in light of the factors discussed above, including the nature, quality and scope of the services provided to the Fund by the Adviser and its affiliates, continuation of the advisory contract was appropriate.
The Board based its decision to approve the advisory contract on the totality of the circumstances and relevant factors and with a view to past and future long-term considerations. Not all of the factors and considerations identified above were necessarily relevant to the Fund, nor did the Board consider any one of them to be determinative. With respect to the factors that were relevant, the Board's decision to approve the contract reflects its determination that Federated's performance and actions provided a satisfactory basis to support the decision to continue the existing arrangements.
Annual Shareholder Report
Voting Proxies on Fund Portfolio Securities
A description of the policies and procedures that the Fund uses to determine how to vote proxies, if any, relating to securities held in the Fund's portfolio is available, without charge and upon request, by calling 1-800-341-7400. A report on “ Form N-PX” of how the Fund voted any such proxies during the most recent 12-month period ended June 30 is available from Federated's website at FederatedInvestors.com. To access this information from the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Literature and Prospectuses” tab. At the bottom of that page, select “Proxy Voting Record Report (Form N-PX).” Form N-PX filings are also available at the SEC's website at www.sec.gov.
Quarterly Portfolio Schedule
The Fund files with the SEC a complete schedule of its portfolio holdings, as of the close of the first and third quarters of its fiscal year, on “Form N-Q.” These filings are available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. (Call 1-800-SEC-0330 for information on the operation of the Public Reference Room.) You may also access this information from the “ Products” section of Federated's website at FederatedInvestors.com. From the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Literature and Prospectuses” tab. At the bottom of that page, select “Form N-Q.”
Annual Shareholder Report
Mutual funds are not bank deposits or obligations, are not guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency. Investment in mutual funds involves investment risk, including the possible loss of principal.
This Report is authorized for distribution to prospective investors only when preceded or accompanied by the Fund's Prospectus, which contains facts concerning its objective and policies, management fees, expenses and other information.
Federated Municipal Securities Fund, Inc.
Federated Investors Funds
4000 Ericsson Drive
Warrendale, PA 15086-7561
Contact us at FederatedInvestors.com
or call 1-800-341-7400.
Federated Securities Corp., Distributor
CUSIP 313913105
CUSIP 313913204
CUSIP 313913303
CUSIP 313913402
8042830 (5/13)
Federated is a registered trademark of Federated Investors, Inc.
2013 ©Federated Investors, Inc.
Item 2. Code of Ethics
(a) As of the end of the period covered by this report, the registrant has adopted a code of ethics (the "Section 406 Standards for Investment Companies - Ethical Standards for Principal Executive and Financial Officers") that applies to the registrant's Principal Executive Officer and Principal Financial Officer; the registrant's Principal Financial Officer also serves as the Principal Accounting Officer.
(c) Not Applicable
(d) Not Applicable
(e) Not Applicable
(f)(3) The registrant hereby undertakes to provide any person, without charge, upon request, a copy of the code of ethics. To request a copy of the code of ethics, contact the registrant at 1-800-341-7400, and ask for a copy of the Section 406 Standards for Investment Companies - Ethical Standards for Principal Executive and Financial Officers.
Item 3. Audit Committee Financial Expert
The registrant's Board has determined that each of the following members of the Board's Audit Committee is an “audit committee financial expert,” and is "independent," for purposes of this Item: Charles F. Mansfield, Jr., Thomas M. O'Neill and John S. Walsh.
Item 4. Principal Accountant Fees and Services
(a) Audit Fees billed to the registrant for the two most recent fiscal years:
Fiscal year ended 2013 - $25,450
Fiscal year ended 2012 - $24,450
(b) Audit-Related Fees billed to the registrant for the two most recent fiscal years:
Fiscal year ended 2013 - $36
Fiscal year ended 2012 - $0
Travel to Audit Committee Meeting.
Amount requiring approval of the registrant’s audit committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $0 and $0 respectively.
(c) Tax Fees billed to the registrant for the two most recent fiscal years:
Fiscal year ended 2013 - $0
Fiscal year ended 2012 - $0
Amount requiring approval of the registrant’s audit committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $0 and $3,718 respectively. Fiscal year ended 2012- Tax preparation fees for fiscal year end 2011.
(d) All Other Fees billed to the registrant for the two most recent fiscal years:
Fiscal year ended 2013 - $0
Fiscal year ended 2012 - $0
Amount requiring approval of the registrant’s audit committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $0 and $0 respectively.
(e)(1) Audit Committee Policies regarding Pre-approval of Services.
The Audit Committee is required to pre-approve audit and non-audit services performed by the independent auditor in order to assure that the provision of such services do not impair the auditor’s independence. Unless a type of service to be provided by the independent auditor has received general pre-approval, it will require specific pre-approval by the Audit Committee. Any proposed services exceeding pre-approved cost levels will require specific pre-approval by the Audit Committee.
Certain services have the general pre-approval of the Audit Committee. The term of the general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee specifically provides for a different period. The Audit Committee will annually review the services that may be provided by the independent auditor without obtaining specific pre-approval from the Audit Committee and may grant general pre-approval for such services. The Audit Committee will revise the list of general pre-approved services from time to time, based on subsequent determinations. The Audit Committee will not delegate its responsibilities to pre-approve services performed by the independent auditor to management.
