UNITED STATES | |
SECURITIES AND EXCHANGE COMMISSION | |
Washington, D.C. 20549 | |
FORM N-CSR | |
CERTIFIED SHAREHOLDER REPORT OF REGISTERED | |
MANAGEMENT INVESTMENT COMPANIES | |
Investment Company Act file number 811-5079 | |
John Hancock Tax-Exempt Series Fund | |
(Exact name of registrant as specified in charter) | |
601 Congress Street, Boston, Massachusetts 02210 | |
(Address of principal executive offices) (Zip code) | |
Salvatore Schiavone | |
Treasurer | |
601 Congress Street | |
Boston, Massachusetts 02210 | |
(Name and address of agent for service) | |
Registrant's telephone number, including area code: 617-663-4497 | |
Date of fiscal year end: | May 31 |
Date of reporting period: | November 30, 2011 |
Item 1. Schedule of Investments.
A look at performance
Total returns for the period ended November 30, 2011
SEC 30-day | ||||||||||||
Average annual total returns (%) | Cumulative total returns (%) | SEC 30-day | yield (%) | |||||||||
with maximum sales charge | with maximum sales charge | yield (%) | unsubsidized1 | |||||||||
as of | as of | |||||||||||
1-year | 5-year | 10-year | 6-months | 1-year | 5-year | 10-year | 11-30-11 | 11-30-11 | ||||
Class A | 0.70 | 2.77 | 3.85 | –0.58 | 0.70 | 14.65 | 45.87 | 3.07 | 2.93 | |||
Class B | –0.19 | 2.67 | 3.75 | –1.20 | –0.19 | 14.06 | 44.47 | 2.47 | 2.37 | |||
Class C | 3.81 | 3.01 | 3.61 | 2.80 | 3.81 | 16.01 | 42.57 | 2.47 | 2.37 | |||
Performance figures assume all distributions are reinvested. Figures reflect maximum sales charges on Class A shares of 4.5% and the applicable contingent deferred sales charge (CDSC) on Class B shares and Class C shares. The returns for Class C shares have been adjusted to reflect the elimination of the front-end sales charge effective 7-15-04. The Class B shares’ CDSC declines annually between years 1 to 6 according to the following schedule: 5, 4, 3, 3, 2, 1%. No sales charge will be assessed after the sixth year. Class C shares held for less than one year are subject to a 1% CDSC.
The expense ratios of the Fund, both net (including any fee waivers or expense limitations) and gross (excluding any fee waivers or expense limitations), are set forth according to the most recent publicly available prospectus for the Fund and may differ from those disclosed in the Financial highlights tables in this report. The fee waivers and expense limitations are contractual at least until 9-30-12 for Class A, Class B and Class C shares. Had the fee waivers and expense limitations not been in place gross expenses would apply. The expense ratios are as follows:
Class A | Class B | Class C | ||||
Net (%) | 0.92 | 1.67 | 1.67 | |||
Gross (%) | 1.07 | 1.77 | 1.77 |
The returns reflect past results and should not be considered indicative of future performance. The return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Due to market volatility, the Fund’s current performance may be higher or lower than the performance shown. For current to the most recent month end performance data, please call 1–800–225–5291 or visit the Fund’s Web site at www.jhfunds.com.
The performance table above and the chart on the next page do not reflect the deduction of taxes that a shareholder may pay on fund distributions or on the redemption of fund shares. Please note that a portion of the Fund’s income may be subject to taxes, and on some investors may be subject to the Alternative Minimum Tax (AMT). Also note that capital gains are taxable. The Fund’s performance results reflect any applicable fee waivers or expense reductions, without which the expenses would increase and results would have been less favorable.
6 | New York Tax-Free Income Fund | Semiannual report |
Without | With maximum | |||
Start date | sales charge | sales charge | Index | |
Class B2 | 11-30-01 | $14,447 | $14,447 | $16,411 |
Class C2 | 11-30-01 | 14,257 | 14,257 | 16,411 |
Performance of the classes will vary based on the difference in sales charges paid by shareholders investing in the different classes and the fee structure of those classes.
The Class C shares investment with maximum sales charge has been adjusted to reflect the elimination of the front-end sales charge effective 7-15-04.
Barclays Capital Municipal Bond Index is an unmanaged index representative of the tax-exempt bond market.
It is not possible to invest directly in an index. Index figures do not reflect sales charges or direct expenses, which would have resulted in lower values if they did.
1 Unsubsidized yield reflects what the yield would have been without the effect of reimbursements and waivers.
2 No contingent deferred sales charge is applicable.
Semiannual report | New York Tax-Free Income Fund | 7 |
Your expenses
These examples are intended to help you understand your ongoing operating expenses.
Understanding fund expenses
As a shareholder of the Fund, you incur two types of costs:
▪ Transaction costs which include sales charges (loads) on purchases or redemptions (varies by share class), minimum account fee charge, etc.
▪ Ongoing operating expenses including management fees, distribution and service fees (if applicable), and other fund expenses.
We are going to present only your ongoing operating expenses here.
Actual expenses/actual returns
This example is intended to provide information about the Fund’s actual ongoing operating expenses, and is based on the Fund’s actual return. It assumes an account value of $1,000.00 on June 1, 2011 with the same investment held until November 30, 2011.
Account value | Ending value | Expenses paid during | |
on 6-1-11 | on 11-30-11 | period ended 11-30-111 | |
Class A | $1,000.00 | $1,040.80 | $4.74 |
Class B | 1,000.00 | 1,038.00 | 8.41 |
Class C | 1,000.00 | 1,038.00 | 8.41 |
Together with the value of your account, you may use this information to estimate the operating expenses that you paid over the period. Simply divide your account value at November 30, 2011, by $1,000.00, then multiply it by the “expenses paid” for your share class from the table above. For example, for an account value of $8,600.00, the operating expenses should be calculated as follows:
8 | New York Tax-Free Income Fund | Semiannual report |
Hypothetical example for comparison purposes
This table allows you to compare the Fund’s ongoing operating expenses with those of any other fund. It provides an example of the Fund’s hypothetical account values and hypothetical expenses based on each class’s actual expense ratio and an assumed 5% annualized return before expenses (which is not the Fund’s actual return). It assumes an account value of $1,000.00 on June 1, 2011, with the same investment held until November 30, 2011. Look in any other fund shareholder report to find its hypothetical example and you will be able to compare these expenses.
Account value | Ending value | Expenses paid during | |
on 6-1-11 | on 11-30-11 | period ended 11-30-111 | |
Class A | $1,000.00 | $1,020.40 | $4.70 |
Class B | 1,000.00 | 1,016.80 | 8.32 |
Class C | 1,000.00 | 1,016.80 | 8.32 |
Remember, these examples do not include any transaction costs, therefore, these examples will not help you to determine the relative total costs of owning different funds. If transaction costs were included, your expenses would have been higher. See the prospectus for details regarding transaction costs.
1 Expenses are equal to the Fund’s annualized expense ratio of 0.93%, 1.65% and 1.65% for Class A, Class B and Class C shares, respectively, multiplied by the average account value over the period, multiplied by 183/366 (to reflect the one-half year period).
Semiannual report | New York Tax-Free Income Fund | 9 |
Portfolio summary
Top 10 Holdings (30.1% of Net Assets on 11-30-11)1,2 | ||||
Oneida County Industrial Development Agency, Zero Coupon, 7-1-29 | 3.9% | |||
New York State Dormitory Authority, 5.500%, 5-15-19 | 3.8% | |||
New York City Industrial Development Agency, 6.250%, 3-1-15 | 3.3% | |||
Triborough Bridge & Tunnel Authority, 6.125%, 1-1-21 | 3.2% | |||
Metropolitan Transportation Authority, 5.000%, 11-15-34 | 3.0% | |||
Puerto Rico Sales Tax Financing Corp., Zero Coupon, 8-1-32 | 2.9% | |||
Long Island Power Authority, 5.750%, 4-1-39 | 2.7% | |||
New York City Municipal Water Finance Authority, Zero Coupon, 6-15-20 | 2.6% | |||
Upper Mohawk Valley Regional Water Finance Authority, Zero Coupon, 4-1-22 | 2.4% | |||
New York Local Assistance Corp., 5.500%, 4-1-17 | 2.3% | |||
Sector Composition1,3 | ||||
General Obligation Bonds | 4.4% | Airport | 7.1% | |
Revenue Bonds | Transportation | 6.7% | ||
Education | 15.7% | Facilities | 1.9% | |
Development | 10.4% | Tobacco | 1.5% | |
Water & Sewer | 10.3% | Pollution | 1.3% | |
Health Care | 10.1% | Other Revenue | 20.5% | |
Utilities | 7.9% | Short-Term Investments & Other | 2.2% | |
Quality Composition1,4 | ||||
AAA | 6.8% | |||
AA | 37.2% | |||
A | 23.4% | |||
BBB | 18.9% | |||
BB | 5.3% | |||
Not Rated | 6.2% | |||
Short-Term Investments & Other | 2.2% | |||
1 As a percentage of net assets on 11-30-11.
2 Cash and cash equivalents not included.
3 Investments focused on one sector may fluctuate more widely than investments across various sectors. Because the Fund may focus on particular sectors, its performance may depend on the performance of those sectors.
4 Ratings are from Moody’s Investors Service, Inc. If not available, we have used Standard & Poor’s Corporation ratings. In the absence of ratings from these agencies, we have used Fitch, Inc. ratings. “Not Rated” securities are those with no ratings available from these agencies. All ratings are as of 11-30-11 and do not reflect subsequent downgrades or upgrades, if any.
10 | New York Tax-Free Income Fund | Semiannual report |
Fund’s investments
As of 11-30-11 (unaudited)
Maturity | |||||
Rate (%) | date | Par value | Value | ||
Municipal Bonds 97.76% | $60,045,101 | ||||
(Cost $56,838,021) | |||||
New York 84.59% | 51,952,497 | ||||
Brooklyn Arena Local Development Corp. | |||||
Barclays Center Project | 6.375 | 07-15-43 | $1,000,000 | 1,034,990 | |
Chautauqua Asset Securitization Corp. | |||||
Tobacco Settlement | 6.750 | 07-01-40 | 1,000,000 | 908,850 | |
City of New York, Series E-1 | 6.250 | 10-15-28 | 500,000 | 587,020 | |
City of New York, Series D-1 | 5.000 | 10-01-36 | 1,000,000 | 1,062,210 | |
Herkimer County Industrial Development | |||||
Agency Flots Adult Home, Series A | 5.500 | 03-20-40 | 965,000 | 1,024,994 | |
Hudson Yards Infrastructure Corp. | |||||
Series A | 5.750 | 02-15-47 | 1,000,000 | 1,057,750 | |
Long Island Power Authority | |||||
Electric, Power & Light Revenues, Series A | 5.750 | 04-01-39 | 1,500,000 | 1,644,405 | |
Long Island Power Authority | |||||
Electric, Power & Light Revenues, Series A | 6.000 | 05-01-33 | 1,000,000 | 1,121,810 | |
Metropolitan Transportation Authority | |||||
Transit Revenue, Series A | 5.250 | 11-15-28 | 1,000,000 | 1,089,190 | |
Metropolitan Transportation Authority | |||||
Transit Revenue, Series B | 5.000 | 11-15-34 | 1,750,000 | 1,839,005 | |
Monroe County Industrial Development Corp. | |||||
NY, Series A | 5.000 | 07-01-41 | 1,000,000 | 1,033,820 | |
Monroe Newpower Corp. | |||||
Electric, Power & Light Revenues | 5.100 | 01-01-16 | 1,000,000 | 1,023,550 | |
New York City Industrial Development Agency | |||||
Airis JFK I LLC Project, Series A AMT | 5.500 | 07-01-28 | 1,000,000 | 862,370 | |
New York City Industrial Development Agency | |||||
Brooklyn Navy Yard Cogeneration | |||||
Partners AMT | 5.650 | 10-01-28 | 1,000,000 | 802,320 | |
New York City Industrial Development Agency | |||||
Liberty-7 World Trade Center, Series A | 6.250 | 03-01-15 | 2,000,000 | 2,004,080 | |
New York City Industrial Development Agency | |||||
Lycee Francais De NY Project, Series A (D) | 5.375 | 06-01-23 | 1,000,000 | 1,015,400 | |
New York City Industrial Development Agency | |||||
Polytechnic University Project (D) | 5.250 | 11-01-27 | 1,000,000 | 1,007,030 | |
New York City Industrial Development Agency | |||||
Terminal One Group Association Project | |||||
AMT (P) | 5.500 | 01-01-21 | 1,000,000 | 1,051,760 | |
New York City Municipal Water | |||||
Finance Authority | |||||
Water Revenue, Series A | 5.750 | 06-15-40 | 1,000,000 | 1,121,830 |
See notes to financial statements | Semiannual report | New York Tax-Free Income Fund | 11 |
Maturity | |||||
Rate (%) | date | Par value | Value | ||
New York (continued) | |||||
New York City Municipal Water | |||||
Finance Authority | |||||
Water Revenue, Series D (Z) | Zero | 06-15-20 | $2,000,000 | $1,607,520 | |
New York City Municipal Water | |||||
Finance Authority | |||||
Water Revenue, Series FF-2 | 5.000 | 06-15-40 | 1,000,000 | 1,049,260 | |
New York City Municipal Water | |||||
Finance Authority | |||||
Water Revenue, Series GG-1 | 5.000 | 06-15-39 | 1,000,000 | 1,049,920 | |
New York City Transitional | |||||
Finance Authority | |||||
Government Fund/Grant Revenue, Series S-4 | 5.500 | 01-15-39 | 1,000,000 | 1,081,200 | |
New York Liberty Development Corp. | 5.625 | 07-15-47 | 1,000,000 | 1,008,360 | |
New York Liberty Development Corp. | |||||
4 World Trade Center Project | 5.000 | 11-15-44 | 500,000 | 496,790 | |
New York Local Assistance Corp. | |||||
Sales Tax Revenue, Series C | 5.500 | 04-01-17 | 1,225,000 | 1,429,514 | |
New York State Dormitory Authority | |||||
General Purpose, Series E | 5.000 | 02-15-35 | 1,000,000 | 1,055,000 | |
New York State Dormitory Authority | |||||
Miriam Osborn Memorial Home Association, | |||||
Series B (D) | 6.875 | 07-01-25 | 750,000 | 755,303 | |
New York State Dormitory Authority | |||||
Mount Sinai School of Medicine | 5.125 | 07-01-39 | 1,000,000 | 1,015,970 | |
New York State Dormitory Authority | |||||
North Shore Long Island Jewish Group, | |||||
Prerefunded to 5-1-13 | 5.375 | 05-01-23 | 1,000,000 | 1,071,040 | |
New York State Dormitory Authority | |||||
North Shore Long Island Jewish Group, | |||||
Series A | 5.000 | 05-01-41 | 1,000,000 | 990,830 | |
New York State Dormitory Authority | |||||
Orange Regional Medical Center | 6.125 | 12-01-29 | 750,000 | 750,501 | |
New York State Dormitory Authority | |||||
Rockefeller University, Series A | 5.000 | 07-01-41 | 1,000,000 | 1,068,280 | |
New York State Dormitory Authority | |||||
State University Educational Facilities, | |||||
Series A (D) | 5.250 | 05-15-15 | 1,000,000 | 1,084,630 | |
New York State Dormitory Authority | |||||
State University Educational Facilities, | |||||
Series A | 5.500 | 05-15-19 | 2,000,000 | 2,347,460 | |
New York State Environmental Facilities Corp. | |||||
Water Revenue, Series A | 5.000 | 06-15-34 | 1,000,000 | 1,061,190 | |
Oneida County Industrial Development Agency | |||||
Hamilton College Project, Series A (D)(Z) | Zero | 07-01-29 | 5,330,000 | 2,383,096 | |
Onondaga County Industrial Development | |||||
Agency AMT | 6.125 | 01-01-32 | 1,000,000 | 838,880 | |
Orange County Industrial Development Agency | |||||
Arden Hill Care Center, Series C | 7.000 | 08-01-31 | 500,000 | 412,825 | |
Port Authority of New York & New Jersey | |||||
5th Installment Special Project AMT | 6.750 | 10-01-19 | 1,500,000 | 1,393,560 | |
Port Authority of New York & New Jersey | |||||
JFK International Airport Terminal | 6.000 | 12-01-36 | 1,000,000 | 1,043,280 | |
Suffolk County Industrial Development Agency | |||||
Huntington Hospital Project, Series B | 6.000 | 11-01-22 | 1,000,000 | 1,052,490 |
12 | New York Tax-Free Income Fund | Semiannual report | See notes to financial statements |
Maturity | |||||
Rate (%) | date | Par value | Value | ||
New York (continued) | |||||
Triborough Bridge & Tunnel Authority | |||||
Highway Revenue Tolls, Escrowed to | |||||
Maturity, Series Y | 6.125 | 01-01-21 | $1,500,000 | $1,963,680 | |
Upper Mohawk Valley Regional Water | |||||
Finance Authority | |||||
Water Revenue (D)(Z) | Zero | 04-01-22 | 2,230,000 | 1,498,694 | |
Westchester County Healthcare Corp. | |||||
Senior Lien, Series A | 6.000 | 11-01-30 | 1,150,000 | 1,150,840 | |
Puerto Rico 10.61% | 6,515,819 | ||||
Commonwealth of Puerto Rico | |||||
Public Improvement, Series A | 5.750 | 07-01-41 | 1,000,000 | 1,027,380 | |
Puerto Rico Public Building Authority | |||||
Lease Revenue, Series A (D) | 6.250 | 07-01-12 | 1,110,000 | 1,141,169 | |
Puerto Rico Public Finance Corp. | |||||
Prerefunded to 2-1-12, Series E | 5.500 | 08-01-29 | 1,005,000 | 1,014,015 | |
Puerto Rico Sales Tax Financing Corp. | |||||
Sales Tax Revenue, Series A (Zero coupon | |||||
steps up to 6.750% on 8-1-16) (Z) | Zero | 08-01-32 | 2,000,000 | 1,809,060 | |
Puerto Rico Sales Tax Financing Corp., Series C | 5.000 | 08-01-35 | 1,000,000 | 1,008,330 | |
Puerto Rico Sales Tax Financing Corp., Series C | 5.375 | 08-01-38 | 500,000 | 515,865 | |
Virgin Islands 1.74% | 1,069,750 | ||||
Virgin Islands Public Finance Authority, Series A | 6.750 | 10-01-37 | 1,000,000 | 1,069,750 | |
Guam 0.82% | 507,035 | ||||
Guam Government, Series A | 5.750 | 12-01-34 | 500,000 | 507,035 | |
Short-Term Investments 1.09% | $667,000 | ||||
(Cost $667,000) | |||||
Par value | Value | ||||
Repurchase Agreement 1.09% | 667,000 | ||||
Repurchase Agreement with State Street Corp. dated 11-30-11 | |||||
at 0.010% to be repurchased at $667,000 on 12-1-11, | |||||
collateralized by $680,000 Federal Home Loan Mortgage Corp., | |||||
0.500% due 8-23-13 (valued at $680,850 including interest) | $667,000 | 667,000 | |||
Total investments (Cost $57,505,021)† 98.85% | $60,712,101 | ||||
Other assets and liabilities, net 1.15% | $706,214 | ||||
Total net assets 100.00% | $61,418,315 | ||||
The percentage shown for each investment category is the total value of the category as a percentage of the net assets of the Fund.
