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, 2012 |
ITEM 1. REPORTS TO STOCKHOLDERS. |
A look at performance
Total returns for the period ended November 30, 2012
Tax | ||||||||||||||
Average annual total | SEC 30-day | SEC 30-day | equivalent | |||||||||||
returns (%) | Cumulative total returns (%) | yield (%) | yield (%) | subsidized | ||||||||||
with maximum sales charge | with maximum sales charge | subsidized | unsubsidized1 | yield (%)2 | ||||||||||
as of | as of | as of | ||||||||||||
1-year | 5-year | 10-year | 6-months | 1-year | 5-year | 10-year | 11-30-12 | 11-30-12 | 11-30-12 | |||||
Class A | 7.61 | 5.06 | 4.58 | 0.27 | 7.61 | 27.99 | 56.43 | 1.83 | 1.69 | 3.09 | ||||
Class B | 6.80 | 4.96 | 4.47 | –0.36 | 6.80 | 27.41 | 54.90 | 1.18 | 1.08 | 1.99 | ||||
Class C | 10.80 | 5.29 | 4.33 | 3.64 | 10.80 | 29.42 | 52.79 | 1.17 | 1.07 | 1.98 | ||||
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 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 9-30-13 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 (%) | 0.91 | 1.66 | 1.66 | ||||||
Gross (%) | 1.06 | 1.76 | 1.76 |
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.
See the following page for footnotes.
6 | New York Tax-Free Income Fund | Semiannual report |
Without | With maximum | ||||
Start date | sales charge | sales charge | Index 1 | Index 2 | |
Class B3 | 11-30-02 | $15,490 | $15,490 | $16,861 | $17,005 |
Class C3 | 11-30-02 | 15,279 | 15,279 | 16,861 | 17,005 |
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 New York Municipal Bond Index is an unmanaged index composed of New York investment grade municipal bonds.
Barclays Municipal Bond Index is an unmanaged index representative of the tax-exempt bond market.
Prior to December 14, 2012, the Fund compared its performance solely to the Barclays Municipal Bond Index. After this date, the Fund added the Barclays New York Municipal Bond Index as the primary benchmark index and retained the Barclays Municipal Bond Index as the secondary benchmark index to which the Fund compares its performance to better reflect the universe of investment opportunities based on the Fund’s investment strategy.
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.
Footnotes related to performance pages
1 Unsubsidized yield reflects what the yield would have been without the effect of reimbursements and waivers.
2 Tax equivalent yield is based on the maximum federal income tax rate of 35% and a state tax rate of 8.97%. Share classes will differ due to varying expenses.
3 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 of investing in the Fund so you can compare these costs with the ongoing costs of investing in other mutual funds.
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, 2012 with the same investment held until November 30, 2012.
Account value | Ending value | Expenses paid during | |
on 6-1-12 | on 11-30-12 | period ended 11-30-121 | |
Class A | $1,000.00 | $1,049.60 | $4.62 |
Class B | 1,000.00 | 1,046.40 | 8.46 |
Class C | 1,000.00 | 1,046.40 | 8.46 |
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, 2012, 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, 2012, with the same investment held until November 30, 2012. 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 6-1-12 | on 11-30-12 | period ended 11-30-121 | |
Class A | $1,000.00 | $1,020.60 | $4.56 |
Class B | 1,000.00 | 1,016.80 | 8.34 |
Class C | 1,000.00 | 1,016.80 | 8.34 |
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 0.90%, 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 183/365 (to reflect the one-half year period).
Semiannual report | New York Tax-Free Income Fund | 9 |
Portfolio summary
Top 10 Holdings (30.2% of Net Assets on 11-30-12)1,2 | ||||
Oneida County Industrial Development Agency, Zero Coupon, 7-1-29 | 4.1% | |||
New York State Dormitory Authority, 5.500%, 5-15-19 | 3.6% | |||
Puerto Rico Sales Tax Financing Corp., Step Coupon, 8-1-32 | 3.2% | |||
Triborough Bridge & Tunnel Authority, 6.125%, 1-1-21 | 3.1% | |||
Metropolitan Transportation Authority, 5.000%, 11-15-34 | 3.1% | |||
Long Island Power Authority, 5.750%, 4-1-39 | 2.8% | |||
New York City Municipal Water Finance Authority, Zero Coupon, 6-15-20 | 2.8% | |||
New York State Dormitory Authority, 5.000%, 7-1-42 | 2.7% | |||
Upper Mohawk Valley Regional Water Finance Authority, Zero Coupon, 4-1-22 | 2.6% | |||
New York Local Assistance Corp., 5.500%, 4-1-17 | 2.2% | |||
Sector Composition1,3 | ||||
General Obligation Bonds | 4.4% | Health Care | 7.0% | |
Revenue Bonds | Airport | 5.5% | ||
Education | 16.9% | Pollution | 2.1% | |
Water & Sewer | 11.7% | Tobacco | 1.5% | |
Transportation | 8.4% | Other Revenue | 22.6% | |
Utilities | 8.0% | Short-Term Investments & Other | 3.9% | |
Development | 8.0% | |||
Quality Composition1,3,4 | ||
AAA | 5.3% | |
AA | 40.2% | |
A | 27.9% | |
BBB | 14.9% | |
BB | 3.6% | |
B | 1.4% | |
Not Rated | 2.8% | |
Short-Term Investments & Other | 3.9% | |
1 As a percentage of net assets on 11-30-12.
2 Cash and cash equivalents not included.
3 The major risk factors in this Fund’s performance are interest-rate and credit risk. When interest rates rise, bond prices usually fall. Generally, an increase in the Fund’s average maturity will make it more sensitive to interest-rate risk. Investments in higher-yielding, lower-rated securities involve additional risks as these securities include a higher risk of default and loss of principal. Municipal bond prices can decline due to fiscal mismanagement or tax shortfalls, or if related projects become unprofitable. 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. If the Fund invests heavily in any one state or region, performance could be disproportionately affected by factors particular to that state or region.