The Audit Committee has delegated pre-approval authority to its Chairman. The Chairman will report any pre-approval decisions to the Audit Committee at its next scheduled meeting. The Committee will designate another member with such pre-approval authority when the Chairman is unavailable.
AUDIT SERVICES
The annual Audit services engagement terms and fees will be subject to the specific pre-approval of the Audit Committee. The Audit Committee must approve any changes in terms, conditions and fees resulting from changes in audit scope, registered investment company (RIC) structure or other matters.
In addition to the annual Audit services engagement specifically approved by the Audit Committee, the Audit Committee may grant general pre-approval for other Audit Services, which are those services that only the independent auditor reasonably can provide. The Audit Committee has pre-approved certain Audit services, all other Audit services must be specifically pre-approved by the Audit Committee.
AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements or that are traditionally performed by the independent auditor. The Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor, and has pre-approved certain Audit-related services, all other Audit-related services must be specifically pre-approved by the Audit Committee.
TAX SERVICES
The Audit Committee believes that the independent auditor can provide Tax services to the Company such as tax compliance, tax planning and tax advice without impairing the auditor’s independence. However, the Audit Committee will not permit the retention of the independent auditor in connection with a transaction initially recommended by the independent auditor, the purpose of which may be tax avoidance and the tax treatment of which may not be supported in the Internal Revenue Code and related regulations. The Audit Committee has pre-approved certain Tax services, all Tax services involving large and complex transactions must be specifically pre-approved by the Audit Committee.
ALL OTHER SERVICES
With respect to the provision of services other than audit, review or attest services the pre-approval requirement is waived if:
| (1) | The aggregate amount of all such services provided constitutes no more than five percent of the total amount of revenues paid by the registrant, the registrant’s adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant to its accountant during the fiscal year in which the services are provided; |
| (2) | Such services were not recognized by the registrant, the registrant’s adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant at the time of the engagement to be non-audit services; and |
| (3) | Such services are promptly brought to the attention of the Audit Committee of the issuer and approved prior to the completion of the audit by the Audit Committee or by one or more members of the Audit Committee who are members of the board of directors to whom authority to grant such approvals has been delegated by the Audit Committee. |
The Audit Committee may grant general pre-approval to those permissible non-audit services classified as All Other services that it believes are routine and recurring services, and would not impair the independence of the auditor.
The SEC’s rules and relevant guidance should be consulted to determine the precise definitions of prohibited non-audit services and the applicability of exceptions to certain of the prohibitions.
PRE-APPROVAL FEE LEVELS
Pre-approval fee levels for all services to be provided by the independent auditor will be established annually by the Audit Committee. Any proposed services exceeding these levels will require specific pre-approval by the Audit Committee.
PROCEDURES
Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the independent auditor and the Principal Accounting Officer and/or Internal Auditor, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC’s rules on auditor independence.
(e)(2) Percentage of services identified in items 4(b) through 4(d) that were approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X:
4(b)
Fiscal year ended 2013 – 0%
Fiscal year ended 2012 - 0%
Percentage of services provided to the registrants investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, 0% and 0% respectively.
4(c)
Fiscal year ended 2013 – 0%
Fiscal year ended 2012 – 0%
Percentage of services provided to the registrants investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, 0% and 0% respectively.
4(d)
Fiscal year ended 2013 – 0%
Fiscal year ended 2012 – 0%
Percentage of services provided to the registrants investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, 0% and 0% respectively.
| (g) | Non-Audit Fees billed to the registrant, the registrant’s investment adviser, and certain entities controlling, controlled by or under common control with the investment adviser: |
Fiscal year ended 2013 - $106,315
Fiscal year ended 2012 - $403,918
(h) The registrant’s Audit Committee has considered that the provision of non-audit services that were rendered to the registrant’s adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.
Item 5. Audit Committee of Listed Registrants
Not Applicable
Item 6. Schedule of Investments
(a) The registrant’s Schedule of Investments is included as part of the Report to Stockholders filed under Item 1 of this form.
(b) Not Applicable; Fund had no divestments during the reporting period covered since the previous Form N-CSR filing.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers
Item 10. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 11. Controls and Procedures
(a) The registrant’s President and Treasurer have concluded that the
registrant’s disclosure controls and procedures (as defined in rule 30a-3(c) under the Act) are effective in design and operation and are sufficient to form the basis of the certifications required by Rule 30a-(2) under the Act, based on their evaluation of these disclosure controls and procedures within 90 days of the filing date of this report on Form N-CSR.
(b) There were no changes in the registrant’s internal control over financial reporting (as defined in rule 30a-3(d) under the Act) during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12. Exhibits
(a)(1) Code of Ethics- Not Applicable to this Report.
(a)(2) Certifications of Principal Executive Officer and Principal Financial Officer.
(a)(3) Not Applicable.
(b) Certifications pursuant to 18 U.S.C. Section 1350.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Registrant Federated Municipal Securities Fund, Inc.
By /S/ Lori A. Hensler
Lori A. Hensler, Principal Financial Officer
Date May 22, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By /S/ J. Christopher Donahue
J. Christopher Donahue, Principal Executive Officer
Date May 22, 2013
By /S/ Lori A. Hensler
Lori A. Hensler, Principal Financial Officer
Date May 22, 2013