See notes to financial statements | Semiannual report | New York Tax-Free Income Fund | 13 |
Notes to Schedule of Investments
AMT Interest earned from these securities may be considered a tax preference item for purpose of the Federal Alternative Minimum Tax.
(D) Bond is insured by one of these companies:
Insurance Coverage | As a % of total investments | |
ACA Financial Guaranty Corp. | 4.58% | |
Ambac Financial Group, Inc. | 4.34% | |
National Public Finance Guarantee Corp. | 5.71% |
(P) Variable rate obligation. The coupon rate shown represents the rate at period end.
(Z) Zero coupon bonds are issued at a discount from their principal amount in lieu of paying interest periodically.
† At 11-30-11, the aggregate cost of investment securities for federal income tax purposes was $57,388,775. Net unrealized appreciation aggregated $3,323,326, of which $3,925,855 related to appreciated investment securities and $602,529 related to depreciated investment securities.
The Fund had the following sector composition as a percentage of total net assets on 11-30-11:
General Obligation Bonds | 4.4% | ||
Revenue Bonds | |||
Education | 15.7% | ||
Development | 10.4% | ||
Water & Sewer | 10.3% | ||
Health Care | 10.1% | ||
Utilities | 7.9% | ||
Airport | 7.1% | ||
Transportation | 6.7% | ||
Facilities | 1.9% | ||
Tobacco | 1.5% | ||
Pollution | 1.3% | ||
Other Revenue | 20.5% | ||
Short-Term Investments & Other | 2.2% |
14 | New York Tax-Free Income Fund | Semiannual report | See notes to financial statements |
F I N A N C I A L S T A T E M E N T S
Financial statements
Statement of assets and liabilities 11-30-11 (unaudited)
This Statement of assets and liabilities is the Fund’s balance sheet. It shows the value of what the Fund owns, is due and owes. You’ll also find the net asset value and the maximum offering price per share.
Assets | |
Investments, at value (Cost $57,505,021) | $60,712,101 |
Cash | 509 |
Receivable for fund shares sold | 47,267 |
Interest receivable | 780,651 |
Other receivables and prepaid expenses | 11,599 |
Total assets | 61,552,127 |
Liabilities | |
Payable for fund shares repurchased | 43,264 |
Distributions payable | 38,292 |
Payable to affiliates | |
Accounting and legal services fees | 1,107 |
Transfer agent fees | 3,448 |
Distribution and service fees | 8,551 |
Trustees’ fees | 3,367 |
Other liabilities and accrued expenses | 35,783 |
Total liabilities | 133,812 |
Net assets | |
Paid-in capital | $58,024,772 |
Undistributed net investment income | 25,805 |
Accumulated net realized gain on investments | 160,658 |
Net unrealized appreciation (depreciation) on investments | 3,207,080 |
Net assets | $61,418,315 |
Net asset value per share | |
Based on net asset values and shares outstanding — the Fund has an | |
unlimited number of shares authorized with no par value | |
Class A ($51,304,563 ÷ 4,210,743 shares) | $12.18 |
Class B ($2,078,113 ÷ 170,528 shares)1 | $12.19 |
Class C ($8,035,639 ÷ 659,397 shares)1 | $12.19 |
Maximum offering price per share | |
Class A (net asset value per share ÷ 95.5%)2 | $12.75 |
1 Redemption price per share is equal to the net asset value less any applicable contingent deferred sales charge.
2 On single retail sales of less than $100,000. On sales of $100,000 or more and on group sales the offering price is reduced.
See notes to financial statements | Semiannual report | New York Tax-Free Income Fund | 15 |
F I N A N C I A L S T A T E M E N T S
Statement of operations For the six-month period ended 11-30-11
(unaudited)
This Statement of operations summarizes the Fund’s investment income earned and expenses incurred in operating the Fund. It also shows net gains (losses) for the period stated.
Investment income | |
Interest | $1,529,225 |
Total investment income | 1,529,225 |
Expenses | |
Investment management fees (Note 4) | 153,570 |
Distribution and service fees (Note 4) | 127,570 |
Accounting and legal services fees (Note 4) | 3,680 |
Transfer agent fees (Note 4) | 20,637 |
Trustees’ fees (Note 4) | 2,240 |
State registration fees | 4,386 |
Printing and postage | 4,211 |
Professional fees | 21,061 |
Custodian fees | 5,666 |
Registration and filing fees | 7,419 |
Other | 4,947 |
Total expenses | 355,387 |
Less expense reductions (Note 4) | (33,854) |
Net expenses | 321,533 |
Net investment income | 1,207,692 |
Realized and unrealized gain (loss) | |
Net realized gain on investments | 51,600 |
Change in net unrealized appreciation (depreciation) of investments | 1,190,992 |
Net realized and unrealized gain | 1,242,592 |
Increase in net assets from operations | $2,450,284 |
16 | New York Tax-Free Income Fund | Semiannual report | See notes to financial statements |
F I N A N C I A L S T A T E M E N T S
Statements of changes in net assets
These Statements of changes in net assets show how the value of the Fund’s net assets has changed during the last two periods. The difference reflects earnings less expenses, any investment gains and losses, distributions, if any, paid to shareholders and the net of Fund share transactions.
Six months | ||
ended | Year | |
11-30-11 | ended | |
(Unaudited) | 5-31-11 | |
Increase (decrease) in net assets | ||
From operations | ||
Net investment income | $1,207,692 | $2,613,552 |
Net realized gain (loss) | 51,600 | (11,832) |
Change in net unrealized appreciation (depreciation) | 1,190,992 | (1,584,978) |
Increase in net assets resulting from operations | 2,450,284 | 1,016,742 |
Distributions to shareholders | ||
From net investment income | ||
Class A | (1,034,134) | (2,160,862) |
Class B | (35,082) | (87,536) |
Class C | (132,733) | (281,845) |
Total distributions | (1,201,949) | (2,530,243) |
From Fund share transactions (Note 5) | 158,655 | (2,867,247) |
Total increase (decrease) | 1,406,990 | (4,380,748) |
Net assets | ||
Beginning of period | 60,011,325 | 64,392,073 |
End of period | $61,418,315 | $60,011,325 |
Undistributed net investment income | $25,805 | $20,062 |
See notes to financial statements | Semiannual report | New York Tax-Free Income Fund | 17 |
Financial highlights
The Financial highlights show how the Fund’s net asset value for a share has changed since the end of the previous period.
CLASS A SHARES Period ended | 11-30-111 | 5-31-11 | 5-31-10 | 5-31-092 | 8-31-08 | 8-31-07 | 8-31-06 |
Per share operating performance | |||||||
Net asset value, beginning | |||||||
of period | $11.94 | $12.20 | $11.60 | $11.96 | $12.03 | $12.40 | $12.61 |
Net investment income3 | 0.25 | 0.52 | 0.51 | 0.38 | 0.51 | 0.52 | 0.52 |
Net realized and unrealized gain | |||||||
(loss) on investments | 0.23 | (0.28) | 0.60 | (0.36) | (0.07) | (0.37) | (0.21) |
Total from investment operations | 0.48 | 0.24 | 1.11 | 0.02 | 0.44 | 0.15 | 0.31 |
Less distributions | |||||||
From net investment income | (0.24) | (0.50) | (0.51) | (0.38) | (0.51) | (0.52) | (0.52) |
Net asset value, end of period | $12.18 | $11.94 | $12.20 | $11.60 | $11.96 | $12.03 | $12.40 |
Total return (%)4 | 4.085,6 | 2.045 | 9.715 | 0.286 | 3.735 | 1.185 | 2.545 |
Ratios and supplemental data | |||||||
Net assets, end of period | |||||||
(in millions) | $51 | $50 | $54 | $46 | $44 | $40 | $43 |
Ratios (as a percentage of average | |||||||
net assets): | |||||||
Expenses before reductions | 1.047 | 1.08 | 1.10 | 1.197,8 | 1.04 | 1.03 | 1.03 |
Expenses net of fee waivers | 0.937 | 0.96 | 1.10 | 1.197,8 | 1.04 | 1.03 | 1.03 |
Net investment income | 4.057 | 4.31 | 4.27 | 4.507 | 4.28 | 4.22 | 4.20 |
Portfolio turnover (%) | 7 | 9 | 7 | 22 | 25 | 17 | 32 |
1 Semiannual period from 6-1-11 to 11-30-11. Unaudited.
2 For the nine-month period ended 5-31-09. The Fund changed its fiscal year end from August 31 to May 31.
3 Based on the average daily shares outstanding.
4 Does not reflect the effect of sales charges, if any.
5 Total returns would have been lower had certain expenses not been reduced during the periods shown.
6 Not annualized.
7 Annualized.
8 Includes proxy fees. The impact of this expense to the gross and net expense ratios was 0.04%.
18 | New York Tax-Free Income Fund | Semiannual report | See notes to financial statements |
CLASS B SHARES Period ended | 11-30-111 | 5-31-11 | 5-31-10 | 5-31-092 | 8-31-08 | 8-31-07 | 8-31-06 |
Per share operating performance | |||||||
Net asset value, beginning | |||||||
of period | $11.94 | $12.21 | $11.60 | $11.96 | $12.03 | $12.40 | $12.61 |
Net investment income3 | 0.20 | 0.43 | 0.42 | 0.32 | 0.43 | 0.43 | 0.43 |
Net realized and unrealized gain | |||||||
(loss) on investments | 0.25 | (0.28) | 0.61 | (0.36) | (0.07) | (0.37) | (0.21) |
Total from investment operations | 0.45 | 0.15 | 1.03 | (0.04) | 0.36 | 0.06 | 0.22 |
Less distributions | |||||||
From net investment income | (0.20) | (0.42) | (0.42) | (0.32) | (0.43) | (0.43) | (0.43) |
Net asset value, end of period | $12.19 | $11.94 | $12.21 | $11.60 | $11.96 | $12.03 | $12.40 |
Total return (%)4 | 3.805,6 | 1.255 | 9.035 | (0.24)6 | 3.015 | 0.485 | 1.835 |
Ratios and supplemental data | |||||||
Net assets, end of period | |||||||
(in millions) | $2 | $2 | $3 | $6 | $8 | $11 | $14 |
Ratios (as a percentage of average | |||||||
net assets): | |||||||
Expenses before reductions | 1.747 | 1.77 | 1.80 | 1.897,8 | 1.74 | 1.73 | 1.73 |
Expenses net of fee waivers | 1.657 | 1.66 | 1.80 | 1.897,8 | 1.74 | 1.73 | 1.73 |
Net investment income | 3.337 | 3.59 | 3.57 | 3.807 | 3.57 | 3.52 | 3.50 |
Portfolio turnover (%) | 7 | 9 | 7 | 22 | 25 | 17 | 32 |
1 Semiannual period from 6-1-11 to 11-30-11. Unaudited.
2 For the nine-month period ended 5-31-09. The Fund changed its fiscal year end from August 31 to May 31.
3 Based on the average daily shares outstanding.
4 Does not reflect the effect of sales charges, if any.
5 Total returns would have been lower had certain expenses not been reduced during the periods shown.
6 Not annualized.
7 Annualized.
8 Includes proxy fees. The impact of this expense to the gross and net expense ratios was 0.04%.
CLASS C SHARES Period ended | 11-30-111 | 5-31-11 | 5-31-10 | 5-31-092 | 8-31-08 | 8-31-07 | 8-31-06 |
Per share operating performance | |||||||
Net asset value, beginning | |||||||
of period | $11.94 | $12.21 | $11.60 | $11.96 | $12.03 | $12.40 | $12.61 |
Net investment income3 | 0.20 | 0.43 | 0.43 | 0.32 | 0.43 | 0.43 | 0.43 |
Net realized and unrealized gain | |||||||
(loss) on investments | 0.25 | (0.28) | 0.60 | (0.36) | (0.07) | (0.37) | (0.21) |
Total from investment operations | 0.45 | 0.15 | 1.03 | (0.04) | 0.36 | 0.06 | 0.22 |
Less distributions | |||||||
From net investment income | (0.20) | (0.42) | (0.42) | (0.32) | (0.43) | (0.43) | (0.43) |
Net asset value, end of period | $12.19 | $11.94 | $12.21 | $11.60 | $11.96 | $12.03 | $12.40 |
Total return (%)4 | 3.805,6 | 1.255 | 9.045 | (0.24)6 | 3.015 | 0.485 | 1.835 |
Ratios and supplemental data | |||||||
Net assets, end of period | |||||||
(in millions) | $8 | $8 | $8 | $6 | $3 | $4 | $3 |
Ratios (as a percentage of average | |||||||
net assets): | |||||||
Expenses before reductions | 1.747 | 1.78 | 1.80 | 1.897,8 | 1.74 | 1.73 | 1.73 |
Expenses net of fee waivers | 1.657 | 1.66 | 1.80 | 1.897,8 | 1.74 | 1.73 | 1.73 |
Net investment income | 3.347 | 3.61 | 3.56 | 3.797 | 3.57 | 3.51 | 3.50 |
Portfolio turnover (%) | 7 | 9 | 7 | 22 | 25 | 17 | 32 |
1 Semiannual period from 6-1-11 to 11-30-11. Unaudited.
2 For the nine-month period ended 5-31-09. The Fund changed its fiscal year end from August 31 to May 31.
3 Based on the average daily shares outstanding.
4 Does not reflect the effect of sales charges, if any.
5 Total returns would have been lower had certain expenses not been reduced during the periods shown.
6 Not annualized.
7 Annualized.
8 Includes proxy fees. The impact of this expense to the gross and net expense ratios was 0.04%.
See notes to financial statements | Semiannual report | New York Tax-Free Income Fund | 19 |
Notes to financial statements
(unaudited)
Note 1 — Organization
John Hancock New York Tax-Free Income Fund (the Fund) is a diversified series of John Hancock Tax-Exempt Series Fund (the Trust), an open-end management investment company organized as a Massachusetts business trust and registered under the Investment Company Act of 1940, as amended (the 1940 Act). The investment objective of the Fund is to seek a high level of current income, consistent with preservation of capital, that is exempt from federal, New York State and New York City personal income taxes.
The Fund may offer multiple classes of shares. The shares currently offered are detailed in the Statement of assets and liabilities. Class A, Class B and Class C shares are offered to all investors. Shareholders of each class have exclusive voting rights to matters that affect that class. The distribution and service fees, if any, and transfer agent fees for each class may differ. Class B shares convert to Class A shares eight years after purchase.
Note 2 — Significant accounting policies
The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make certain estimates and assumptions at the date of the financial statements. Actual results could differ from those estimates. Events or transactions occurring after the end of the fiscal period through the date that the financial statements were issued have been evaluated in the preparation of the financial statements. The following summarizes the significant accounting policies of the Fund:
Security valuation. Investments are stated at value as of the close of regular trading on the New York Stock Exchange (NYSE), normally at 4:00 P.M., Eastern Time. The Fund uses a three-tier hierarchy to prioritize the pricing assumptions, referred to as inputs, used in valuation techniques to measure fair value. Level 1 includes securities valued using quoted prices in active markets for identical securities. Level 2 includes securities valued using significant observable inputs. Observable inputs may include quoted prices for similar securities, interest rates, prepayment speeds and credit risk. Prices for securities valued using these inputs are received from independent pricing vendors and brokers and are based on an evaluation of the inputs described. Level 3 includes securities valued using significant unobservable inputs when market prices are not readily available or reliable, including the Fund’s own assumptions in determining the fair value of investments. Factors used in determining value may include market or issuer specific events, changes in interest rates and credit quality. The inputs or methodology used for valuing securities are not necessarily an indication of the risks associated with investing in those securities.