4 Ratings are from Moody’s Investors Service, Inc. If not available, we have used ratings from Standard & Poor’s Ratings Services. 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 11-30-12 and do not reflect subsequent downgrades or upgrades, if any.
10 | New York Tax-Free Income Fund | Semiannual report |
Fund’s investments
As of 11-30-12 (unaudited)
Maturity | |||||
Rate (%) | date | Par value | Value | ||
Municipal Bonds 96.1% | $63,406,019 | ||||
(Cost $55,174,289) | |||||
New York 85.3% | 56,324,964 | ||||
Brooklyn Arena Local Development Corp. | |||||
Barclays Center Project | 6.375 | 07-15-43 | $1,000,000 | 1,179,169 | |
Chautauqua Asset Securitization Corp. | |||||
Tobacco Settlement | 6.750 | 07-01-40 | 1,000,000 | 973,120 | |
City of New York, Series D-1 | 5.000 | 10-01-36 | 1,000,000 | 1,189,220 | |
City of New York, Series E-1 | 6.250 | 10-15-28 | 500,000 | 635,975 | |
Herkimer County Industrial | |||||
Development Agency | |||||
Flots Adult Home, Series A (D) | 5.500 | 03-20-40 | 955,000 | 1,073,648 | |
Hudson Yards Infrastructure Corp. | |||||
Series A | 5.750 | 02-15-47 | 1,000,000 | 1,214,720 | |
Long Island Power Authority | |||||
Electric, Power & Light Revenues, Series A | 5.750 | 04-01-39 | 1,500,000 | 1,847,190 | |
Long Island Power Authority | |||||
Electric, Power & Light Revenues, Series A | 6.000 | 05-01-33 | 1,000,000 | 1,259,050 | |
Metropolitan Transportation Authority | |||||
Transit Revenue, Series A | 5.250 | 11-15-28 | 1,000,000 | 1,178,000 | |
Metropolitan Transportation Authority | |||||
Transit Revenue, Series B | 5.000 | 11-15-34 | 1,750,000 | 2,016,945 | |
Metropolitan Transportation Authority | |||||
Transit Revenue, Series E | 5.000 | 11-15-42 | 1,000,000 | 1,167,310 | |
Metropolitan Transportation Authority | |||||
Transit Revenue, Series H | 5.000 | 11-15-42 | 1,000,000 | 1,167,310 | |
Monroe County Industrial Development Corp., | |||||
Series A | 5.000 | 07-01-41 | 1,000,000 | 1,152,830 | |
Monroe Newpower Corp. | |||||
Electric, Power & Light Revenues | 5.100 | 01-01-16 | 1,000,000 | 1,020,960 | |
New York City Industrial Development Agency | |||||
Brooklyn Navy Yard Cogeneration | |||||
Partners AMT | 5.650 | 10-01-28 | 1,000,000 | 889,430 | |
New York City Industrial Development Agency | |||||
Lycee Francais De NY Project, Series A (D) | 5.375 | 06-01-23 | 1,000,000 | 1,023,720 | |
New York City Industrial Development Agency | |||||
Polytechnic University Project (D) | 5.250 | 11-01-27 | 1,000,000 | 1,093,550 | |
New York City Industrial Development Agency | |||||
Terminal One Group Association Project | |||||
AMT (P) | 5.500 | 01-01-21 | 1,000,000 | 1,090,410 |
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 A | 5.750 | 06-15-40 | $1,000,000 | $1,237,180 | |
New York City Municipal Water | |||||
Finance Authority | |||||
Water Revenue, Series D (Z) | Zero | 06-15-20 | 2,000,000 | 1,815,400 | |
New York City Municipal Water | |||||
Finance Authority | |||||
Water Revenue, Series FF-2 | 5.000 | 06-15-40 | 1,000,000 | 1,173,420 | |
New York City Municipal Water | |||||
Finance Authority | |||||
Water Revenue, Series GG-1 | 5.000 | 06-15-39 | 1,000,000 | 1,173,500 | |
New York City Transitional Finance Authority | |||||
Government Fund/Grant Revenue, | |||||
Series S-4 (D) | 5.500 | 01-15-39 | 1,000,000 | 1,171,840 | |
New York Liberty Development Corp. | |||||
4 World Trade Center Project | 5.000 | 11-15-44 | 500,000 | 576,765 | |
New York Liberty Development Corp. | |||||
7 World Trade Center, Class 2 | 5.000 | 09-15-43 | 1,000,000 | 1,156,700 | |
New York Liberty Development Corp. | |||||
Bank of American Tower, Class 2 | 5.625 | 07-15-47 | 1,000,000 | 1,188,400 | |
New York Local Assistance Corp. | |||||
Sales Tax Revenue, Series C | 5.500 | 04-01-17 | 1,225,000 | 1,430,200 | |
New York State Dormitory Authority | |||||
General Purpose, Series E | 5.000 | 02-15-35 | 1,000,000 | 1,212,760 | |
New York State Dormitory Authority | |||||
Mount Sinai School of Medicine | 5.125 | 07-01-39 | 1,000,000 | 1,126,750 | |
New York State Dormitory Authority | |||||
North Shore Long Island Jewish Group, | |||||
Series A | 5.000 | 05-01-41 | 1,000,000 | 1,135,070 | |