As of November 30, 2011, all investments are categorized as Level 2 under the hierarchy described above. Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. During the six months ended November 30, 2011, there were no significant transfers into or out of Level 1, Level 2 or Level 3 assets.
In order to value the securities, the Fund uses the following valuation techniques. Debt obligations are valued based on the evaluated prices provided by an independent pricing service, which utilizes both dealer-supplied and electronic data processing techniques, taking into account factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Certain securities traded only in the over-the-counter market are valued at the last bid price quoted by brokers making markets in the securities at the close of trading. Certain short-term securities are valued at amortized cost. Other portfolio
20 | New York Tax-Free Income Fund | Semiannual report |
securities and assets, where market quotations are not readily available, are valued at fair value, as determined in good faith by the Fund’s Pricing Committee, following procedures established by the Board of Trustees.
Repurchase agreements. The Fund may enter into repurchase agreements. When the Fund enters into a repurchase agreement, it receives collateral which is held in a segregated account by the Fund’s custodian. The collateral amount is marked-to-market and monitored on a daily basis to ensure that the collateral held is in an amount not less than the principal amount of the repurchase agreement plus any accrued interest. In the event of a default by the counterparty, realization of the collateral proceeds could be delayed, during which time the collateral value may decline.
Security transactions and related investment income. Investment security transactions are accounted for on a trade date plus one basis for daily net asset value calculations. However, for financial reporting purposes, investment transactions are reported on trade date. Interest income is accrued as earned. Interest income includes coupon interest and amortization/accretion of premiums/discounts on debt securities. Debt obligations may be placed in a non-accrual status and related interest income may be reduced by stopping current accruals and writing off interest receivable when the collection of all or a portion of interest has become doubtful. Gains and losses on securities sold are determined on the basis of identified cost and may include proceeds from litigation.
Line of credit. The Fund may borrow from banks for temporary or emergency purposes, including meeting redemption requests that otherwise might require the untimely sale of securities. Pursuant to the custodian agreement, the custodian may loan money to the Fund to make properly authorized payments. The Fund is obligated to repay the custodian for any overdraft, including any related costs or expenses. The custodian has a lien, security interest or security entitlement in any Fund property that is not segregated, to the maximum extent permitted by law for any overdraft.
In addition, the Fund and other affiliated funds have entered into an agreement with Citibank N.A. which enables them to participate in a $100 million unsecured committed line of credit. A commitment fee, payable at the end of each calendar quarter, based on the average daily unused portion of the line of credit, is charged to each participating fund on a pro rata basis and is reflected in other expenses on the Statement of operations. For the six months ended November 30, 2011, the Fund had no borrowings under the line of credit.
Expenses. The majority of expenses are directly attributable to an individual fund. Expenses that are not readily attributable to a specific fund are allocated among all funds in an equitable manner, taking into consideration, among other things, the nature and type of expense and the fund’s relative net assets. Expense estimates are accrued in the period to which they relate and adjustments are made when actual amounts are known.
Class allocations. Income, common expenses and realized and unrealized gains (losses) are determined at the fund level and allocated daily to each class of shares based on the net assets of the class. Class-specific expenses, such as distribution and service fees, if any, and transfer agent fees, are calculated daily for each class, based on the net asset value of the class and the applicable specific expense rates.
Federal income taxes. The Fund intends to continue to qualify as a regulated investment company by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income that is distributed to shareholders. Therefore, no federal income tax provision is required.
For federal income tax purposes, the Fund has a capital loss carryforward of $1,452 available to offset future net realized capital gains as of May 31, 2011. The loss carryforward expires May 31, 2012.
Semiannual report | New York Tax-Free Income Fund | 21 |
Under the Regulated Investment Company Modernization Act of 2010, the Fund will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital losses that are carried forward will retain their character as either short-term or long-term capital losses rather than being considered all short-term as under previous law.
As of May 31, 2011, the Fund had no uncertain tax positions that would require financial statement recognition, derecognition or disclosure. The Fund’s federal tax returns are subject to examination by the Internal Revenue Service for a period of three years.
Distribution of income and gains. Distributions to shareholders from net investment income and net realized gains, if any, are recorded on the ex-date. The Fund generally declares dividends daily and pays them monthly. Capital gain distributions, if any, are distributed annually.
Distributions paid by the Fund with respect to each class of shares are calculated in the same manner, at the same time and in the same amount, except for the effect of class level expenses that may be applied differently to each class.
Such distributions, on a tax basis, are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America.
Capital accounts within the financial statements are adjusted for permanent book-tax differences. These adjustments have no impact on net assets or the results of operations. Temporary book-tax differences, if any, will reverse in a subsequent period. Book-tax differences are primarily attributable to expiration of capital loss carryforward, distributions payable and accretion on debt securities.
New accounting pronouncement. In May 2011, Accounting Standards Update 2011-04 (ASU 2011-04), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, was issued and is effective during interim and annual periods beginning after December 15, 2011. ASU 2011-04 amends Financial Accounting Standards Board (FASB) Topic 820, Fair Value Measurement. The amendments are the result of the work by the FASB and the International Accounting Standards Board to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP. Management is currently evaluating the application of ASU 2011-04 and its impact, if any, on the Fund’s financial statement disclosure.
Note 3 — Guarantees and indemnifications
Under the Fund’s organizational documents, its Officers and Trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss from such claims is considered remote.
Note 4 — Fees and transactions with affiliates
John Hancock Advisers, LLC (the Adviser) serves as investment adviser for the Fund. John Hancock Funds, LLC (the Distributor), an affiliate of the Adviser, serves as principal underwriter of the Fund. The Adviser and the Distributor are indirect wholly owned subsidiaries of Manulife Financial Corporation (MFC).
22 | New York Tax-Free Income Fund | Semiannual report |
Management fee. The Fund has an investment management agreement with the Adviser under which the Fund pays a daily management fee to the Adviser equivalent, on an annual basis, to the sum of: (a) 0.500% of the first $250,000,000 of the Fund’s average daily net assets, (b) 0.450% of the next $250,000,000, (c) 0.425% of the next $500,000,000, (d) 0.400% of the next $250,000,000 and (e) 0.300% of the Fund’s average daily net assets in excess of $1,250,000,000. The Adviser has a subadvisory agreement with John Hancock Asset Management a division of Manulife Asset Management (US) LLC, an indirectly owned subsidiary of MFC and an affiliate of the Adviser. The Fund is not responsible for payment of the subadvisory fees.
The Adviser has contractually agreed to waive fees and/or reimburse certain expenses for each share class of the Fund. This agreement excluded taxes, portfolio brokerage commissions, interest, litigation and extraordinary expenses not incurred in the ordinary course of the Fund’s business. The fee waivers and/or expense reimbursements were such that these expenses would not exceed 0.94%, 1.64% and 1.64% for Class A, Class B and Class C shares, respectively. The fee waivers and/or expense reimbursements expired on September 30, 2011.
Accordingly, these expense reductions amounted to $3,048, $309 and $1,199 for Class A, Class B and Class C shares, respectively, for the six months ended November 30, 2011.
The investment management fees including the impact of the waivers and reimbursements described above incurred for the six months ended November 30, 2011 were equivalent to an annual effective rate of 0.49% of the Fund’s average daily net assets.
Accounting and legal services. Pursuant to a service agreement, the Fund reimburses the Adviser for all expenses associated with providing the administrative, financial, legal, accounting and recordkeeping services to the Fund, including the preparation of all tax returns, periodic reports to shareholders and regulatory reports, among other services. These expenses are allocated to each share class based on its relative net assets at the time the expense was incurred. These accounting and legal services fees incurred for the six months ended November 30, 2011 amounted to an annual rate of 0.01% of the Fund’s average daily net assets.
Distribution and service plans. The Fund has a distribution agreement with the Distributor. The Fund has adopted distribution and service plans with respect to Class A, Class B and Class C shares pursuant to Rule 12b-1 under the 1940 Act, to pay the Distributor for services provided as the distributor of shares of the Fund. The Fund may pay up to the following contractual rates of distribution and service fees under these arrangements, expressed as an annual percentage of average daily net assets for each class of the Fund’s shares.
CLASS | 12b-1 FEE | |||
Class A | 0.30% | |||
Class B | 1.00% | |||
Class C | 1.00% |
Effective August 1, 2011, the Distributor has contractually agreed to limit the distribution and service fees to 0.15%, 0.90% and 0.90% of the average daily net assets of Class A, Class B and Class C shares, respectively, until at least September 30, 2012.
Accordingly, these fee limitations amounted to $25,929, $706 and $2,663 for Class A, Class B and Class C shares, respectively, for the six months ended November 30, 2011.
Sales charges. Class A shares are assessed up-front sales charges, which resulted in payments to the Distributor amounting to $44,169 for the six months ended November 30, 2011. Of this amount, $501 was retained and used for printing prospectuses, advertising, sales literature and other
Semiannual report | New York Tax-Free Income Fund | 23 |
purposes, $40,335 was paid as sales commissions to broker-dealers and $3,333 was paid as sales commissions to sales personnel of Signator Investors, Inc., a broker-dealer affiliate of the Adviser.
Class B and Class C shares are subject to contingent deferred sales charges (CDSCs). Class B shares that are redeemed within six years of purchase are subject to CDSCs, at declining rates, beginning at 5.00% of the lesser of the current market value at the time of redemption or the original purchase cost of the shares being redeemed. Class C shares that are redeemed within one year of purchase are subject to a 1.00% CDSC on the lesser of the current market value at the time of redemption or the original purchase cost of the shares being redeemed. Proceeds from CDSCs are used to compensate the Distributor for providing distribution-related services in connection with the sale of these shares. During the six months ended November 30, 2011, CDSCs received by the Distributor amounted to $2,442 and $80 for Class B and Class C shares, respectively.
Transfer agent fees. The Fund has a transfer agent agreement with John Hancock Signature Services, Inc. (Signature Services), an affiliate of the Adviser. The transfer agent fees paid to Signature Services are determined based on the cost to Signature Services (Signature Services Cost) of providing recordkeeping services. The Signature Services Cost includes a component of allocated John Hancock corporate overhead for providing transfer agent services to the Fund and to all other John Hancock affiliated funds. It also includes out-of-pocket expenses that are comprised of payments made to third-parties for recordkeeping services provided to their clients who invest in one or more John Hancock funds. In addition, Signature Services Cost may be reduced by certain fees that Signature Services receives in connection with retirement and small accounts. Signature Services Cost is calculated monthly and allocated, as applicable, to four categories of share classes: Institutional Share Classes, Retirement Share Classes, Municipal Bond Classes and all other Retail Share Classes. Within each of these categories, the applicable costs are allocated to the affected John Hancock affiliated funds and/or classes, based on the relative average daily net assets.
Class level expenses. Class level expenses for the six months ended November 30, 2011 were:
DISTRIBUTION AND | TRANSFER | |||
CLASS | SERVICE FEES | AGENT FEES | ||
Class A | $76,959 | $17,239 | ||
Class B | 10,593 | 711 | ||
Class C | 40,018 | 2,687 | ||
Total | $127,570 | $20,637 |
Trustee expenses. The Fund compensates each Trustee who is not an employee of the Adviser or its affiliates. These Trustees may, for tax purposes, elect to defer receipt of this compensation under the John Hancock Group of Funds Deferred Compensation Plan (the Plan). Deferred amounts are invested in various John Hancock funds and remain in the fund until distributed in accordance with the Plan. The investment of deferred amounts and the offsetting liability are included within Other receivables and prepaid expenses and Payable to affiliates — Trustees’ fees, respectively, in the accompanying Statement of assets and liabilities.
24 | New York Tax-Free Income Fund | Semiannual report |
Note 5 — Fund share transactions
Transactions in Fund shares for the six months ended November 30, 2011 and for the year ended May 31, 2011 were as follows:
Six months ended 11-30-11 | Year ended 5-31-11 | |||
Shares | Amount | Shares | Amount | |
Class A shares | ||||
Sold | 298,403 | $3,618,831 | 488,751 | $5,913,088 |
Distributions reinvested | 67,418 | 816,696 | 128,442 | 1,540,904 |
Repurchased | (335,587) | (4,070,018) | (843,143) | (10,094,405) |
Net increase (decrease) | 30,234 | $365,509 | (225,950) | ($2,640,413) |
Class B shares | ||||
Sold | 12,610 | $152,146 | 23,714 | $283,835 |
Distributions reinvested | 1,855 | 22,488 | 4,476 | 53,903 |
Repurchased | (23,535) | (284,393) | (92,142) | (1,107,950) |
Net decrease | (9,070) | ($109,759) | (63,952) | ($770,212) |
Class C shares | ||||
Sold | 44,734 | $542,527 | 162,028 | $1,968,639 |
Distributions reinvested | 7,471 | 90,557 | 13,153 | 157,706 |
Repurchased | (60,287) | (730,179) | (133,702) | (1,582,967) |
Net increase (decrease) | (8,082) | ($97,095) | 41,479 | $543,378 |
Net increase (decrease) | 13,082 | $158,655 | (248,423) | ($2,867,247) |
Note 6 — Purchase and sale of securities
Purchases and sales of securities, other than short-term securities, aggregated $5,602,595 and $4,351,677, respectively, for the six months ended November 30, 2011.
Semiannual report | New York Tax-Free Income Fund | 25 |
Board Consideration of and Continuation of Investment Advisory Agreement and Subadvisory Agreement
The Board of Trustees (the Board, the members of which are referred to as Trustees) of John Hancock New York Tax-Free Income Fund (the Fund), a series of John Hancock Tax-Exempt Series Fund (the Trust), met in-person on May 1–3 and June 5–7, 2011 to consider the approval of the Fund’s investment advisory agreement (the Advisory Agreement) with John Hancock Advisers, LLC (the Adviser), the Fund’s investment adviser. The Board also considered the approval of the investment subadvisory agreement (the Subadvisory Agreement) among the Adviser, Manulife Asset Management (US) LLC (the Subadviser) and the Trust on behalf of the Fund. The Advisory Agreement and the Subadvisory Agreement are referred to as the Agreements.
Activities and composition of the Board
The Board consists of eleven individuals, nine of whom are Independent Trustees. Independent Trustees are generally those individuals who are not employed by or have any significant business or professional relationship with the Adviser or the Subadviser. The Trustees are responsible for the oversight of operations of the Fund and perform various duties required of directors of investment companies by the Investment Company Act of 1940, as amended (the 1940 Act). The Independent Trustees have hired independent legal counsel to assist them in connection with their duties. The Board has appointed an Independent Trustee as Chairperson. The Board has established four standing committees that are composed entirely of Independent Trustees: the Audit Committee; the Compliance Committee; the Nominating, Governance and Administration Committee; and the Contracts/Operations Committee. Additionally, Investment Performance Committee A is a standing committee of the Board that is composed of Independent Trustees and one Trustee who is affiliated with the Adviser. Investment Performance Committee A oversees and monitors matters relating to the investment performance of the Fund. The Board has also designated an Independent Trustee as Vice Chairperson to serve in the absence of the Chairperson. The Board also designates working groups or ad hoc committees as it deems appropriate.
The approval process
Under the 1940 Act, the Board is required to consider the continuation of the Agreements each year. Throughout the year, the Board, acting directly and through its committees, regularly reviews and assesses the quality of the services that the Fund receives under these Agreements. The Board reviews reports of the Adviser at least quarterly, which include Fund performance reports and compliance reports. In addition, the Board meets with portfolio managers and senior investment officers at various times throughout the year. The Board considers at each of its meetings factors that are relevant to its annual consideration of the renewal of the Agreements, including the services and support provided by the Adviser and Subadviser to the Fund and its shareholders.
Prior to the May 1–3, 2011 meeting, the Board requested and received materials specifically relating to the Agreements. The materials provided in connection with the May meeting included information compiled and prepared by Morningstar, Inc. (Morningstar) on Fund fees and expenses, and the investment performance of the Fund. This Fund information is assembled in a format that permits comparison with similar information from a Category and a subset of the Category referred to as the Peer Group, each as determined by Morningstar, and with the Fund’s benchmark index. The Category includes all funds that invest similarly to the way the Fund invests. The Peer Group represents funds of similar size, excluding passively managed funds and funds-of-funds. The Fund’s benchmark index is an unmanaged index of securities that is provided as a basis for comparison with the Fund’s performance. Other material provided for the Fund review included (a) information on the profitability of the Agreements to the Adviser and a discussion of any additional benefits to the Adviser or Subadviser or their affiliates that result from being the Adviser or Subadviser to the Fund; (b) a general analysis provided by the Adviser and the Subadviser concerning investment advisory fees charged to other clients, such as institutional clients and other investment companies, having similar investment mandates, as well as the performance of those other clients and a
26 | New York Tax-Free Income Fund | Semiannual report |
comparison of the services provided to those other clients and the services provided to the Fund; (c) the impact of economies of scale; (d) a summary of aggregate amounts paid by the Fund to the Adviser; and (e) sales and redemption data regarding the Fund’s shares.
At an in-person meeting held on May 1–3, 2011, the Board reviewed materials relevant to its consideration of the Agreements. As a result of the discussions that occurred during the May 1–3, 2011 meeting, the Board asked the Adviser for additional information on certain matters. The Adviser provided the additional information and the Board also considered this information as part of its consideration of the Agreements.