New York State Dormitory Authority | |||||
Orange Regional Medical Center | 6.125 | 12-01-29 | 750,000 | 847,103 | |
New York State Dormitory Authority | |||||
Rockefeller University, Series A | 5.000 | 07-01-37 | 1,000,000 | 1,204,340 | |
New York State Dormitory Authority | |||||
Rockefeller University, Series A | 5.000 | 07-01-41 | 1,000,000 | 1,183,130 | |
New York State Dormitory Authority | |||||
Series B | 5.000 | 07-01-42 | 1,500,000 | 1,777,110 | |
New York State Dormitory Authority | |||||
State University Educational Facilities, | |||||
Series A (D) | 5.250 | 05-15-15 | 1,000,000 | 1,076,680 | |
New York State Dormitory Authority | |||||
State University Educational Facilities, Series A | 5.500 | 05-15-19 | 2,000,000 | 2,400,920 | |
New York State Environmental Facilities Corp. | |||||
Water Revenue, Series A | 5.000 | 06-15-34 | 1,000,000 | 1,221,480 | |
Niagara Area Development Corp. | |||||
Covanta Energy Project, Series A | 5.250 | 11-01-42 | 500,000 | 509,800 | |
Oneida County Industrial Development Agency | |||||
Hamilton College Project, Series A (D)(Z) | Zero | 07-01-29 | 5,330,000 | 2,696,447 | |
Onondaga Civic Development Corp. | |||||
St. Joseph’s Hospital Health Center | 5.000 | 07-01-42 | 1,000,000 | 1,036,970 | |
Orange County Industrial Development Agency | |||||
Arden Hill Care Center, Series C | 7.000 | 08-01-31 | 500,000 | 502,720 |
12 | New York Tax-Free Income Fund | Semiannual report | See notes to financial statements |
Maturity | |||||
Rate (%) | date | Par value | Value | ||
New York (continued) | |||||
Port Authority of New York & New Jersey | |||||
5th Installment Special Project AMT | 6.750 | 10-01-19 | $1,350,000 | $1,350,068 | |
Port Authority of New York & New Jersey | |||||
JFK International Airport Terminal | 6.000 | 12-01-36 | 1,000,000 | 1,193,200 | |
Triborough Bridge & Tunnel Authority | |||||
Highway Revenue Tolls, Escrowed to | |||||
Maturity, Series Y | 6.125 | 01-01-21 | 1,500,000 | 2,029,125 | |
Upper Mohawk Valley Regional Water | |||||
Finance Authority | |||||
Water Revenue (D)(Z) | Zero | 04-01-22 | 2,230,000 | 1,725,329 | |
Puerto Rico 8.1% | 5,315,850 | ||||
Commonwealth of Puerto Rico | |||||
Public Improvement, Series A | 5.750 | 07-01-41 | 1,000,000 | 1,071,980 | |
Puerto Rico Aqueduct & Sewer Authority | |||||
Water Revenue, Series A | 5.125 | 07-01-37 | 500,000 | 511,575 | |
Puerto Rico Sales Tax Financing Corp. | |||||
Sales Tax Revenue, Series A (Zero coupon | |||||
steps up to 6.750% on 8-1-16) | Zero | 08-01-32 | 2,000,000 | 2,112,300 | |
Puerto Rico Sales Tax Financing Corp., Series C | 5.000 | 08-01-35 | 1,000,000 | 1,075,000 | |
Puerto Rico Sales Tax Financing Corp., Series C | 5.375 | 08-01-38 | 500,000 | 544,995 | |
Virgin Islands 1.8% | 1,193,200 | ||||
Virgin Islands Public Finance Authority, Series A | 6.750 | 10-01-37 | 1,000,000 | 1,193,200 | |
Guam 0.9% | 572,005 | ||||
Guam Government, Series A | 5.750 | 12-01-34 | 500,000 | 572,005 | |
Par value | Value | ||||
Short-Term Investments 2.8% | $1,849,000 | ||||
(Cost $1,849,000) | |||||
Repurchase Agreement 2.8% | 1,849,000 | ||||
Repurchase Agreement with State Street Corp. dated 11-30-12 at | |||||
0.010% to be repurchased at $1,849,002 on 12-3-12, collateralized | |||||
by $1,890,000 U.S. Treasury Cash Management Bill, 0.010% due | |||||
12-31-12 (valued at $1,889,055 including interest) | $1,849,000 | 1,849,000 | |||
Total investments (Cost $57,023,289)† 98.9% | $65,255,019 | ||||
Other assets and liabilities, net 1.1% | $743,318 | ||||
Total net assets 100.0% | $65,998,337 | ||||
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. | 3.2% | ||
Ambac Financial Group, Inc. | 2.6% | ||
Federal Housing Administration | 1.6% | ||
National Public Finance Guarantee Insurance Company | 5.8% | ||
State Aid Withholding | 1.8% |
(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 11-30-12, the aggregate cost of investment securities for federal income tax purposes was $56,906,044. Net unrealized appreciation aggregated $8,348,975 of which $8,414,929 related to appreciated investment securities and $65,954 related to depreciated investment securities.