At an in-person meeting held on June 5–7, 2011, the Board, including the Independent Trustees, formally considered the continuation of the Advisory Agreement between the Adviser and the Fund and the Subadvisory Agreement among the Fund, the Adviser and the Subadviser, each for an additional one-year term. The Board considered what it believed were key relevant factors that are described under separate headings presented below.
The Board also considered other matters important to the approval process, such as payments made to and by the Adviser or its affiliates relating to the distribution of Fund shares and other services. The Board reviewed services related to the valuation and pricing of Fund portfolio holdings. Other important matters considered by the Board were the direct and indirect benefits to the Adviser, the Subadviser and their affiliates from their relationship with the Fund and advice from independent legal counsel with respect to the review process and materials submitted for the Board’s review.
Nature, extent and quality of services
The Board reviewed the nature, extent and quality of services provided by the Adviser and the Subadviser, including the investment advisory services and the resulting performance of the Fund.
The Board considered the ability of the Adviser and the Subadviser, based on their resources, reputation and other attributes, to attract and retain qualified investment professionals, including research, advisory and supervisory personnel. It considered the background and experience of senior management and investment professionals responsible for managing the Fund. The Board considered the investment philosophy, research and investment decision-making processes of the Adviser and the Subadviser responsible for the daily investment activities of the Fund, including, among other things, portfolio trading capabilities, use of technology, commitment to compliance and approach to training and retaining portfolio managers and other research, advisory and management personnel.
The Board considered the Subadviser’s history and experience providing investment services to the Fund. The Board considered the Adviser’s execution of its oversight responsibilities. The Board further considered the culture of compliance, resources dedicated to compliance, compliance programs, record of compliance with applicable laws and regulation, with the Fund’s investment policies and restrictions and with the applicable Code of Ethics, and the responsibilities of the Adviser’s and Subadviser’s compliance departments.
In addition to advisory services, the Board considered the quality of the administrative and non-investment advisory services provided to the Fund by the Adviser under a separate agreement. The Board noted that the Adviser and its affiliates provide the Fund with certain administrative, transfer agency, shareholder and other services (in addition to any such services provided to the Fund by third parties) and officers and other personnel as are necessary for the operations of the Fund. The Board reviewed the structure and duties of the Adviser’s administration, accounting, legal and compliance departments and its affiliate’s transfer agency operations and considered the Adviser’s and its affiliate’s policies and procedures for assuring compliance with applicable laws and regulations.
Semiannual report | New York Tax-Free Income Fund | 27 |
The Board also received information about the nature, extent and quality of services provided by and fee rates charged by the Adviser and Subadviser to their other clients, including other registered investment companies, institutional investors and separate accounts. The Board reviewed a general analysis provided by the Adviser and the Subadviser concerning investment advisory fees charged to other clients having similar investment mandates, the services provided to those other clients as compared to the services provided to the Fund, the performance of those other clients as compared to the performance by the Fund and other factors relating to those other clients. The Board considered the significant differences between the Adviser’s and Subadviser’s services to the Fund and the services they provide to other clients. For other clients that are not mutual funds, the differences in services relate to the greater share purchase and redemption activity in a mutual fund, the generally higher turnover of mutual fund portfolio holdings, the more burdensome regulatory and legal obligations of mutual funds and the higher marketing costs for mutual funds. When compared to all clients including mutual funds, the Adviser has greater oversight and supervisory responsibility for the Fund and undertakes greater entrepreneurial risk as the sponsor of the Fund.
Fund performance
The Board was provided with reports, independently prepared by Morningstar, which included a comprehensive analysis of the Fund’s performance. The Board also examined materials provided by the Fund’s portfolio management team discussing Fund performance and the Fund’s investment objective, strategies and outlook. The Board also reviewed a narrative and statistical analysis of the Morningstar data that was prepared by the Adviser, which analyzed various factors that may affect the Morningstar rankings. The Board reviewed information regarding the investment performance of the Fund as compared to its Morningstar Category as well as its benchmark index (see chart below). The Board was provided with a description of the methodology used by Morningstar to select the funds in the Category. The Board also considered updated performance information provided by the Adviser at its May and June 2011 meetings. The Board regularly reviews the performance of the Fund throughout the year and attaches more importance to performance over relatively longer periods of time, typically three to five years.
Set forth below is the performance of the Fund over certain time periods ended December 31, 2010 and that of its Category and benchmark index over the same periods:
1 YEAR | 3 YEAR | 5 YEAR | 10 YEAR | |
New York Tax-Free Income Fund Class A | 1.89% | 3.45% | 3.28% | 4.06% |
Muni NY Long Category Average | 1.95% | 3.06% | 3.21% | 4.18% |
BarCap Municipal TR Index | 2.38% | 4.08% | 4.09% | 4.83% |
The Board noted that the Fund had outperformed its Category’s average performance over certain periods shown and had underperformed its Category’s average performance for other periods shown. The Board noted that, although the Fund had underperformed its benchmark index’s performance over a sustained period, the index was not specifically for New York tax-exempt securities.
Expenses and fees
The Board, including the Independent Trustees, reviewed the Fund’s contractual advisory fee rate payable by the Fund to the Adviser as compared with the other funds in its Peer Group. The Board also received information about the investment subadvisory fee rate payable by the Adviser to the Subadviser for investment subadvisory services. The Board considered the services provided and the fees charged by the Adviser and the Subadviser to other clients with similar investment mandates, including separately managed institutional accounts.
In addition, the Board considered the cost of the services provided to the Fund by the Adviser. The Board received and considered expense information regarding the Fund’s various components, including advisory fees, distribution fees and fees other than advisory and distribution fees, including transfer agent fees, custodian fees, administration fees and other miscellaneous fees
28 | New York Tax-Free Income Fund | Semiannual report |
(e.g., fees for accounting and legal services). The Board considered comparisons of these expenses to the Peer Group median. The Board also considered expense information regarding the Fund’s total operating expense ratio (Gross Expense Ratio) and total operating expense ratio after taking the Adviser’s contractual fee waiver/expense reimbursement agreement into account (Net Expense Ratio). The Board considered information comparing the Gross Expense Ratio and Net Expense Ratio of the Fund to that of the Peer Group median. As part of its analysis, the Board reviewed the Adviser’s methodology in allocating its costs to the management of the Fund and the Fund complex.
The Board noted that the advisory fee ratio was six basis points above the Peer Group median advisory fee ratio. The Board noted the following information about the Fund’s Gross and Net Expense Ratios for Class A shares contained in the Fund’s financial statements in relation with the Fund’s Peer Group median provided by Morningstar in April 2011:
FUND (CLASS A) | PEER GROUP MEDIAN | |
Advisory Fee Ratio | 0.50% | 0.44% |
Gross Expense Ratio | 1.07% | 0.97% |
Net Expense Ratio | 0.97% | 0.82% |
The Board viewed favorably the Adviser’s contractual agreement to waive all or a portion of its advisory fees and to reimburse or pay operating expenses to the extent necessary to maintain the Fund’s expense ratio at 0.94% for Class A shares, excluding certain expenses such as taxes, brokerage commissions, interest, litigation and extraordinary expenses, until September 30, 2011. The Board viewed favorably the new contractual agreement to decrease Rule 12b-1 fees from 0.30% to 0.15% for Class A shares from August 1, 2011 until September 30, 2012. The Board favorably considered the impact of these contractual agreements towards ultimately lowering the Fund’s Gross Expense Ratio. The Board also received and considered information relating to the Fund’s Gross Expense Ratio and Net Expense Ratio that reflected the new methodology for calculating transfer agent fees that was approved by the Trustees at the June 2010 meeting.
The Board received and reviewed statements relating to the Adviser’s financial condition and was also provided with a profitability analysis that detailed the revenues earned and the expenses incurred by the Adviser for services under the Advisory Agreement, as well as from other relationships between the Fund and the Adviser and its affiliates. The Board reviewed the Adviser’s profitability with respect to the Fund and other funds the Board currently oversees for the year ended December 31, 2010 compared to available aggregate profitability data provided for the year ended December 31, 2009. The Board reviewed the Adviser’s profitability with respect to other fund complexes managed by the Adviser and/or its affiliates. The Board reviewed the Adviser’s assumptions and methodology of allocating expenses in the profitability analysis, noting the inherent limitations in allocating costs among various advisory products.
The Board also considered a comparison of the Adviser’s profitability to that of other similar investment advisers whose profitability information is publicly available. The Board recognized that profitability may be affected by numerous factors including, among other things, fee waivers and expense reimbursements by the Adviser, the types of funds managed, expense allocations and business mix, and therefore comparability of profitability is somewhat limited.
The Board considered the profitability information with respect to the Subadviser, which is affiliated with the Adviser. In addition, as noted above, the Board considered the assumptions and methodology for allocating expenses in the Subadviser’s profitability analysis.
Semiannual report | New York Tax-Free Income Fund | 29 |
Economies of scale
The Board, including the Independent Trustees, considered the extent to which economies of scale might be realized as the assets of the Fund increase. Possible changes in the advisory fee rate or structure in order to enable the Fund to participate in these economies of scale (e.g., through the use of breakpoints in the advisory fee at higher asset levels) are periodically discussed. The Board also considered the Adviser’s overall operations and its ongoing investment in its business in order to expand the scale of, and improve the quality of, its operations that benefit the Fund.
The Board recognized the inherent limitations of any analysis of economies of scale, stemming largely from the Board’s understanding that most of the Adviser’s costs are not specific to individual funds, but rather are incurred across a variety of products and services. To ensure that any economies are reasonably shared with the Fund as its assets increase, the Adviser and the Board agreed to continue the existing breakpoints to the contractual advisory fee rate.
Other benefits to the Adviser and the Subadviser
The Board understands that the Adviser, the Subadviser or their affiliates may derive other ancillary benefits from their relationship with the Fund, both tangible and intangible, such as their ability to leverage investment professionals who manage other portfolios, an increase in their profile in the investment advisory community and the engagement of their affiliates and/or significant shareholders as service providers to the Fund, including for administrative, transfer agency and distribution services. The Board believes that certain of these benefits are difficult to quantify. The Board also was informed that the Subadviser may use third-party research obtained by soft dollars generated by certain mutual fund transactions to assist itself in managing all or a number of its other client accounts.
Board determination
The Board unanimously approved the continuation of the Advisory Agreement between the Adviser and the Fund for an additional one-year term. The Subadvisory Agreement among the Fund, the Adviser and the Subadviser was also approved for an additional one-year term. Based upon its evaluation of relevant factors in their totality, the Board was satisfied that the terms of the Agreements, including the advisory and subadvisory fee rates, were fair and reasonable and in the best interest of the Fund and its shareholders. In arriving at its decision to approve the Agreements, the Board did not identify any single factor or any group of factors as all-important or controlling, but considered all factors together. Different Trustees may have attributed different weights to the various factors considered. The Independent Trustees were also assisted by independent legal counsel in making this determination. The Trustees’ conclusions may be based in part on their consideration of these arrangements in prior years and on their ongoing regular review of Fund performance and operations throughout the year.
30 | New York Tax-Free Income Fund | Semiannual report |
More information
Trustees | Investment adviser |
Steven R. Pruchansky, Chairman | John Hancock Advisers, LLC |
James F. Carlin* | |
William H. Cunningham | Subadviser |
Deborah C. Jackson | John Hancock Asset Management a division of |
Charles L. Ladner,* Vice Chairman# | Manulife Asset Management (US) LLC |
Stanley Martin* | |
Hugh McHaffie† | Principal distributor |
Dr. John A. Moore,* Vice Chairman^ | John Hancock Funds, LLC |
Patti McGill Peterson* | |
Gregory A. Russo | Custodian |
John G. Vrysen† | State Street Bank and Trust Company |
Officers | Transfer agent |
Keith F. Hartstein | John Hancock Signature Services, Inc. |
President and Chief Executive Officer | |
Legal counsel | |
Andrew G. Arnott | K&L Gates LLP |
Senior Vice President and Chief Operating Officer | |
Thomas M. Kinzler | |
Secretary and Chief Legal Officer | |
Francis V. Knox, Jr. | |
Chief Compliance Officer | |
Charles A. Rizzo | |
Chief Financial Officer | |
Salvatore Schiavone | |
Treasurer | |
*Member of the Audit Committee | |
†Non-Independent Trustee | |
#Retired, effective 12-31-11 | |
^Effective 1-1-12 |
The Fund’s proxy voting policies and procedures, as well as the Fund’s proxy voting record for the most recent twelve-month period ended June 30, are available free of charge on the Securities and Exchange Commission (SEC) Web site at www.sec.gov or on our Web site.
The Fund’s complete list of portfolio holdings, for the first and third fiscal quarters, is filed with the SEC on Form N-Q. The Fund’s Form N-Q is available on our Web site and the SEC’s Web site, www.sec.gov, and can be reviewed and copied (for a fee) at the SEC’s Public Reference Room in Washington, DC. Call 1-800-SEC-0330 to receive information on the operation of the SEC’s Public Reference Room.
We make this information on your fund, as well as monthly portfolio holdings, and other fund details available on our Web site at www.jhfunds.com or by calling 1-800-225-5291.
You can also contact us: | ||
1-800-225-5291 | Regular mail: | Express mail: |
jhfunds.com | John Hancock Signature Services, Inc. | John Hancock Signature Services, Inc. |
P.O. Box 55913 | Mutual Fund Image Operations | |
Boston, MA 02205-5913 | 30 Dan Road | |
Canton, MA 02021 |
Semiannual report | New York Tax-Free Income Fund | 31 |
1-800-225-5291
1-800-554-6713 TDD
1-800-338-8080 EASI-Line
www.jhfunds.com
Now available: electronic delivery
www.jhfunds.com/edelivery
This report is for the information of the shareholders of John Hancock New York Tax-Free Income Fund. | 760SA 11/11 |
It is not authorized for distribution to prospective investors unless preceded or accompanied by a prospectus. | 1/12 |
A look at performance
Total returns for the period ended November 30, 2011
SEC 30-day | |||||||||||||
Average annual total returns (%) | Cumulative total returns (%) | SEC 30-day | yield (%) | ||||||||||
with maximum sales charge | with maximum sales charge | yield (%) | unsubsidized1 | ||||||||||
as of | as of | ||||||||||||
1-year | 5-year | 10-year | 6-months | 1-year | 5-year | 10-year | 11-30-11 | 11-30-11 | |||||
Class A | 1.96 | 3.07 | 4.17 | 0.24 | 1.96 | 16.31 | 50.52 | 2.98 | 2.83 | ||||
Class B | 1.10 | 2.94 | 4.07 | –0.38 | 1.10 | 15.61 | 49.09 | 2.37 | 2.27 | ||||
Class C | 5.01 | 3.29 | 3.93 | 3.62 | 5.01 | 17.59 | 47.00 | 2.37 | 2.27 | ||||
Performance figures assume all distributions are reinvested. Figures reflect maximum sales charges on Class A shares of 4.5% and the applicable contingent deferred sales charge (CDSC) on Class B shares and Class C shares. The returns for Class C shares have been adjusted to reflect the elimination of the front-end sales charge effective 7-15-04. The Class B shares’ CDSC declines annually between years 1 to 6 according to the following schedule: 5, 4, 3, 3, 2, 1%. No sales charge will be assessed after the sixth year. Class C shares held for less than one year are subject to a 1% CDSC.
The expense ratios of the Fund, both net (including any fee waivers or expense limitations) and gross (excluding any fee waivers or expense limitations), are set forth according to the most recent publicly available prospectus for the Fund and may differ from those disclosed in the Financial highlights tables in this report. The fee waivers and expense limitations are contractual at least until 9-30-12 for Class A, Class B and Class C shares. Had the fee waivers and expense limitations not been in place gross expenses would apply. The expense ratios are as follows:
Class A | Class B | Class C | |||||
Net (%) | 0.85 | 1.60 | 1.60 | ||||
Gross (%) | 1.00 | 1.70 | 1.70 |
The returns reflect past results and should not be considered indicative of future performance. The return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Due to market volatility, the Fund’s current performance may be higher or lower than the performance shown. For current to the most recent month end performance data, please call 1–800–225–5291 or visit the Fund’s Web site at www.jhfunds.com.
The performance table above and the chart on the next page do not reflect the deduction of taxes that a shareholder may pay on fund distributions or on the redemption of fund shares. Please note that a portion of the Fund’s income may be subject to taxes, and some investors may be subject to the Alternative Minimum Tax (AMT). Also note that capital gains are taxable. The Fund’s performance results reflect any applicable fee waivers or expense reductions, without which the expenses would increase and results would have been less favorable.
6 | Massachusetts Tax-Free Income Fund | Semiannual report |
Without | With maximum | |||
Start date | sales charge | sales charge | Index | |
Class B2 | 11-30-01 | $14,909 | $14,909 | $16,411 |
Class C2 | 11-30-01 | 14,700 | 14,700 | 16,411 |
Performance of the classes will vary based on the difference in sales charges paid by shareholders investing in the different classes and the fee structure of those classes.
The Class C shares investment with maximum sales charge has been adjusted to reflect the elimination of the front-end sales charge effective 7-15-04.
Barclays Capital Municipal Bond Index is an unmanaged index representative of the tax-exempt bond market.