The Fund had the following sector composition as a percentage of total net assets on 11-30-12:
General Obligation Bonds | 4.4% | |||
Revenue Bonds | ||||
Education | 16.9% | |||
Water & Sewer | 11.7% | |||
Transportation | 8.4% | |||
Utilities | 8.0% | |||
Development | 8.0% | |||
Health Care | 7.0% | |||
Airport | 5.5% | |||
Pollution | 2.1% | |||
Tobacco | 1.5% | |||
Other Revenue | 22.6% | |||
Short-Term Investments & Other | 3.9% |
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 11-30-12 (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 $57,023,289) | $65,255,019 |
Cash | 473 |
Receivable for fund shares sold | 157,668 |
Interest receivable | 723,537 |
Other receivables and prepaid expenses | 7,650 |
Total assets | 66,144,347 |
Liabilities | |
Payable for fund shares repurchased | 59,022 |
Distributions payable | 25,036 |
Payable to affiliates | |
Accounting and legal services fees | 4,514 |
Transfer agent fees | 3,224 |
Distribution and service fees | 10,512 |
Trustees’ fees | 3,827 |
Other liabilities and accrued expenses | 39,875 |
Total liabilities | 146,010 |
Net assets | |
Paid-in capital | $57,366,374 |
Undistributed net investment income | 29,700 |
Accumulated net realized gain (loss) on investments | 370,533 |
Net unrealized appreciation (depreciation) on investments | 8,231,730 |
Net assets | $65,998,337 |
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 ($53,481,493 ÷ 4,044,428 shares) | $13.22 |
Class B ($2,288,129 ÷ 173,014 shares)1 | $13.23 |
Class C ($10,228,715 ÷ 773,391 shares)1 | $13.23 |
Maximum offering price per share | |
Class A (net asset value per share ÷ 95.5%)2 | $13.84 |
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 11-30-12
(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 | $1,459,791 |
Expenses | |
Investment management fees | 163,983 |
Distribution and service fees | 139,626 |
Accounting and legal services fees | 7,215 |
Transfer agent fees | 19,274 |
Trustees’ fees | 2,063 |
State registration fees | 4,789 |
Printing and postage | 4,462 |
Professional fees | 23,674 |
Custodian fees | 6,559 |
Registration and filing fees | 6,769 |
Other | 6,332 |
Total expenses | 384,746 |
Less expense reductions | (46,250) |
Net expenses | 338,496 |
Net investment income | 1,121,295 |
Realized and unrealized gain (loss) | |
Net realized gain on Investments in unaffiliated issuers | 155,354 |
Change in net unrealized appreciation (depreciation) of investments | 1,869,637 |
1,869,637 | |
Net realized and unrealized gain | 2,024,991 |
Increase in net assets from operations | $3,146,286 |
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 | |
11-30-12 | ended | |
(Unaudited) | 5-31-12 | |
Increase (decrease) in net assets | ||
From operations | ||
Net investment income | $1,121,295 | $2,378,527 |
Net realized gain | 155,354 | 142,970 |
Change in net unrealized appreciation (depreciation) | 1,869,637 | 4,346,005 |
Increase in net assets resulting from operations | 3,146,286 | 6,867,502 |
Distributions to shareholders | ||
From net investment income | ||
Class A | (951,627) | (2,034,067) |
Class B | (30,639) | (67,551) |
Class C | (133,258) | (264,603) |
From net realized gain | ||
Class A | — | (37,821) |
Class B | — | (1,492) |
Class C | — | (5,975) |
Total distributions | (1,115,524) | (2,411,509) |
From Fund share transactions | (295,032) | (204,711) |
Total increase | 1,735,730 | 4,251,282 |
Net assets | ||
Beginning of period | 64,262,607 | 60,011,325 |
End of period | $65,998,337 | $64,262,607 |
Undistributed net investment income | $29,700 | $23,929 |
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 during the period.
CLASS A SHARES Period ended | 11-30-121 | 5-31-12 | 5-31-11 | 5-31-10 | 5-31-092 | 8-31-08 | 8-31-07 |
Per share operating performance | |||||||
Net asset value, beginning | |||||||
of period | $12.82 | $11.94 | $12.20 | $11.60 | $11.96 | $12.03 | $12.40 |
Net investment income3 | 0.23 | 0.48 | 0.52 | 0.51 | 0.38 | 0.51 | 0.52 |
Net realized and unrealized gain | |||||||
(loss) on investments | 0.40 | 0.89 | (0.28) | 0.60 | (0.36) | (0.07) | (0.37) |
Total from investment operations | 0.63 | 1.37 | 0.24 | 1.11 | 0.02 | 0.44 | 0.15 |
Less distributions | |||||||
From net investment income | (0.23) | (0.48) | (0.50) | (0.51) | (0.38) | (0.51) | (0.52) |
From net realized gain | — | (0.01) | — | — | — | — | — |
Total distributions | (0.23) | (0.49) | (0.50) | (0.51) | (0.38) | (0.51) | (0.52) |
Net asset value, end of period | $13.22 | $12.82 | $11.94 | $12.20 | $11.60 | $11.96 | $12.03 |
Total return (%)4,5 | 4.966 | 11.71 | 2.04 | 9.71 | 0.286 | 3.73 | 1.18 |
Ratios and supplemental data | |||||||
Net assets, end of period | |||||||
(in millions) | $53 | $53 | $50 | $54 | $46 | $44 | $40 |
Ratios (as a percentage of average | |||||||
net assets): | |||||||
Expenses before reductions | 1.057 | 1.06 | 1.08 | 1.10 | 1.197,8 | 1.04 | 1.03 |
Expenses net of fee waivers | 0.907 | 0.93 | 0.96 | 1.10 | 1.197,8 | 1.04 | 1.03 |
Net investment income | 3.557 | 3.92 | 4.31 | 4.27 | 4.507 | 4.28 | 4.22 |
Portfolio turnover (%) | 6 | 16 | 9 | 7 | 22 | 25 | 17 |
1 Six months ended 11-30-12. 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 applicable 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 | 11-30-121 | 5-31-12 | 5-31-11 | 5-31-10 | 5-31-092 | 8-31-08 | 8-31-07 |
Per share operating performance | |||||||
Net asset value, beginning | |||||||
of period | $12.82 | $11.94 | $12.21 | $11.60 | $11.96 | $12.03 | $12.40 |
Net investment income3 | 0.18 | 0.39 | 0.43 | 0.42 | 0.32 | 0.43 | 0.43 |
Net realized and unrealized gain | |||||||
(loss) on investments | 0.41 | 0.89 | (0.28) | 0.61 | (0.36) | (0.07) | (0.37) |
Total from investment operations | 0.59 | 1.28 | 0.15 | 1.03 | (0.04) | 0.36 | 0.06 |
Less distributions | |||||||
From net investment income | (0.18) | (0.39) | (0.42) | (0.42) | (0.32) | (0.43) | (0.43) |
From net realized gain | — | (0.01) | — | — | — | — | — |
Total distributions | (0.18) | (0.40) | (0.42) | (0.42) | (0.32) | (0.43) | (0.43) |
Net asset value, end of period | $13.23 | $12.82 | $11.94 | $12.21 | $11.60 | $11.96 | $12.03 |
Total return (%)4,5 | 4.646 | 10.90 | 1.25 | 9.03 | (0.24)6 | 3.01 | 0.48 |
Ratios and supplemental data | |||||||
Net assets, end of period | |||||||
(in millions) | $2 | $2 | $2 | $3 | $6 | $8 | $11 |
Ratios (as a percentage of average | |||||||
net assets): | |||||||
Expenses before reductions | 1.757 | 1.76 | 1.77 | 1.80 | 1.897,8 | 1.74 | 1.73 |
Expenses net of fee waivers | 1.657 | 1.66 | 1.66 | 1.80 | 1.897,8 | 1.74 | 1.73 |
Net investment income | 2.807 | 3.18 | 3.59 | 3.57 | 3.807 | 3.57 | 3.52 |
Portfolio turnover (%) | 6 | 16 | 9 | 7 | 22 | 25 | 17 |
1 Six months ended 11-30-12. 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 applicable 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 | 11-30-121 | 5-31-12 | 5-31-11 | 5-31-10 | 5-31-092 | 8-31-08 | 8-31-07 |
Per share operating performance | |||||||
Net asset value, beginning | |||||||
of period | $12.82 | $11.94 | $12.21 | $11.60 | $11.96 | $12.03 | $12.40 |
Net investment income3 | 0.18 | 0.39 | 0.43 | 0.43 | 0.32 | 0.43 | 0.43 |
Net realized and unrealized gain | |||||||
(loss) on investments | 0.41 | 0.89 | (0.28) | 0.60 | (0.36) | (0.07) | (0.37) |
Total from investment operations | 0.59 | 1.28 | 0.15 | 1.03 | (0.04) | 0.36 | 0.06 |
Less distributions | |||||||
From net investment income | (0.18) | (0.39) | (0.42) | (0.42) | (0.32) | (0.43) | (0.43) |
From net realized gain | — | (0.01) | — | — | — | — | — |
Total distributions | (0.18) | (0.40) | (0.42) | (0.42) | (0.32) | (0.43) | (0.43) |
Net asset value, end of period | $13.23 | $12.82 | $11.94 | $12.21 | $11.60 | $11.96 | $12.03 |
Total return (%)4,5 | 4.646 | 10.90 | 1.25 | 9.04 | (0.24)6 | 3.01 | 0.48 |
Ratios and supplemental data | |||||||
Net assets, end of period | |||||||
(in millions) | $10 | $9 | $8 | $8 | $6 | $3 | $4 |
Ratios (as a percentage of average | |||||||
net assets): | |||||||
Expenses before reductions | 1.757 | 1.76 | 1.78 | 1.80 | 1.897,8 | 1.74 | 1.73 |
Expenses net of fee waivers | 1.657 | 1.66 | 1.66 | 1.80 | 1.897,8 | 1.74 | 1.73 |
Net investment income | 2.807 | 3.19 | 3.61 | 3.56 | 3.797 | 3.57 | 3.51 |
Portfolio turnover (%) | 6 | 16 | 9 | 7 | 22 | 25 | 17 |
1 Six months ended 11-30-2012. 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 applicable 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 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. 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 securities and assets, where reliable market quotations are not 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, which include price verification procedures. The frequency with which these fair valuation procedures are used cannot be predicted.
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 or trends, 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.
20 | New York Tax-Free Income Fund | Semiannual report |
Changes in valuation techniques may result in transfers into or out of an assigned level within the disclosure hierarchy.
As of November 30, 2012, all investments are categorized as Level 2 under the hierarchy described above.
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 may have a lien, security interest or security entitlement in any Fund property that is not otherwise segregated or pledged, to the maximum extent permitted by law, to the extent of 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. Commitment fees for the six months ended November 30, 2012 were $639. For the six months ended November 30, 2012, the Fund had no borrowings under the line of credit.
Expenses. Within the John Hancock Funds complex, expenses that are directly attributable to an individual fund are allocated to such 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.
Semiannual report | New York Tax-Free Income Fund | 21 |
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.
As of May 31, 2012, 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 and distributable earnings, 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 distributions payable and accretion on debt securities.
New accounting pronouncement. In December 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-11 (ASU 2011-11), Disclosures about Offsetting Assets and Liabilities. The update creates new disclosure requirements requiring entities to disclose both gross and net information for derivatives and other financial instruments that are either offset in the Statement of assets and liabilities or subject to an enforceable master netting arrangement or similar agreement. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. ASU 2011-11 may result in additional disclosure relating to the presentation of derivatives and certain other financial instruments.
Note 3 — Guarantees and indemnifications
Under the Trust’s organizational documents, its Officers and Trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust including 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 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.