It is not possible to invest directly in an index. Index figures do not reflect sales charges or direct expenses, which would have resulted in lower values if they did.
1 Unsubsidized yield reflects what the yield would have been without the effect of reimbursements and waivers.
2 No contingent deferred sales charge is applicable.
Semiannual report | Massachusetts Tax-Free Income Fund | 7 |
Your expenses
These examples are intended to help you understand your ongoing operating expenses.
Understanding fund expenses
As a shareholder of the Fund, you incur two types of costs:
▪ Transaction costs which include sales charges (loads) on purchases or redemptions (varies by share class), minimum account fee charge, etc.
▪ Ongoing operating expenses including management fees, distribution and service fees (if applicable), and other fund expenses.
We are going to present only your ongoing operating expenses here.
Actual expenses/actual returns
This example is intended to provide information about the Fund’s actual ongoing operating expenses, and is based on the Fund’s actual return. It assumes an account value of $1,000.00 on June 1, 2011 with the same investment held until November 30, 2011.
Account value | Ending value | Expenses paid during | |
on 6-1-11 | on 11-30-11 | period ended 11-30-111 | |
Class A | $1,000.00 | $1,050.00 | $4.56 |
Class B | 1,000.00 | 1,046.20 | 8.29 |
Class C | 1,000.00 | 1,046.20 | 8.29 |
Together with the value of your account, you may use this information to estimate the operating expenses that you paid over the period. Simply divide your account value at November 30, 2011, by $1,000.00, then multiply it by the “expenses paid” for your share class from the table above. For example, for an account value of $8,600.00, the operating expenses should be calculated as follows:
8 | Massachusetts Tax-Free Income Fund | Semiannual report |
Hypothetical example for comparison purposes
This table allows you to compare the Fund’s ongoing operating expenses with those of any other fund. It provides an example of the Fund’s hypothetical account values and hypothetical expenses based on each class’s actual expense ratio and an assumed 5% annualized return before expenses (which is not the Fund’s actual return). It assumes an account value of $1,000.00 on June 1, 2011, with the same investment held until November 30, 2011. Look in any other fund shareholder report to find its hypothetical example and you will be able to compare these expenses.
Account value | Ending value | Expenses paid during | |
on 6-1-11 | on 11-30-11 | period ended 11-30-111 | |
Class A | $1,000.00 | $1,020.60 | $4.50 |
Class B | 1,000.00 | 1,016.90 | 8.17 |
Class C | 1,000.00 | 1,016.90 | 8.17 |
Remember, these examples do not include any transaction costs, therefore, these examples will not help you to determine the relative total costs of owning different funds. If transaction costs were included, your expenses would have been higher. See the prospectus for details regarding transaction costs.
1 Expenses are equal to the Fund’s annualized expense ratio of 0.89%, 1.62% and 1.62% for Class A, Class B and Class C shares, respectively, multiplied by the average account value over the period, multiplied by 183/366 (to reflect the one-half year period).
Semiannual report | Massachusetts Tax-Free Income Fund | 9 |
Portfolio summary
Top 10 Holdings (24.7% of Net Assets on 11-30-11)1,2 | |
Holyoke Gas & Electric Department, 5.000%, 12-1-31 | 2.9% |
Boston Housing Authority, 5.000%, 4-1-27 | 2.9% |
Massachusetts State Department of Transportation, 5.000%, 1-1-37 | 2.7% |
Massachusetts Water Resources Authority, 5.250%, 8-1-29 | 2.6% |
Massachusetts Bay Transportation Authority, 5.250%, 7-1-33 | 2.6% |
Massachusetts Industrial Finance Agency, 6.750%, 12-1-20 | 2.4% |
Puerto Rico Sales Tax Financing Authority, Zero Coupon, 8-1-32 | 2.3% |
Commonwealth of Massachusetts, 5.500%, 12-1-24 | 2.2% |
Puerto Rico Highway & Transportation Authority, 5.500%, 7-1-19 | 2.1% |
Massachusetts Development Finance Agency, 5.000%, 12-15-24 | 2.0% |
Sector Composition1,3 | ||||
General Obligation Bonds | 7.1% | Housing | 9.1% | |
Revenue Bonds | Pollution | 3.8% | ||
Water & Sewer | 14.8% | Utilities | 2.9% | |
Other Revenue | 14.6% | Facilities | 1.7% | |
Education | 14.1% | Development | 0.9% | |
Transportation | 14.0% | Industrial Development | 0.1% | |
Health Care | 12.9% | Short-Term Investments & Other | 4.0% | |
Quality Distribution1,4 | ||||
AAA | 10.7% | |||
AA | 36.6% | |||
A | 20.2% | |||
BBB | 21.1% | |||
Not Rated | 7.4% | |||
Short-Term Investments & Other | 4.0% | |||
1 As a percentage of net assets on 11-30-11.
2 Cash and cash equivalents not included.
3 Investments focused on one sector may fluctuate more widely than investments across multiple sectors. Because the Fund may focus on particular sectors, its performance may depend on the performance of those sectors.
4 Ratings are from Moody’s Investors Service, Inc. If not available, we have used Standard & Poor’s Corporation ratings. In the absence of ratings from these agencies, we have used Fitch, Inc. ratings. “Not Rated” securities are those with no ratings available from these agencies. All ratings are as of 11-30-11 and do not reflect subsequent downgrades or upgrades, if any.
10 | Massachusetts Tax-Free Income Fund | Semiannual report |
Fund’s investments
As of 11-30-11 (unaudited)
Maturity | |||||
Rate (%) | date | Par value | Value | ||
Municipal Bonds 95.98% | $111,535,371 | ||||
(Cost $107,153,189) | |||||
Massachusetts 81.79% | 95,042,071 | ||||
Boston Housing Authority | |||||
Capital Program Revenue (D) | 5.000 | 04-01-27 | $3,255,000 | 3,358,148 | |
Boston Housing Authority | |||||
Capital Program Revenue (D) | 5.000 | 04-01-28 | 2,000,000 | 2,048,940 | |
Boston Industrial Development | |||||
Financing Authority | |||||
Harbor Electric Energy Company Project AMT | 7.375 | 05-15-15 | 110,000 | 110,484 | |
Boston Water & Sewer Commission | |||||
Sewer Revenue, Series A | 5.750 | 11-01-13 | 190,000 | 201,655 | |
Commonwealth of Massachusetts | |||||
Public Improvements (D) | 5.500 | 11-01-17 | 1,000,000 | 1,224,350 | |
Commonwealth of Massachusetts | |||||
Public Improvements, Series C | 5.500 | 11-01-15 | 1,000,000 | 1,168,580 | |
Commonwealth of Massachusetts | |||||
Series C (D) | 5.500 | 12-01-24 | 2,000,000 | 2,535,560 | |
Commonwealth of Massachusetts, Series E (D) | 5.000 | 11-01-25 | 1,000,000 | 1,195,290 | |
Freetown Lakeville Regional School District (D) | 5.000 | 07-01-23 | 1,000,000 | 1,046,170 | |
Holyoke Gas & Electric Department | |||||
Natural Gas Revenue, Series A (D) | 5.000 | 12-01-31 | 3,410,000 | 3,411,296 | |
Massachusetts Bay Transportation Authority | |||||
Sales Tax Revenue, Series A | 5.000 | 07-01-31 | 2,000,000 | 2,308,260 | |
Massachusetts Bay Transportation Authority | |||||
Sales Tax Revenue, Series A | 5.250 | 07-01-35 | 1,310,000 | 1,558,468 | |
Massachusetts Bay Transportation Authority | |||||
Sales Tax Revenue, Series A–2 (Z) | Zero | 07-01-26 | 2,500,000 | 1,305,425 | |
Massachusetts Bay Transportation Authority | |||||
Transit Revenue, Series A | 7.000 | 03-01-14 | 1,000,000 | 1,082,570 | |
Massachusetts Bay Transportation Authority | |||||
Transit Revenue, Series B | 5.250 | 07-01-33 | 2,500,000 | 2,977,125 | |
Massachusetts Development Finance Agency | |||||
Brandeis University, Series 0-1 | 5.000 | 10-01-40 | 1,000,000 | 1,012,870 | |
Massachusetts Development Finance Agency | |||||
Carleton Willard Village | 5.625 | 12-01-30 | 450,000 | 457,385 | |
Massachusetts Development Finance Agency | |||||
Combined Jewish Philanthropies, Series A | 5.250 | 02-01-22 | 1,805,000 | 1,836,064 | |
Massachusetts Development Finance Agency | |||||
Curry College, Series A (D) | 4.500 | 03-01-25 | 1,000,000 | 933,490 |
See notes to financial statements | Semiannual report | Massachusetts Tax-Free Income Fund | 11 |
Maturity | |||||
Rate (%) | date | Par value | Value | ||
Massachusetts (continued) | |||||
Massachusetts Development Finance Agency | |||||
Curry College, Series A (D) | 5.250 | 03-01-26 | $1,000,000 | $1,004,450 | |
Massachusetts Development Finance Agency | |||||
Dominion Energy Brayton Point AMT (P) | 5.000 | 02-01-36 | 2,000,000 | 1,964,080 | |
Massachusetts Development Finance Agency | |||||
Draper Laboratory | 5.875 | 09-01-30 | 2,000,000 | 2,180,320 | |
Massachusetts Development Finance Agency | |||||
Emerson College, Series A | 5.000 | 01-01-40 | 2,000,000 | 1,912,740 | |
Massachusetts Development Finance Agency | |||||
Harvard University Series B | 5.000 | 10-15-40 | 1,190,000 | 1,306,073 | |
Massachusetts Development Finance Agency | |||||
Linden Ponds, Inc., Series A–1 | 5.500 | 11-15-46 | 56,460 | 34,014 | |
Massachusetts Development Finance Agency | |||||
Linden Ponds, Inc., Series A–1 | 6.250 | 11-15-39 | 1,057,748 | 762,890 | |
Massachusetts Development Finance Agency | |||||
Linden Ponds, Inc., Series B (Z) | Zero | 11-15-56 | 280,825 | 1,354 | |
Massachusetts Development Finance Agency | |||||
Massachusetts College of Pharmacy, | |||||
Series E (D) | 5.000 | 07-01-37 | 1,000,000 | 1,016,020 | |
Massachusetts Development Finance Agency | |||||
New England Conservatory of Music | 5.250 | 07-01-38 | 2,000,000 | 1,982,920 | |
Massachusetts Development Finance Agency | |||||
Ogden Haverhill Project, Series B AMT | 5.500 | 12-01-19 | 1,500,000 | 1,501,200 | |
Massachusetts Development Finance Agency | |||||
Orchard Cove | 5.250 | 10-01-26 | 1,000,000 | 853,980 | |
Massachusetts Development Finance Agency | |||||
Plantation Apartments, Series A AMT | 5.000 | 12-15-24 | 2,320,000 | 2,346,007 | |
Massachusetts Development Finance Agency | |||||
The Groves in Lincoln, Series A | 7.750 | 06-01-39 | 700,000 | 701,372 | |
Massachusetts Development Finance Agency, | |||||
Southeastern Massachusetts System, | |||||
Series A (D) | 5.625 | 01-01-16 | 500,000 | 506,015 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Civic Investments, Prerefunded to 12-15-12, | |||||
Series B | 9.200 | 12-15-31 | 2,000,000 | 2,218,600 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Emerson Hospital, Series E (D) | 5.000 | 08-15-35 | 1,000,000 | 806,420 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Harvard Pilgrim Health Care, Series A (D) | 5.000 | 07-01-18 | 1,000,000 | 1,001,870 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Lahey Clinic Medical Center, Series C (D) | 5.000 | 08-15-23 | 1,000,000 | 1,030,710 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Mass Eye & Ear Infirmary | 5.375 | 07-01-35 | 2,000,000 | 1,961,900 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Partners HealthCare System | 5.000 | 07-01-22 | 1,000,000 | 1,111,470 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Partners HealthCare, Series C | 5.750 | 07-01-32 | 30,000 | 30,225 |
12 | Massachusetts Tax-Free Income Fund | Semiannual report | See notes to financial statements |
Maturity | |||||
�� | Rate (%) | date | Par value | Value | |
Massachusetts (continued) | |||||
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Partners HealthCare, Series J1 | 5.000 | 07-01-34 | $1,000,000 | $1,029,200 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
South Shore Hospital | 5.750 | 07-01-29 | 365,000 | 365,088 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Springfield College | 5.625 | 10-15-40 | 2,000,000 | 1,942,900 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Sterling & Francine Clark, Series A | 5.000 | 07-01-36 | 1,000,000 | 1,021,720 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Suffolk University, Series A | 6.250 | 07-01-30 | 1,000,000 | 1,073,490 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Tufts University | 5.375 | 08-15-38 | 350,000 | 381,203 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Williams College, Series H | 5.000 | 07-01-33 | 1,500,000 | 1,520,700 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Woods Hole Oceanographic, Series B | 5.375 | 06-01-30 | 1,000,000 | 1,079,240 | |
Massachusetts Housing Finance Agency, | |||||
Series A AMT (D) | 5.800 | 07-01-30 | 45,000 | 45,088 | |
Massachusetts Housing Finance Agency, | |||||
Series B | 4.700 | 12-01-16 | 1,050,000 | 1,073,447 | |
Massachusetts Industrial Finance Agency | |||||
Aquarion Water Company AMT | 6.750 | 12-01-20 | 2,780,000 | 2,782,335 | |
Massachusetts Industrial Finance Agency | |||||
Aquarion Water Company AMT | 6.900 | 12-01-29 | 1,210,000 | 1,210,339 | |
Massachusetts Industrial Finance Agency | |||||
Ogden Haverhill Project, Series A AMT | 5.600 | 12-01-19 | 500,000 | 501,570 | |
Massachusetts Port Authority | |||||
Boston Fuel Project AMT (D) | 5.000 | 07-01-32 | 1,770,000 | 1,749,751 | |
Massachusetts Port Authority | |||||
Conrac Project — Series A | 5.125 | 07-01-41 | 500,000 | 513,120 | |
Massachusetts Port Authority | |||||
US Airways Project, Series A AMT (D) | 5.750 | 09-01-16 | 1,000,000 | 954,140 | |
Massachusetts School Building Authority | |||||
Senior, Series B | 5.000 | 10-15-41 | 1,000,000 | 1,059,100 | |
Massachusetts State College Building Authority | |||||
College & University Revenue, Series A | 5.500 | 05-01-49 | 1,000,000 | 1,050,730 | |
Massachusetts State College Building Authority | |||||
College & University Revenue, Series B (D)(Z) | Zero | 05-01-19 | 1,000,000 | 799,840 | |
Massachusetts State Department | |||||
of Transportation | |||||
Highway Revenue Tolls, Series B | 5.000 | 01-01-37 | 3,000,000 | 3,100,620 | |
Massachusetts State Turnpike Authority | |||||
Highway Revenue Tolls, Escrowed to | |||||
Maturity, Series A (D) | 5.125 | 01-01-23 | 445,000 | 538,535 | |
Massachusetts State Turnpike Authority | |||||
Highway Revenue Tolls, Series C (D)(Z) | Zero | 01-01-20 | 1,000,000 | 748,190 |
See notes to financial statements | Semiannual report | Massachusetts Tax-Free Income Fund | 13 |
Maturity | |||||
Rate (%) | date | Par value | Value | ||
Massachusetts (continued) | |||||
Massachusetts Water Pollution | |||||
Abatement Trust | |||||
Government Fund/Grant Revenue | 5.000 | 08-01-28 | $1,000,000 | $1,130,220 | |
Massachusetts Water Pollution | |||||
Abatement Trust | |||||
Series 7 | 5.125 | 02-01-31 | 1,775,000 | 1,780,307 | |
Massachusetts Water Pollution | |||||
Abatement Trust | |||||
Series 9 | 5.250 | 08-01-18 | 60,000 | 68,757 | |
Massachusetts Water Pollution | |||||
Abatement Trust | |||||
Water Revenue, Series 13 | 5.000 | 08-01-28 | 1,000,000 | 1,090,980 | |
Massachusetts Water Pollution | |||||
Abatement Trust | |||||
Water Revenue, Series 14 | 5.000 | 08-01-32 | 1,000,000 | 1,090,250 | |
Massachusetts Water Resources Authority | |||||
Water Revenue, Series A | 5.000 | 08-01-40 | 1,600,000 | 1,696,896 | |
Massachusetts Water Resources Authority | |||||
Water Revenue, Series B | 5.000 | 08-01-39 | 1,000,000 | 1,055,290 | |
Massachusetts Water Resources Authority | |||||
Water Revenue, Series B | 5.250 | 08-01-29 | 2,500,000 | 2,988,375 | |
Metropolitan Boston Transit Parking Corp. | 5.000 | 07-01-41 | 2,000,000 | 2,028,820 | |
University of Massachusetts Building Authority | |||||
College & University Revenue, Series 1 | 5.000 | 05-01-39 | 1,500,000 | 1,565,070 | |
Puerto Rico 12.44% | 14,455,970 | ||||
Commonwealth of Puerto Rico | |||||
Public Improvement – Series A | 5.750 | 07-01-41 | 1,000,000 | 1,027,380 | |
Puerto Rico Aqueduct & Sewer Authority | |||||
Water Revenue, Series A | 6.125 | 07-01-24 | 1,750,000 | 1,931,580 | |
Puerto Rico Highway & | |||||
Transportation Authority | |||||
Fuel Sales Tax Revenue, Escrowed to | |||||
Maturity, Series Y | 6.250 | 07-01-14 | 955,000 | 1,092,988 | |
Puerto Rico Highway & | |||||
Transportation Authority | |||||
Fuel Sales Tax Revenue, Series Y | 6.250 | 07-01-14 | 45,000 | 49,516 | |
Puerto Rico Highway & Transportation | |||||
Authority (D) | |||||
Prerefunded, Series H | 5.450 | 07-01-35 | 1,000,000 | 1,024,160 | |
Puerto Rico Highway & Transportation | |||||
Authority (D) | |||||
Unrefunded, Series H | 5.500 | 07-01-19 | 2,000,000 | 2,469,266 | |
Puerto Rico Housing Finance Authority | 5.125 | 12-01-27 | 1,000,000 | 1,042,060 | |
Puerto Rico Sales Tax Financing Corp. | |||||
Sales Tax Revenue, Series A | 5.500 | 08-01-42 | 1,000,000 | 1,041,970 | |
Puerto Rico Sales Tax Financing Corp. | |||||
Sales Tax Revenue, Series A (Zero coupon | |||||
steps up to 6.750% on 8-1-16) (Z) | Zero | 08-01-32 | 3,000,000 | 2,713,590 | |
Puerto Rico Sales Tax Financing Corp., Series C | 5.375 | 08-01-38 | 2,000,000 | 2,063,460 | |
Virgin Islands 1.32% | 1,530,295 | ||||
Virgin Islands Public Finance Authority, Series A | 6.750 | 10-01-37 | 1,000,000 | 1,069,750 | |
Virgin Islands Public Finance Authority, | |||||
Series A–1 | 5.000 | 10-01-39 | 500,000 | 460,545 |
14 | Massachusetts Tax-Free Income Fund | Semiannual report | See notes to financial statements |
Maturity | |||||
Rate (%) | date | Par value | Value | ||
Guam 0.43% | $507,035 | ||||
Guam Government, Series A | 5.750 | 12-01-34 | $500,000 | 507,035 | |
Shares | Value | ||||
Short-Term Investments 1.19% | $1,380,000 | ||||
(Cost $1,380,000) | |||||
Repurchase Agreement 1.19% | 1,380,000 | ||||
Repurchase Agreement with State Street Corp. dated 11-30-11 at | |||||
0.010% to be repurchased at $1,380,000 on 12-1-11, collateralized | |||||
by $1,410,000 Federal Home Loan Mortgage Corp., 0.500% due | |||||
8-23-13 (valued at $1,411,763, including interest) | 1,380,000 | 1,380,000 | |||
Total investments (Cost $108,533,189)† 97.17% | $112,915,371 | ||||
Other assets and liabilities, net 2.83% | $3,291,529 | ||||
Total net assets 100.00% | $116,206,900 | ||||
The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund.
AMT Interest earned from these securities may be considered a tax preference item for purpose of the Federal Alternative Minimum Tax.
(D) Bond is insured by one of the following companies:
Insurance coverage | As a % of total investments | ||
ACA Financial Guaranty Corp. | 1.72% | ||
Ambac Financial Group, Inc. | 3.34% | ||
Assured Guarantee Corp. | 0.90% | ||
Assured Guaranty Municipal Corp. | 9.41% | ||
Financial Guaranty Insurance Company | 0.48% | ||
National Public Finance Guarantee Insurance Company | 10.55% | ||
Radian Asset Assurance, Inc. | 0.71% | ||
XL Capital Assurance, Inc. | 0.71% |
(P) Variable rate obligation. The coupon rate shown represents the rate at period end.
(Z) Zero coupon bonds are issued at a discount from their principal amount in lieu of paying interest periodically.
† At 11-30-11, the aggregate cost of investment securities for federal income tax purposes was $108,226,997. Net unrealized appreciation aggregated $4,688,374, of which $5,998,883 related to appreciated investment securities and $1,310,509 related to depreciated investment securities.
The Fund had the following sector composition as a percentage of total net assets on 11-30-11:
General Obligation Bonds | 7.1% | ||||
Revenue Bonds | |||||
Water & Sewer | 14.8% | ||||
Other Revenue | 14.6% | ||||
Education | 14.1% | ||||
Transportation | 14.0% | ||||
Health Care | 12.9% | ||||
Housing | 9.1% | ||||
Pollution | 3.8% | ||||
Utilities | 2.9% | ||||
Facilities | 1.7% | ||||
Development | 0.9% | ||||
Industrial Development | 0.1% | ||||
Short-Term Investments & Other | 4.0% |
See notes to financial statements | Semiannual report | Massachusetts Tax-Free Income Fund | 15 |
F I N A N C I A L S T A T E M E N T S
Financial statements
Statement of assets and liabilities 11-30-11 (unaudited)
This Statement of assets and liabilities is the Fund’s balance sheet. It shows the value of what the Fund owns, is due and owes. You’ll also find the net asset value and the maximum offering price per share.
Assets | |
Investments, at value (Cost $108,533,189) | $112,915,371 |
Cash | 1,679,177 |
Receivable for fund shares sold | 137,818 |
Interest receivable | 1,925,646 |
Other receivables and prepaid expenses | 16,181 |
Total assets | 116,674,193 |
Liabilities | |
Payable for fund shares repurchased | 299,507 |
Distributions payable | 99,473 |
Payable to affiliates | |
Accounting and legal services fees | 2,032 |
Transfer agent fees | 6,516 |
Distribution and service fees | 12,726 |
Trustees’ fees | 5,332 |
Other liabilities and accrued expenses | 41,707 |
Total liabilities | 467,293 |
Net assets | |
Paid-in capital | $111,341,275 |
Undistributed net investment income | 77,694 |
Accumulated net realized gain (loss) on investments | 405,749 |
Net unrealized appreciation (depreciation) on investments | 4,382,182 |
Net assets | $116,206,900 |
Net asset value per share | |
Based on net asset values and shares outstanding — the Fund has an | |
unlimited number of shares authorized with no par value | |
Class A ($95,493,434 ÷ 7,591,134 shares) | $12.58 |
Class B ($3,313,662 ÷ 263,455 shares)1 | $12.58 |
Class C ($17,399,804 ÷ 1,383,205 shares)1 | $12.58 |
Maximum offering price per share | |
Class A (net asset value per share ÷ 95.5%)2 | $13.17 |
1 Redemption price is equal to net asset value less any applicable contingent deferred sales charge.
2 On single retail sales of less than $100,000. On sales of $100,000 or more and on group sales the offering price is reduced.
16 | Massachusetts Tax-Free Income Fund | Semiannual report | See notes to financial statements |
F I N A N C I A L S T A T E M E N T S
Statement of operations For the six-month period ended 11-30-11
(unaudited)
This Statement of operations summarizes the Fund’s investment income earned and expenses incurred in operating the Fund. It also shows net gains (losses) for the period stated.
Investment income | |
Interest | $2,793,367 |
Expenses | |
Investment management fees (Note 4) | 286,852 |
Distribution and service fees (Note 4) | 243,323 |
Accounting and legal services fees (Note 4) | 7,647 |
Transfer agent fees (Note 4) | 38,537 |
Trustees’ fees (Note 4) | 4,409 |
State registration fees | 7,944 |
Printing and postage | 3,904 |
Professional fees | 22,741 |
Custodian fees | 9,212 |
Registration and filing fees | 9,431 |
Other | 5,903 |
Total expenses | 639,903 |
Less expense reductions (Note 4) | (54,394) |
Net expenses | 585,509 |
Net investment income | 2,207,858 |
Realized and unrealized gain (loss) | |
Net realized gain on investments | 30,184 |
Change in net unrealized appreciation (depreciation) of investments | 3,253,407 |
Net realized and unrealized gain | 3,283,591 |
Increase in net assets from operations | $5,491,449 |
See notes to financial statements | Semiannual report | Massachusetts Tax-Free Income Fund | 17 |
F I N A N C I A L S T A T E M E N T S
Statements of changes in net assets
These Statements of changes in net assets show how the value of the Fund’s net assets has changed during the last two periods. The difference reflects earnings less expenses, any investment gains and losses, distributions, if any, paid to shareholders and the net of Fund share transactions.
Six months | ||
ended | Year | |
11-30-11 | ended | |
(Unaudited) | 5-31-11 | |
Increase (decrease) in net assets | ||
From operations | ||
Net investment income | $2,207,858 | $4,837,630 |
Net realized gain | 30,184 | 494,247 |
Change in net unrealized appreciation (depreciation) | 3,253,407 | (4,078,824) |
Increase in net assets resulting from operations | 5,491,449 | 1,253,053 |
Distributions to shareholders | ||
From net investment income | ||
Class A | (1,867,565) | (4,035,324) |
Class B | (53,313) | (145,125) |
Class C | (274,628) | (631,053) |
From net realized gain | ||
Class A | — | (132,947) |
Class B | — | (5,601) |
Class C | — | (26,227) |
Total distributions | (2,195,506) | (4,976,277) |
From Fund share transactions (Note 5) | (178,435) | (12,583,533) |
Total increase (decrease) | 3,117,508 | (16,306,757) |
Net assets | ||
Beginning of period | 113,089,392 | 129,396,149 |
End of period | $116,206,900 | $113,089,392 |
Undistributed net investment income | $77,694 | $65,342 |
18 | Massachusetts Tax-Free Income Fund | Semiannual report | See notes to financial statements |
Financial highlights
The Financial highlights show how the Fund’s net asset value for a share has changed since the end of the previous period.
CLASS A SHARES Period ended | 11-30-111 | 5-31-11 | 5-31-10 | 5-31-092 | 8-31-08 | 8-31-07 | 8-31-06 |
Per share operating performance | |||||||
Net asset value, beginning | |||||||
of period | $12.22 | $12.53 | $12.10 | $12.28 | $12.37 | $12.64 | $12.87 |
Net investment income3 | 0.25 | 0.50 | 0.49 | 0.38 | 0.51 | 0.53 | 0.53 |
Net realized and unrealized gain | |||||||
(loss) on investments | 0.36 | (0.30) | 0.46 | (0.17) | (0.08) | (0.27) | (0.24) |
Total from investment operations | 0.61 | 0.20 | 0.95 | 0.21 | 0.43 | 0.26 | 0.29 |
Less distributions | |||||||
From net investment income | (0.25) | (0.49) | (0.49) | (0.39) | (0.50) | (0.52) | (0.52) |
From net realized gain | — | (0.02) | (0.03) | —4 | (0.02) | (0.01) | —4 |
Total distributions | (0.25) | (0.51) | (0.52) | (0.39) | (0.52) | (0.53) | (0.52) |
Net asset value, end of period | $12.58 | $12.22 | $12.53 | $12.10 | $12.28 | $12.37 | $12.64 |
Total return (%)5 | 5.006,7 | 1.677 | 8.047 | 1.846 | 3.557 | 2.027 | 2.387 |
Ratios and supplemental data | |||||||
Net assets, end of period | |||||||
(in millions) | $95 | $92 | $105 | $95 | $97 | $80 | $78 |
Ratios (as a percentage of average | |||||||
net assets): | |||||||
Expenses before reductions | 0.998 | 1.00 | 1.00 | 1.098,9 | 0.98 | 0.98 | 0.99 |
Expenses net of fee waivers | 0.898 | 0.95 | 1.00 | 1.098,9 | 0.98 | 0.98 | 0.99 |
Expenses net of fee waivers | |||||||
and credits | 0.898 | 0.95 | 1.00 | 1.098,9 | 0.97 | 0.98 | 0.99 |
Net investment income | 3.988 | 4.04 | 4.00 | 4.398 | 4.08 | 4.16 | 4.19 |
Portfolio turnover (%) | 8 | 17 | 10 | 17 | 22 | 25 | 15 |
1 Semiannual period from 6-1-11 to 11-30-11. Unaudited.
2 For the nine-month period ended 5-31-09. The Fund changed its fiscal year end from August 31 to May 31.
3 Based on the average daily shares outstanding.
4 Less than $0.005 per share.
5 Does not reflect the effect of sales charges, if any.
6 Not annualized.
7 Total returns would have been lower had certain expenses not been reduced during the periods shown.
8 Annualized.
9 Includes the impact of proxy expenses, which amounted to 0.04% of average net assets.
See notes to financial statements | Semiannual report | Massachusetts Tax-Free Income Fund | 19 |
CLASS B SHARES Period ended | 11-30-111 | 5-31-11 | 5-31-10 | 5-31-092 | 8-31-08 | 8-31-07 | 8-31-06 |
Per share operating performance | |||||||
Net asset value, beginning | |||||||
of period | $12.22 | $12.53 | $12.09 | $12.28 | $12.37 | $12.64 | $12.87 |
Net investment income3 | 0.20 | 0.41 | 0.41 | 0.32 | 0.42 | 0.44 | 0.44 |
Net realized and unrealized gain | |||||||
(loss) on investments | 0.36 | (0.29) | 0.46 | (0.19) | (0.08) | (0.27) | (0.24) |
Total from investment operations | 0.56 | 0.12 | 0.87 | 0.13 | 0.34 | 0.17 | 0.20 |
Less distributions | |||||||
From net investment income | (0.20) | (0.41) | (0.40) | (0.32) | (0.41) | (0.43) | (0.43) |
From net realized gain | — | (0.02) | (0.03) | —4 | (0.02) | (0.01) | —4 |
Total distributions | (0.20) | (0.43) | (0.43) | (0.32) | (0.43) | (0.44) | (0.43) |
Net asset value, end of period | $12.58 | $12.22 | $12.53 | $12.09 | $12.28 | $12.37 | $12.64 |
Total return (%)5 | 4.626,7 | 0.967 | 7.377 | 1.226 | 2.837 | 1.317 | 1.677 |
Ratios and supplemental data | |||||||
Net assets, end of period | |||||||
(in millions) | $3 | $3 | $5 | $7 | $10 | $12 | $17 |
Ratios (as a percentage of average | |||||||
net assets): | |||||||
Expenses before reductions | 1.698 | 1.70 | 1.70 | 1.798,9 | 1.68 | 1.68 | 1.69 |
Expenses net of fee waivers | 1.628 | 1.65 | 1.70 | 1.798,9 | 1.68 | 1.68 | 1.69 |
Expenses net of fee waivers | |||||||
and credits | 1.628 | 1.65 | 1.70 | 1.798,9 | 1.67 | 1.68 | 1.69 |
Net investment income | 3.248 | 3.33 | 3.29 | 3.698 | 3.39 | 3.46 | 3.49 |
Portfolio turnover (%) | 8 | 17 | 10 | 17 | 22 | 25 | 15 |
1 Semiannual period from 6-1-11 to 11-30-11. Unaudited.
2 For the nine-month period ended 5-31-09. The Fund changed its fiscal year end from August 31 to May 31.
3 Based on the average daily shares outstanding.
4 Less than $0.005 per share.
5 Does not reflect the effect of sales charges, if any.
6 Not annualized.
7 Total returns would have been lower had certain expenses not been reduced during the periods shown.
8 Annualized.
9 Includes the impact of proxy expenses, which amounted to 0.04% of average net assets.
20 | Massachusetts Tax-Free Income Fund | Semiannual report | See notes to financial statements |
CLASS C SHARES Period ended | 11-30-111 | 5-31-11 | 5-31-10 | 5-31-092 | 8-31-08 | 8-31-07 | 8-31-06 |
Per share operating performance | |||||||
Net asset value, beginning | |||||||
of period | $12.22 | $12.53 | $12.10 | $12.28 | $12.37 | $12.64 | $12.87 |
Net investment income3 | 0.20 | 0.41 | 0.41 | 0.32 | 0.42 | 0.44 | 0.44 |
Net realized and unrealized gain | |||||||
(loss) on investments | 0.36 | (0.29) | 0.45 | (0.18) | (0.08) | (0.27) | (0.24) |
Total from investment operations | 0.56 | 0.12 | 0.86 | 0.14 | 0.34 | 0.17 | 0.20 |
Less distributions | |||||||
From net investment income | (0.20) | (0.41) | (0.40) | (0.32) | (0.41) | (0.43) | (0.43) |
From net realized gain | — | (0.02) | (0.03) | —4 | (0.02) | (0.01) | —4 |
Total distributions | (0.20) | (0.43) | (0.43) | (0.32) | (0.43) | (0.44) | (0.43) |
Net asset value, end of period | $12.58 | $12.22 | $12.53 | $12.10 | $12.28 | $12.37 | $12.64 |
Total return (%)5 | 4.626,7 | 0.967 | 7.297 | 1.316 | 2.837 | 1.317 | 1.677 |
Ratios and supplemental data | |||||||
Net assets, end of period | |||||||
(in millions) | $17 | $17 | $19 | $14 | $12 | $10 | $11 |
Ratios (as a percentage of average | |||||||
net assets): | |||||||
Expenses before reductions | 1.698 | 1.70 | 1.70 | 1.798,9 | 1.68 | 1.68 | 1.69 |
Expenses net of fee waivers | 1.628 | 1.65 | 1.70 | 1.798,9 | 1.68 | 1.68 | 1.69 |
Expenses net of fee waivers | |||||||
and credits | 1.628 | 1.65 | 1.70 | 1.798,9 | 1.67 | 1.68 | 1.69 |
Net investment income | 3.258 | 3.34 | 3.30 | 3.678 | 3.38 | 3.46 | 3.48 |
Portfolio turnover (%) | 8 | 17 | 10 | 17 | 22 | 25 | 15 |
1 Semiannual period from 6-1-11 to 11-30-11. Unaudited.
2 For the nine-month period ended 5-31-09. The Fund changed its fiscal year end from August 31 to May 31.
3 Based on the average daily shares outstanding.
4 Less than $0.005 per share.
5 Does not reflect the effect of sales charges, if any.
6 Not annualized.
7 Total returns would have been lower had certain expenses not been reduced during the periods shown.
8 Annualized.
9 Includes the impact of proxy expenses, which amounted to 0.04% of average net assets.
See notes to financial statements | Semiannual report | Massachusetts Tax-Free Income Fund | 21 |
Notes to financial statements
(unaudited)
Note 1 — Organization
John Hancock Massachusetts Tax-Free Income Fund (the Fund) is a diversified series of John Hancock Tax-Exempt Series Fund (the Trust), an open-end management investment company organized as a Massachusetts business trust and registered under the Investment Company Act of 1940, as amended (the 1940 Act). The investment objective of the Fund is to seek a high level of current income, consistent with preservation of capital, that is exempt from federal and Massachusetts personal income taxes.