22 | New York Tax-Free Income Fund | Semiannual report |
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 investment management fees incurred for the six months ended November 30, 2012 were equivalent to a net annual effective rate of 0.50% 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, 2012 amounted to an annual rate of 0.02% 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 pays the following contractual rates of distribution 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% |
The Distributor has contractually agreed to waive 0.15% of Rule 12b-1 fees for Class A shares and 0.10% of Rule 12b-1 fees for Class B and Class C shares. The current waiver agreement expires on September 30, 2013, unless renewed by mutual agreement of the Fund and the Distributor based upon a determination that this is appropriate under the circumstances at that time.
Accordingly, these fee limitations amounted to $40,359, $1,100 and $4,791 for Class A, Class B and Class C shares, respectively, for the six months ended November 30, 2012.
Sales charges. Class A shares are assessed up-front sales charges, which resulted in payments to the Distributor amounting to $78,221 for the six months ended November 30, 2012. Of this amount, $442 was retained and used for printing prospectuses, advertising, sales literature and other purposes, $74,892 was paid as sales commissions to broker-dealers and $2,887 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, 2012, CDSCs received by the Distributor amounted to $3,383 and $70 for Class B and Class C shares, respectively.
Semiannual report | New York Tax-Free Income Fund | 23 |
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, 2012 were:
DISTRIBUTION AND | TRANSFER | ||||
CLASS | SERVICE FEES | AGENT FEES | |||
Class A | $80,717 | $15,811 | |||
Class B | 10,998 | 646 | |||
Class C | 47,911 | 2,817 | |||
Total | $139,626 | $19,274 |
Trustee expenses. The Fund compensates each Trustee who is not an employee of the Adviser or its affiliates. Under the John Hancock Group of Funds Deferred Compensation Plan (the Plan) which was terminated in November 2012, these Trustees could have elected, for tax purposes, to defer receipt of this compensation. Any deferred amounts were invested in various John Hancock funds. The investment of deferred amounts and the offsetting liability are included with Other receivables and prepaid expenses and Payable to affiliates — Trustees’ fees, respectively, in the accompanying Statement of assets and liabilities. Plan assets will be liquidated in accordance with the Plan documents.
Note 5 — Fund share transactions
Transactions in Fund shares for the six months ended November 30, 2012 and for the year ended May 31, 2012 were as follows:
Six months ended 11-30-12 | Year ended 5-31-12 | |||
Shares | Amount | Shares | Amount | |
Class A shares | ||||
Sold | 272,313 | $3,516,385 | 528,795 | $6,514,026 |
Distributions reinvested | 63,293 | 820,474 | 137,351 | 1,698,349 |
Repurchased | (423,749) | (5,496,052) | (714,084) | (8,831,901) |
Net decrease | (88,143) | ($1,159,193) | (47,938) | ($619,526) |
Class B shares | ||||
Sold | 30,313 | $392,993 | 40,733 | $505,065 |
Distributions reinvested | 1,801 | 23,358 | 3,701 | 45,757 |
Repurchased | (26,488) | (341,572) | (56,644) | (699,651) |
Net increase (decrease) | 5,626 | $74,779 | (12,210) | ($148,829) |
24 | New York Tax-Free Income Fund | Semiannual report |
Six months ended 11-30-12 | Year ended 5-31-12 | |||
Shares | Amount | Shares | Amount | |
Class C shares | ||||
Sold | 121,797 | $1,574,370 | 142,903 | $1,774,380 |
Distributions reinvested | 8,918 | 115,699 | 16,233 | 201,053 |
Repurchased | (69,688) | (900,687) | (114,251) | (1,411,789) |
Net increase | 61,027 | $789,382 | 44,885 | $563,644 |
Net decrease | (21,490) | ($295,032) | (15,263) | ($204,711) |
Note 6 — Purchase and sale of securities
Purchases and sales of securities, other than short-term securities, aggregated $3,758,135 and $5,025,000, respectively, for the six months ended November 30, 2012.
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 6–8 and June 3–5, 2012 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
On June 3–5, 2012, the Board consisted of nine individuals, seven of whom were 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 independent legal counsel to assist them in connection with their duties. The Board has appointed an Independent Trustee as Chairman. On June 3–5, 2012, the Board had four standing committees that were composed entirely of Independent Trustees: the Audit Committee; the Compliance Committee; the Nominating, Governance and Administration Committee; and the Contracts & Operations Committee. Additionally, on June 3–5, 2012, Investment Performance Committee A was a standing committee of the Board composed of Independent Trustees and one Trustee who is affiliated with the Adviser. Investment Performance Committee A was responsible for overseeing and monitoring matters relating to the investment performance of the Fund. The Board also designated an Independent Trustee as Vice Chairman to serve in the absence of the Chairman. 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 6–8, 2012 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 Lipper, a Thomson Reuters company (Lipper), 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 Expense Group, each as determined by Lipper, and with the Fund’s benchmark index. The Category includes all funds that invest similarly to the way the Fund invests. The Expense 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
26 | New York Tax-Free Income Fund | Semiannual report |
institutional clients and other investment companies, 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 6–8, 2012, the Board reviewed materials relevant to its consideration of the Agreements. As a result of the discussions that occurred during the May 6–8, 2012 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 3–5, 2012, the Board, including the Independent Trustees, formally considered the continuation of the Advisory Agreement and the Subadvisory Agreement, 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 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 investment manager analytical capabilities, market and economic knowledge and execution of its Subadviser oversight responsibilities. The Board further considered the culture of compliance, resources dedicated to compliance, compliance programs, record of compliance with applicable laws and regulations, 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
Semiannual report | New York Tax-Free Income Fund | 27 |
Adviser’s and its affiliates’ policies and procedures for assuring compliance with applicable laws and regulations.