The Fund may offer multiple classes of shares. The shares currently offered are detailed in the Statement of assets and liabilities. Class A, Class B and Class C shares are offered to all investors. Shareholders of each class have exclusive voting rights to matters that affect that class. The distribution and service fees, if any, and transfer agent fees for each class may differ. Class B shares convert to Class A shares eight years after purchase.
Note 2 — Significant accounting policies
The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make certain estimates and assumptions at the date of the financial statements. Actual results could differ from those estimates. Events or transactions occurring after the end of the fiscal period through the date that the financial statements were issued have been evaluated in the preparation of the financial statements. The following summarizes the significant accounting policies of the Fund:
Security valuation. Investments are stated at value as of the close of regular trading on the New York Stock Exchange (NYSE), normally at 4:00 P.M., Eastern Time. The Fund uses a three-tier hierarchy to prioritize the pricing assumptions, referred to as inputs, used in valuation techniques to measure fair value. Level 1 includes securities valued using quoted prices in active markets for identical securities. Level 2 includes securities valued using significant observable inputs. Observable inputs may include quoted prices for similar securities, interest rates, prepayment speeds and credit risk. Prices for securities valued using these inputs are received from independent pricing vendors and brokers and are based on an evaluation of the inputs described. Level 3 includes securities valued using significant unobservable inputs when market prices are not readily available or reliable, including the Fund’s own assumptions in determining the fair value of investments. Factors used in determining value may include market or issuer specific events, changes in interest rates and credit quality. The inputs or methodology used for valuing securities are not necessarily an indication of the risks associated with investing in those securities.
As of November 30, 2011, all investments are categorized as Level 2 under the hierarchy described above. Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. During the six months ended November 30, 2011, there were no significant transfers in or out of Level 1, Level 2 or Level 3 assets.
In order to value the securities, the Fund uses the following valuation techniques. Debt obligations are valued based on the evaluated prices provided by an independent pricing service, which utilizes both dealer-supplied and electronic data processing techniques, taking into account factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Certain securities traded only in the over-the-counter market are valued at the last bid price quoted by brokers making markets in the securities at the close of trading. Certain short-term securities are valued at amortized cost. Other portfolio
22 | Massachusetts Tax-Free Income Fund | Semiannual report |
securities and assets, where market quotations are not readily available, are valued at fair value, as determined in good faith by the Fund’s Pricing Committee, following procedures established by the Board of Trustees.
Repurchase agreements. The Fund may enter into repurchase agreements. When the Fund enters into a repurchase agreement, it receives collateral which is held in a segregated account by the Fund’s custodian. The collateral amount is marked-to-market and monitored on a daily basis to ensure that the collateral held is in an amount not less than the principal amount of the repurchase agreement plus any accrued interest. In the event of a default by the counterparty, realization of the collateral proceeds could be delayed, during which time the collateral value may decline.
Security transactions and related investment income. Investment security transactions are accounted for on a trade date plus one basis for daily net asset value calculations. However, for financial reporting purposes, investment transactions are reported on trade date. Interest income is accrued as earned. Interest income includes coupon interest and amortization/accretion of premiums/discounts on debt securities. Debt obligations may be placed in a non-accrual status and related interest income may be reduced by stopping current accruals and writing off interest receivable when the collection of all or a portion of interest has become doubtful. Gains and losses on securities sold are determined on the basis of identified cost and may include proceeds from litigation.
Line of credit. The Fund may borrow from banks for temporary or emergency purposes, including meeting redemption requests that otherwise might require the untimely sale of securities. Pursuant to the custodian agreement, the custodian may loan money to the Fund to make properly authorized payments. The Fund is obligated to repay the custodian for any overdraft, including any related costs or expenses. The custodian has a lien, security interest or security entitlement in any Fund property that is not segregated, to the maximum extent permitted by law for any overdraft.
In addition, the Fund and other affiliated funds have entered into an agreement with Citibank N.A. which enables them to participate in a $100 million unsecured committed line of credit. A commitment fee, payable at the end of each calendar quarter, based on the average daily unused portion of the line of credit, is charged to each participating fund on a pro rata basis and is reflected in other expenses on the Statement of operations. For the six months ended November 30, 2011, the Fund had no borrowings under the line of credit.
Expenses. The majority of expenses are directly attributable to an individual fund. Expenses that are not readily attributable to a specific fund are allocated among all funds in an equitable manner, taking into consideration, among other things, the nature and type of expense and the fund’s relative net assets. Expense estimates are accrued in the period to which they relate and adjustments are made when actual amounts are known.
Class allocations. Income, common expenses and realized and unrealized gains (losses) are determined at the fund level and allocated daily to each class of shares based on the net assets of the class. Class-specific expenses, such as distribution and service fees, if any, and transfer agent fees, are calculated daily for each class, based on the net asset value of the class and the applicable specific expense rates.
Federal income taxes. The Fund intends to continue to qualify as a regulated investment company by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income that is distributed to shareholders. Therefore, no federal income tax provision is required.
Semiannual report | Massachusetts Tax-Free Income Fund | 23 |
As of May 31, 2011, the Fund had no uncertain tax positions that would require financial statement recognition, derecognition or disclosure. The Fund’s federal tax returns are subject to examination by the Internal Revenue Service for a period of three years.
Distribution of income and gains. Distributions to shareholders from net investment income and net realized gains, if any, are recorded on the ex-date. The Fund generally declares dividends daily and pays them monthly. Capital gain distributions, if any, are distributed annually.
Distributions paid by the Fund with respect to each class of shares are calculated in the same manner, at the same time and in the same amount, except for the effect of class level expenses that may be applied differently to each class.
Such distributions, on a tax basis, are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America.
Capital accounts within financial statements are adjusted for permanent book-tax differences. These adjustments have no impact on net assets or the results of operations. Temporary book-tax differences, if any, will reverse in a subsequent period. Book-tax differences are primarily attributable to wash sale loss deferrals, distributions payable and accretion on debt securities.
New accounting pronouncement. In May 2011, Accounting Standards Update 2011-04 (ASU 2011-04), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, was issued and is effective during interim and annual periods beginning after December 15, 2011. ASU 2011-04 amends Financial Accounting Standards Board (FASB) Topic 820, Fair Value Measurement. The amendments are the result of the work by the FASB and the International Accounting Standards Board to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP. Management is currently evaluating the application of ASU 2011-04 and its impact, if any, on the Fund’s financial statement disclosure.
Note 3 — Guarantees and indemnifications
Under the Fund’s organizational documents, its Officers and Trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss from such claims is considered remote.
Note 4 — Fees and transactions with affiliates
John Hancock Advisers, LLC (the Adviser) serves as investment adviser for the Fund. John Hancock Funds, LLC (the Distributor), an affiliate of the Adviser, serves as principal underwriter of the Fund. The Adviser and the Distributor are indirect wholly owned subsidiaries of Manulife Financial Corporation (MFC).
Management fee. The Fund has an investment management contract with the Adviser under which the Fund pays a daily management fee to the Adviser equivalent, on an annual basis, to the sum of: (a) 0.500% of the first $250,000,000 of the Fund’s average daily net assets, (b) 0.450% of the next $250,000,000, (c) 0.425% of the next $500,000,000, (d) 0.400% of the next $250,000,000 and (e) 0.300% of the Fund’s average daily net assets in excess of $1,250,000,000. The Adviser has a subadvisory agreement with John Hancock Asset Management a division of Manulife Asset Management (US) LLC, an indirectly owned subsidiary of MFC and an affiliate of the Adviser. The Fund is not responsible for payment of the subadvisory fees.
24 | Massachusetts Tax-Free Income Fund | Semiannual report |
The investment management fees incurred for the six months ended November 30, 2011 were equivalent to an annual effective rate of 0.500% of the Fund’s average daily net assets.
Effective July 1, 2010, the Adviser has contractually agreed to waive fees and/or reimburse certain expenses for each share class of the Fund. This agreement excluded taxes, portfolio brokerage commissions, interest, litigation and extraordinary expenses not incurred in the ordinary course of the Fund’s business. The fee waivers and/or expense reimbursements were such that these expenses would not exceed 0.95%, 1.65%, and 1.65% for Class A, Class B and Class C shares, respectively. Effective September 30, 2011, these fees waivers and/or expense reimbursements expired.
Accounting and legal services. Pursuant to a service agreement, the Fund reimburses the Adviser for all expenses associated with providing the administrative, financial, legal, accounting and recordkeeping services to the Fund, including the preparation of all tax returns, periodic reports to shareholders and regulatory reports, among other services. These expenses are allocated to each share class based on its relative net assets at the time the expense was incurred. These accounting and legal services fees incurred for the six months ended November 30, 2011, amounted to an annual rate of 0.01% of the Fund’s average daily net assets.
Distribution and service plans. The Fund has a distribution agreement with the Distributor. The Fund has adopted distribution and service plans with respect to Class A, Class B and Class C shares pursuant to Rule 12b-1 under the 1940 Act, to pay the Distributor for services provided as the distributor of shares of the Fund. The Fund may pay up to the following contractual rates of distribution and service fees under these arrangements, expressed as an annual percentage of average daily net assets for each class of the Fund’s shares.
CLASS | 12b-1 FEE | |||||
A | 0.30% | |||||
B | 1.00% | |||||
C | 1.00% |
Effective August 1, 2011, the Distributor has contractually agreed to limit the distribution and service fees to 0.15%, 0.90% and 0.90% of the average daily net assets of Class A, Class B and Class C shares, respectively, until at least September 30, 2012.
Accordingly, these expense reductions amounted to $47,622, $1,100 and $5,672 for Class A, Class B, and Class C shares, respectively, for the six months ended November 30, 2011.
Sales charges. Class A shares are assessed up-front sales charges, which resulted in payments to the Distributor amounting to $65,066 for the six months ended November 30, 2011. Of this amount, $569 was retained and used for printing prospectuses, advertising, sales literature and other purposes, $61,093 was paid as sales commissions to broker-dealers and $3,404 was paid as sales commissions to sales personnel of Signator Investors, Inc., a broker-dealer affiliate of the Adviser.
Class B and Class C shares are subject to contingent deferred sales charges (CDSCs). Class B shares that are redeemed within six years of purchase are subject to CDSCs, at declining rates, beginning at 5.00% of the lesser of the current market value at the time of redemption or the original purchase cost of the shares being redeemed. Class C shares that are redeemed within one year of purchase are subject to a 1.00% CDSC on the lesser of the current market value at the time of redemption or the original purchase cost of the shares being redeemed. Proceeds from CDSCs are used to compensate the Distributor for providing distribution-related services in connection with the sale of these shares. During the six months ended November 30, 2011, CDSCs received by the Distributor amounted to $900 for Class B shares.
Semiannual report | Massachusetts Tax-Free Income Fund | 25 |
Transfer agent fees. The Fund has a transfer agent agreement with John Hancock Signature Services, Inc. (Signature Services), an affiliate of the Adviser. The transfer agent fees paid to Signature Services are determined based on the cost to Signature Services (Signature Services Cost) of providing recordkeeping services. The Signature Services Cost includes a component of allocated John Hancock corporate overhead for providing transfer agent services to the Fund and to all other John Hancock affiliated funds. It also includes out-of-pocket expenses that are comprised of payments made to third-parties for recordkeeping services provided to their clients who invest in one or more John Hancock funds. In addition, Signature Services Cost may be reduced by certain fees that Signature Services receives in connection with retirement and small accounts. Signature Services Cost is calculated monthly and allocated, as applicable, to four categories of share classes: Institutional Share Classes, Retirement Share Classes, Municipal Bond Classes and all other Retail Share Classes. Within each of these categories, the applicable costs are allocated to the affected John Hancock affiliated funds and/or classes, based on the relative average daily net assets.
Class level expenses. Class level expenses for the six months ended November 30, 2011 were:
DISTRIBUTION AND | TRANSFER | |||
CLASS | SERVICE FEES | AGENT FEES | ||
A | $141,591 | $31,708 | ||
B | 16,542 | 1,110 | ||
C | 85,190 | 5,719 | ||
Total | $243,323 | $38,537 |
Trustee expenses. The Fund compensates each Trustee who is not an employee of the Adviser or its affiliates. These Trustees may, for tax purposes, elect to defer receipt of this compensation under the John Hancock Group of Funds Deferred Compensation Plan (the Plan). Deferred amounts are invested in various John Hancock funds and remain in the funds until distributed in accordance with the Plan. The investment of deferred amounts and the offsetting liability are included within Other receivables and prepaid expenses and Payable to affiliates — Trustees’ fees, respectively, in the accompanying Statement of assets and liabilities.
Note 5 — Fund share transactions
Transactions in Fund shares for the six months ended November 30, 2011 and for the year ended May 31, 2011 were as follows:
Six months ended 11-30-11 | Year ended 5-31-11 | |||
Shares | Amount | Shares | Amount | |
Class A shares | ||||
Sold | 423,578 | $5,278,592 | 910,737 | $11,317,354 |
Distributions reinvested | 101,068 | 1,261,611 | 220,734 | 2,708,233 |
Repurchased | (483,185) | (6,030,335) | (1,997,898) | (24,236,994) |
Net increase (decrease) | 41,461 | $509,868 | (866,427) | ($10,211,407) |
Class B shares | ||||
Sold | 12,578 | $157,667 | 29,576 | $366,589 |
Distributions reinvested | 2,735 | 34,134 | 6,859 | 84,129 |
Repurchased | (29,569) | (366,476) | (177,947) | (2,181,221) |
Net decrease | (14,256) | ($174,675) | (141,512) | ($1,730,503) |
26 | Massachusetts Tax-Free Income Fund | Semiannual report |
Six months ended 11-30-11 | Year ended 5-31-11 | |||
Shares | Amount | Shares | Amount | |
Class C shares | ||||
Sold | 125,817 | $1,579,692 | 288,638 | $3,610,346 |
Distributions reinvested | 16,329 | 203,751 | 34,930 | 427,901 |
Repurchased | (184,119) | (2,297,071) | (390,925) | (4,679,870) |
Net decrease | (41,973) | ($513,628) | (67,357) | ($641,623) |
Net decrease | (14,768) | ($178,435) | (1,075,296) | ($12,583,533) |
Note 6 — Purchase and sale of securities
Purchases and sales of securities, other than short-term securities, aggregated $9,204,204 and $9,906,899, respectively, for the six months ended November 30, 2011.
Semiannual report | Massachusetts Tax-Free Income Fund | 27 |
Board Consideration of and Continuation of Investment Advisory Agreement and Subadvisory Agreement
The Board of Trustees (the Board, the members of which are referred to as Trustees) of John Hancock Massachusetts Tax-Free Income Fund (the Fund), a series of John Hancock Tax-Exempt Series Fund (the Trust), met in-person on May 1–3 and June 5–7, 2011 to consider the approval of the Fund’s investment advisory agreement (the Advisory Agreement) with John Hancock Advisers, LLC (the Adviser), the Fund’s investment adviser. The Board also considered the approval of the investment subadvisory agreement (the Subadvisory Agreement) among the Adviser, Manulife Asset Management (US) LLC (the Subadviser) and the Trust on behalf of the Fund. The Advisory Agreement and the Subadvisory Agreement are referred to as the Agreements.
Activities and composition of the Board
The Board consists of eleven individuals, nine of whom are Independent Trustees. Independent Trustees are generally those individuals who are not employed by or have any significant business or professional relationship with the Adviser or the Subadviser. The Trustees are responsible for the oversight of operations of the Fund and perform various duties required of directors of investment companies by the Investment Company Act of 1940, as amended (the 1940 Act). The Independent Trustees have hired independent legal counsel to assist them in connection with their duties. The Board has appointed an Independent Trustee as Chairperson. The Board has established four standing committees that are composed entirely of Independent Trustees: the Audit Committee; the Compliance Committee; the Nominating, Governance and Administration Committee; and the Contracts/Operations Committee. Additionally, Investment Performance Committee A is a standing committee of the Board that is composed of Independent Trustees and one Trustee who is affiliated with the Adviser. Investment Performance Committee A oversees and monitors matters relating to the investment performance of the Fund. The Board has also designated an Independent Trustee as Vice Chairperson to serve in the absence of the Chairperson. The Board also designates working groups or ad hoc committees as it deems appropriate.
The approval process
Under the 1940 Act, the Board is required to consider the continuation of the Agreements each year. Throughout the year, the Board, acting directly and through its committees, regularly reviews and assesses the quality of the services that the Fund receives under these Agreements. The Board reviews reports of the Adviser at least quarterly, which include Fund performance reports and compliance reports. In addition, the Board meets with portfolio managers and senior investment officers at various times throughout the year. The Board considers at each of its meetings factors that are relevant to its annual consideration of the renewal of the Agreements, including the services and support provided by the Adviser and Subadviser to the Fund and its shareholders.
Prior to the May 1–3, 2011 meeting, the Board requested and received materials specifically relating to the Agreements. The materials provided in connection with the May meeting included information compiled and prepared by Morningstar, Inc. (Morningstar) on Fund fees and expenses, and the investment performance of the Fund. This Fund information is assembled in a format that permits comparison with similar information from a Category and a subset of the Category referred to as the Peer Group, each as determined by Morningstar, and with the Fund’s benchmark index. The category includes all funds that invest similarly to the way the Fund invests. The peer group represents funds of similar size, excluding passively managed funds and funds-of-funds. The Fund’s benchmark index is an unmanaged index of securities that is provided as a basis for comparison with the Fund’s performance. Other material provided for the Fund review included (a) information on the profitability of the Agreements to the Adviser and a discussion of any additional benefits to the Adviser or Subadviser or their affiliates that result from being the Adviser or Subadviser to the Fund; (b) a general analysis provided by the Adviser and the Subadviser concerning investment advisory fees charged to other clients, such as institutional clients and other investment companies,
28 | Massachusetts Tax-Free Income Fund | Semiannual report |
having similar investment mandates, as well as the performance of those other clients and a comparison of the services provided to those other clients and the services provided to the Fund; (c) the impact of economies of scale; (d) a summary of aggregate amounts paid by the Fund to the Adviser; and (e) sales and redemption data regarding the Fund’s shares.
At an in-person meeting held on May 1–3, 2011, the Board reviewed materials relevant to its consideration of the Agreements. As a result of the discussions that occurred during the May 1–3, 2011 meeting, the Board asked the Adviser for additional information on certain matters. The Adviser provided the additional information and the Board also considered this information as part of its consideration of the Agreements.
At an in-person meeting held on June 5–7, 2011, the Board, including the Independent Trustees, formally considered the continuation of the Advisory Agreement between the Adviser and the Fund and the Subadvisory Agreement among the Fund, the Adviser and the Subadviser, each for an additional one-year term. The Board considered what it believed were key relevant factors that are described under separate headings presented below.
The Board also considered other matters important to the approval process, such as payments made to and by the Adviser or its affiliates relating to the distribution of Fund shares and other services. The Board reviewed services related to the valuation and pricing of Fund portfolio holdings. Other important matters considered by the Board were the direct and indirect benefits to the Adviser, the Subadviser and their affiliates from their relationship with the Fund and advice from independent legal counsel with respect to the review process and materials submitted for the Board’s review.
Nature, extent and quality of services
The Board reviewed the nature, extent and quality of services provided by the Adviser and the Subadviser, including the investment advisory services and the resulting performance of the Fund.
The Board considered the ability of the Adviser and the Subadviser, based on their resources, reputation and other attributes, to attract and retain qualified investment professionals, including research, advisory and supervisory personnel. It considered the background and experience of senior management and investment professionals responsible for managing the Fund. The Board considered the investment philosophy, research and investment decision-making processes of the Adviser and the Subadviser responsible for the daily investment activities of the Fund, including, among other things, portfolio trading capabilities, use of technology, commitment to compliance and approach to training and retaining portfolio managers and other research, advisory and management personnel.
The Board considered the Subadviser’s history and experience providing investment services to the Fund. The Board considered the Adviser’s execution of its oversight responsibilities. The Board further considered the culture of compliance, resources dedicated to compliance, compliance programs, record of compliance with applicable laws and regulation, with the Fund’s investment policies and restrictions and with the applicable Code of Ethics, and the responsibilities of the Adviser’s and Subadviser’s compliance departments.
In addition to advisory services, the Board considered the quality of the administrative and non-investment advisory services provided to the Fund by the Adviser under a separate agreement. The Board noted that the Adviser and its affiliates provide the Fund with certain administrative, transfer agency, shareholder and other services (in addition to any such services provided to the Fund by third parties) and officers and other personnel as are necessary for the operations of the Fund. The Board reviewed the structure and duties of the Adviser’s administration, accounting, legal and compliance departments and its affiliate’s transfer agency operations and considered the Adviser’s and its affiliate’s policies and procedures for assuring compliance with applicable laws and regulations.
Semiannual report | Massachusetts Tax-Free Income Fund | 29 |
The Board also received information about the nature, extent and quality of services provided by and fee rates charged by the Adviser and Subadviser to their other clients, including other registered investment companies, institutional investors and separate accounts. The Board reviewed a general analysis provided by the Adviser and the Subadviser concerning investment advisory fees charged to other clients having similar investment mandates, the services provided to those other clients as compared to the services provided to the Fund, the performance of those other clients as compared to the performance by the Fund and other factors relating to those other clients. The Board considered the significant differences between the Adviser’s and Subadviser’s services to the Fund and the services they provide to other clients. For other clients that are not mutual funds, the differences in services relate to the greater share purchase and redemption activity in a mutual fund, the generally higher turnover of mutual fund portfolio holdings, the more burdensome regulatory and legal obligations of mutual funds and the higher marketing costs for mutual funds. When compared to all clients including mutual funds, the Adviser has greater oversight and supervisory responsibility for the Fund and undertakes greater entrepreneurial risk as the sponsor of the Fund.
Fund performance
The Board was provided with reports, independently prepared by Morningstar, which included a comprehensive analysis of the Fund’s performance. The Board also examined materials provided by the Fund’s portfolio management team discussing Fund performance and the Fund’s investment objective, strategies and outlook. The Board also reviewed a narrative and statistical analysis of the Morningstar data that was prepared by the Adviser, which analyzed various factors that may affect the Morningstar rankings. The Board reviewed information regarding the investment performance of the Fund as compared to its Morningstar Category as well as its benchmark index (see chart below). The Board was provided with a description of the methodology used by Morningstar to select the funds in the Category. The Board also considered updated performance information provided by the Adviser at its May and June 2011 meetings. The Board regularly reviews the performance of the Fund throughout the year and attaches more importance to performance over relatively longer periods of time, typically three to five years.
Set forth below is the performance of the Fund over certain time periods ended December 31, 2010 and that of its Category and benchmark index over the same periods:
1 YEAR | 3 YEAR | 5 YEAR | 10 YEAR | |
Massachusetts Tax-Free Income Fund | 0.22% | 2.88% | 3.04% | 4.28% |
Class A | ||||
Muni MA Category Average | 1.31% | 3.09% | 3.38% | 4.17% |
BarCap Municipal TR Index | 2.38% | 4.08% | 4.09% | 4.83% |
The Board noted that the Fund had underperformed its Category’s average performance except for the ten-year period. The Board was aware that the Fund’s investment style of investing in securities with shorter duration and higher credit quality in relation to peers may at times contribute to underperformance. The Board also noted that, although the Fund had underperformed its benchmark index’s performance over a sustained period, the index was not specifically for Massachusetts tax-exempt securities. The Board concluded that the steps the Adviser and Subadviser were taking had not yet resulted in outperformance and that the Board would continue to monitor Fund performance for improvement over time.
Expenses and fees
The Board, including the Independent Trustees, reviewed the Fund’s contractual advisory fee rate payable by the Fund to the Adviser as compared with the other funds in its Peer Group. The Board also received information about the investment subadvisory fee rate payable by the Adviser to the Subadviser for investment subadvisory services. The Board considered the services provided and the fees charged by the Adviser and the Subadviser to other clients with similar investment mandates, including separately managed institutional accounts.
30 | Massachusetts Tax-Free Income Fund | Semiannual report |
In addition, the Board considered the cost of the services provided to the Fund by the Adviser. The Board received and considered expense information regarding the Fund’s various components, including advisory fees, distribution fees and fees other than advisory and distribution fees, including transfer agent fees, custodian fees, administration fees and other miscellaneous fees (e.g., fees for accounting and legal services). The Board considered comparisons of these expenses to the Peer Group median. The Board also considered expense information regarding the Fund’s total operating expense ratio (Gross Expense Ratio) and total operating expense ratio after taking the Adviser’s contractual fee waiver/expense reimbursement agreement into account (Net Expense Ratio). The Board considered information comparing the Gross Expense Ratio and Net Expense Ratio of the Fund to that of the Peer Group median. As part of its analysis, the Board reviewed the Adviser’s methodology in allocating its costs to the management of the Fund and the Fund complex.
The Board noted that the Fund’s advisory fee ratio was the same as the Peer Group median advisory fee ratio. The Board noted the following information about the Fund’s Gross and Net Expense Ratios for Class A shares contained in the Fund’s financial statements in relation with the Fund’s Peer Group median provided by Morningstar in April 2011:
FUND (CLASS A) | PEER GROUP MEDIAN | |
Advisory Fee Ratio | 0.50% | 0.50% |
Gross Expense Ratio | 0.99% | 0.92% |
Net Expense Ratio | 0.96% | 0.85% |
The Board viewed favorably the Adviser’s contractual agreement to waive all or a portion of its advisory fees and to reimburse or pay operating expenses to the extent necessary to maintain the Fund’s expense ratio at 0.95% for Class A shares, excluding certain expenses such as taxes, brokerage commissions, interest, litigation and extraordinary expenses, until September 30, 2011. The Board viewed favorably the new contractual agreement to decrease Rule 12b-1 fees from 0.30% to 0.15% for Class A shares from August 1, 2011 until September 30, 2012. The Board favorably considered the impact of these contractual agreements towards ultimately lowering the Fund’s Gross Expense Ratio. The Board also received and considered information relating to the Fund’s Gross Expense Ratio and Net Expense Ratio that reflected the new methodology for calculating transfer agent fees that was approved by the Trustees at the June 2010 meeting.
The Board received and reviewed statements relating to the Adviser’s financial condition and was also provided with a profitability analysis that detailed the revenues earned and the expenses incurred by the Adviser for services under the Advisory Agreement, as well as from other relationships between the Fund and the Adviser and its affiliates. The Board reviewed the Adviser’s profitability with respect to the Fund and other funds the Board currently oversees for the year ended December 31, 2010 compared to available aggregate profitability data provided for the year ended December 31, 2009. The Board reviewed the Adviser’s profitability with respect to other fund complexes managed by the Adviser and/or its affiliates. The Board reviewed the Adviser’s assumptions and methodology of allocating expenses in the profitability analysis, noting the inherent limitations in allocating costs among various advisory products.
The Board also considered a comparison of the Adviser’s profitability to that of other similar investment advisers whose profitability information is publicly available. The Board recognized that profitability may be affected by numerous factors including, among other things, fee waivers and expense reimbursements by the Adviser, the types of funds managed, expense allocations and business mix, and therefore comparability of profitability is somewhat limited.
The Board considered the profitability information with respect to the Subadviser, which is affiliated with the Adviser. In addition, as noted above, the Board considered the assumptions and methodology for allocating expenses in the Subadviser’s profitability analysis.
Semiannual report | Massachusetts Tax-Free Income Fund | 31 |
Economies of scale
The Board, including the Independent Trustees, considered the extent to which economies of scale might be realized as the assets of the Fund increase. Possible changes in the advisory fee rate or structure in order to enable the Fund to participate in these economies of scale (e.g., through the use of breakpoints in the advisory fee at higher asset levels) are periodically discussed. The Board also considered the Adviser’s overall operations and its ongoing investment in its business in order to expand the scale of, and improve the quality of, its operations that benefit the Fund.
The Board recognized the inherent limitations of any analysis of economies of scale, stemming largely from the Board’s understanding that most of the Adviser’s costs are not specific to individual funds, but rather are incurred across a variety of products and services. To ensure that any economies are reasonably shared with the Fund as its assets increase, the Adviser and the Board agreed to continue the existing breakpoints to the contractual advisory fee rate.
Other benefits to the Adviser and the Subadviser
The Board understands that the Adviser, the Subadviser or their affiliates may derive other ancillary benefits from their relationship with the Fund, both tangible and intangible, such as their ability to leverage investment professionals who manage other portfolios, an increase in their profile in the investment advisory community and the engagement of their affiliates and/or significant shareholders as service providers to the Fund, including for administrative, transfer agency and distribution services. The Board believes that certain of these benefits are difficult to quantify. The Board also was informed that the Subadviser may use third-party research obtained by soft dollars generated by certain mutual fund transactions to assist itself in managing all or a number of its other client accounts.
Board determination
The Board unanimously approved the continuation of the Advisory Agreement between the Adviser and the Fund for an additional one-year term. The Subadvisory Agreement among the Fund, the Adviser and the Subadviser was also approved for an additional one-year term. Based upon its evaluation of relevant factors in their totality, the Board was satisfied that the terms of the Agreements, including the advisory and subadvisory fee rates, were fair and reasonable and in the best interest of the Fund and its shareholders. In arriving at its decision to approve the Agreements, the Board did not identify any single factor or any group of factors as all-important or controlling, but considered all factors together. Different Trustees may have attributed different weights to the various factors considered. The Independent Trustees were also assisted by independent legal counsel in making this determination. The Trustees’ conclusions may be based in part on their consideration of these arrangements in prior years and on their ongoing regular review of Fund performance and operations throughout the year.
32 | Massachusetts Tax-Free Income Fund | Semiannual report |
More information
Trustees | Investment adviser |
Steven R. Pruchansky, Chairman | John Hancock Advisers, LLC |
James F. Carlin* | |
William H. Cunningham | Subadviser |
Deborah C. Jackson | John Hancock Asset Management a division of |
Charles L. Ladner,* Vice Chairman# | Manulife Asset Management (US) LLC |
Stanley Martin* | |
Hugh McHaffie† | Principal distributor |
Dr. John A. Moore,* Vice Chairman^ | John Hancock Funds, LLC |
Patti McGill Peterson* | |
Gregory A. Russo | Custodian |
John G. Vrysen† | State Street Bank and Trust Company |
Officers | Transfer agent |
Keith F. Hartstein | John Hancock Signature Services, Inc. |
President and Chief Executive Officer | |
Legal counsel | |
Andrew G. Arnott | K&L Gates LLP |
Senior Vice President and Chief Operating Officer | |
Thomas M. Kinzler | |
Secretary and Chief Legal Officer | |
Francis V. Knox, Jr. | |
Chief Compliance Officer | |
Charles A. Rizzo | |
Chief Financial Officer | |
Salvatore Schiavone | |
Treasurer | |
*Member of the Audit Committee | |
†Non-Independent Trustee | |
#Retired, effective 12-31-11 | |
^Effective 1-1-12 |
The Fund’s proxy voting policies and procedures, as well as the Fund’s proxy voting record for the most recent twelve-month period ended June 30, are available free of charge on the Securities and Exchange Commission (SEC) Web site at www.sec.gov or on our Web site.
The Fund’s complete list of portfolio holdings, for the first and third fiscal quarters, is filed with the SEC on Form N-Q. The Fund’s Form N-Q is available on our Web site and the SEC’s Web site, www.sec.gov, and can be reviewed and copied (for a fee) at the SEC’s Public Reference Room in Washington, DC. Call 1-800-SEC-0330 to receive information on the operation of the SEC’s Public Reference Room.
We make this information on your fund, as well as monthly portfolio holdings, and other fund details available on our Web site at www.jhfunds.com or by calling 1-800-225-5291.
You can also contact us: | ||
1-800-225-5291 | Regular mail: | Express mail: |
jhfunds.com | John Hancock Signature Services, Inc. | John Hancock Signature Services, Inc. |
P.O. Box 55913 | Mutual Fund Image Operations | |
Boston, MA 02205-5913 | 30 Dan Road | |
Canton, MA 02021 |
Semiannual report | Massachusetts Tax-Free Income Fund | 33 |
1-800-225-5291
1-800-554-6713 TDD
1-800-338-8080 EASI-Line
www.jhfunds.com
Now available: electronic delivery
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This report is for the information of the shareholders of John Hancock Massachusetts Tax-Free Income Fund. | 770SA 11/11 |
It is not authorized for distribution to prospective investors unless preceded or accompanied by a prospectus. | 1/12 |
ITEM 2. CODE OF ETHICS.
Not applicable at this time.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable at this time.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable at this time.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable at this time.
ITEM 6. SCHEDULE OF INVESTMENTS.
(a) Not applicable.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this Form N-CSR, the registrant's principal executive officer and principal financial officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) Separate certifications for the registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached.
(b) Separate certifications for the registrant's principal executive officer and principal financial officer, as required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and Rule 30a-2(b) under the Investment Company Act of 1940, are attached. The certifications furnished pursuant to this paragraph are not deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certifications are not deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates them by reference.
(c)(1) Contact person at the registrant.
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.
John Hancock Tax-Exempt Series Fund | |
By: | /s/ Keith F. Hartstein |
Keith F. Hartstein | |
President and Chief Executive Officer | |
Date: | January 23, 2012 |
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/ Keith F. Hartstein |
Keith F. Hartstein | |
President and Chief Executive Officer | |
Date: | January 23, 2012 |
By: | /s/ Charles A. Rizzo |
Charles A. Rizzo | |
Chief Financial Officer | |
Date: | January 23, 2012 |