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 Lipper, which included a comprehensive analysis of the Fund’s performance. The Board also examined materials discussing Fund performance and the Fund’s investment objective, strategies and outlook. The Board also reviewed a narrative and statistical analysis of the Lipper data that was prepared by the Adviser, which analyzed various factors that may affect the Lipper rankings. The Board reviewed information regarding the investment performance of the Fund as compared to its Lipper Category as well as its benchmark index (see chart below). The Board was provided with a description of the methodology used by Lipper to select the funds in the Category. The Board also considered updated performance information provided by the Adviser at its May and June 2012 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, 2011 and that of its Category average and benchmark index over the same periods:
1 YEAR | 3 YEAR | 5 YEAR | 10 YEAR | |
NY Tax-Free Income Fund Class A Shares | 9.54% | 8.10% | 4.22% | 4.63% |
New York Municipal Debt Category Average | 9.69% | 9.63% | 3.78% | 4.46% |
Barclay Muni Bond TR Index | 10.70% | 8.57% | 5.22% | 5.38% |
The Board noted that the Fund outperformed its Category’s average performance over the five- and ten-years periods, and underperformed its Category’s average performance over the one- and three-year periods. The Board also noted that the Fund underperformed its benchmark index’s performance over all periods. The Board was aware that the benchmark is composed of securities that materially differ from the Fund’s investment focus on New York issuers.
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 Expense 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 other registered investment companies, institutional investors and separate accounts.
28 | New York 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 Expense Group median. The Board also considered expense information regarding the Fund’s total operating expense ratio (Gross Expense Ratio) and, if different, the Fund’s total operating expense ratio after taking into account any fee waiver or expense waiver agreement by the Adviser (Net Expense Ratio). The Board considered information comparing the Gross Expense Ratio and Net Expense Ratio of the Fund to that of the Expense Group median.
The Board noted that the Fund’s advisory fee ratio was five basis points above the Expense 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 2011 financial statements in relation with the Fund’s Expense Group median provided by Lipper in April 2012:
FUND — CLASS A SHARES | EXPENSE GROUP MEDIAN | |
Advisory Fee Ratio | 0.50% | 0.45% |
Gross Expense Ratio | 0.94% | 0.94% |
Net Expense Ratio (Excluding Leverage Expense) | 0.93% | 0.83% |
The Board viewed favorably the Fund’s agreement with John Hancock Funds, LLC, the Fund’s distributor, to limit the Rule 12b-1 fees on the Fund’s Class A shares at 0.15% until September 30, 2013 and the favorable impact of this agreement on the Class’s Gross Expense Ratio.
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, 2011 compared to available aggregate profitability data provided for the year ended December 31, 2010. 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 a limited number of other 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 limited.
The Board considered limited profitability information with respect to the Subadviser, which is affiliated with the Adviser. In addition, as noted above, the Board considered basic assumptions and methodology for allocating expenses in the Subadviser’s profitability analysis.
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.
Semiannual report | New York Tax-Free Income Fund | 29 |
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 and the Subadvisory Agreement each 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 |
Special Shareholder Meeting
On November 15, 2012, a Special Meeting of the Shareholders of John Hancock Tax-Exempt Series Fund and each of its series, including John Hancock New York Tax-Free Income Fund, was held at 601 Congress Street, Boston, Massachusetts, for the purpose of considering and voting on the following proposal:
Proposal: Election of thirteen (13) Trustees as members of the Board of Trustees of John Hancock Tax-Exempt Series Fund.
TOTAL VOTES | TOTAL VOTES WITHHELD | |
FOR THE NOMINEE | FROM THE NOMINEE | |
Independent Trustees | ||
Charles L. Bardelis | 9,979,481.77 | 374,984.67 |
Peter S. Burgess | 10,179,276.29 | 175,190.15 |
William H. Cunningham | 10,178,553.36 | 175,913.07 |
Grace K. Fey | 10,176,099.03 | 178,367.41 |
Theron S. Hoffman | 9,977,980.92 | 376,485.52 |
Deborah C. Jackson | 10,175,038.24 | 179,428.20 |
Hassell H. McClellan | 10,177,775.26 | 176,691.18 |
James M. Oates | 10,178,553.36 | 175,913.07 |
Steven R. Pruchansky | 9,979,481.77 | 374,984.67 |
Gregory A. Russo | 10,178,215.32 | 176,251.12 |
Non-Independent Trustees | ||
James R. Boyle | 10,179,276.29 | 175,190.15 |
Craig Bromley | 10,177,775.26 | 176,691.18 |
Warren A. Thomson | 10,177,775.26 | 176,691.18 |
Semiannual report | New York Tax-Free Income Fund | 31 |
More information
Trustees | Investment adviser |
James M. Oates, Chairman | John Hancock Advisers, LLC |
Charles L. Bardelis* | |
James R. Boyle† | Subadviser |
Craig Bromley† | John Hancock Asset Management a division of |
Peter S. Burgess* | Manulife Asset Management (US) LLC |
William H. Cunningham | |
Grace K. Fey | Principal distributor |
Theron S. Hoffman* | John Hancock Funds, LLC |
Deborah C. Jackson | |
Hassell H. McClellan | Custodian |
Steven R. Pruchansky, Vice Chairman | State Street Bank and Trust Company |
Gregory A. Russo | |
Warren A. Thomson† | Transfer agent |
John Hancock Signature Services, Inc. | |
Officers | |
Hugh McHaffie | Legal counsel |
President | K&L Gates LLP |
Andrew G. Arnott | |
Executive Vice President | |
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 |
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 1-202-551-8090 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 |
32 | New York Tax-Free Income Fund | Semiannual report |
1-800-225-5291
1-800-554-6713 (TDD)
1-800-338-8080 EASI-Line
www.jhfunds.com
76SA 11/12 | |
This report is for the information of the shareholders of John Hancock New York Tax-Free Income Fund. | 1/13 |
It is not authorized for distribution to prospective investors unless preceded or accompanied by a prospectus. |
A look at performance
Total returns for the period ended November 30, 2012
Tax | ||||||||||
Average annual total | Cumulative total | SEC 30-day | SEC 30-day | equivalent | ||||||
returns (%) | returns (%) | yield (%) | yield (%) | subsidized | ||||||
with maximum sales charge | with maximum sales charge | subsidized | unsubsidized1 | yield (%)2 | ||||||
as of | as of | as of | ||||||||
1-year | 5-year | 10-year | 6-months | 1-year | 5-year | 10-year | 11-30-12 | 11-30-12 | 11-30-12 | |
Class A | 6.17 | 4.81 | 4.67 | –0.20 | 6.17 | 26.46 | 57.82 | 1.78 | 1.64 | 2.89 |
Class B | 5.32 | 4.70 | 4.55 | –0.88 | 5.32 | 25.79 | 56.10 | 1.13 | 1.03 | 1.83 |
Class C | 9.32 | 5.03 | 4.41 | 3.12 | 9.32 | 27.80 | 53.97 | 1.13 | 1.03 | 1.83 |
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 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 9-30-13 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.
See the following page for footnotes.
6 | Massachusetts Tax-Free Income Fund | Semiannual report |
Without | With maximum | |||
Start date | sales charge | sales charge | Index | |
Class B 3 | 11-30-02 | $15,610 | $15,610 | $17,005 |
Class C3 | 11-30-02 | 15,397 | 15,397 | 17,005 |
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 Municipal Bond Index is an unmanaged index representative of the tax-exempt bond market.
Barclays Massachusetts Municipal Bond Index is an unmanaged index composed of Massachusetts investment grade municipal bonds. Total return for this index is not available for the 10-year period.
Prior to December 14, 2012, the Fund compared its performance solely to the Barclays Municipal Bond Index. After this date, the Fund added the Barclays Massachusetts Municipal Bond Index as the primary benchmark index and retained the Barclays Municipal Bond Index as the secondary benchmark index to which the Fund compares its performance to better reflect the universe of investment opportunities based on the Fund’s investment strategy.
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.
Footnotes related to performance pages
1 Unsubsidized yield reflects what the yield would have been without the effect of reimbursements and waivers.
2 Tax equivalent yield is based on the maximum federal income tax rate of 35% and state tax rate of 5.25%. Share classes will differ due to varying expenses.
3 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 of investing in the Fund so you can compare these costs with the ongoing costs of investing in other mutual funds.
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, 2012 with the same investment held until November 30, 2012.
Account value | Ending value | Expenses paid during | |
on 6-1-12 | on 11-30-12 | period ended 11-30-121 | |
Class A | $1,000.00 | $1,045.10 | $4.31 |
Class B | 1,000.00 | 1,041.20 | 8.14 |
Class C | 1,000.00 | 1,041.20 | 8.14 |
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, 2012, 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, 2012, with the same investment held until November 30, 2012. 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 6-1-12 | on 11-30-12 | period ended 11-30-121 | |
Class A | $1,000.00 | $1,020.90 | $4.26 |
Class B | 1,000.00 | 1,017.10 | 8.04 |
Class C | 1,000.00 | 1,017.10 | 8.04 |
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 0.84%, 1.59% and 1.59% for Class A, Class B and Class C shares, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period).
Semiannual report | Massachusetts Tax-Free Income Fund | 9 |
Portfolio summary
Top 10 Holdings (27.0% of Net Assets on 11-30-12)1,2 | |
Massachusetts Housing Finance Agency, 3.450%, 12-1-37 | 3.8% |
Massachusetts School Building Authority, 5.000%, 10-15-41 | 3.6% |
Boston Housing Authority, 5.000%, 4-1-27 | 2.7% |
Massachusetts Bay Transportation Authority, 5.250%, 7-1-33 | 2.6% |
Massachusetts Water Resources Authority, 5.250%, 8-1-29 | 2.6% |
Massachusetts State Department of Transportation, 5.000%, 1-1-37 | 2.6% |
Holyoke Gas & Electric Department, 5.000%, 12-1-31 | 2.6% |
Puerto Rico Sales Tax Financing Corp., Step Coupon, 8-1-32 | 2.4% |
Commonwealth of Massachusetts, 5.500%, 12-1-24 | 2.1% |
Massachusetts Bay Transportation Authority, 5.000%, 7-1-31 | 2.0% |
Sector Composition1,3 | ||||
General Obligation Bonds | 7.2% | Utilities | 2.6% | |
Revenue Bonds | Development | 2.4% | ||
Education | 18.1% | Pollution | 1.9% | |
Health Care | 13.6% | Facilities | 1.8% | |
Transportation | 12.4% | Industrial Development | 0.1% | |
Housing | 11.8% | Other Revenue | 14.6% | |
Water & Sewer | 11.0% | Short-Term Investments & Other | 2.5% | |
Quality Composition1,3,4 | |||
AAA | 9.2% | ||
AA | 43.6% | ||
A | 18.1% | ||
BBB | 22.5% | ||
BB | 0.8% | ||
Not Rated | 3.3% | ||
Short-Term Investments & Other | 2.5% | ||
1 As a percentage of net assets on 11-30-12.
2 Cash and cash equivalents not included.
3 The major risk factors in this Fund’s performance are interest-rate and credit risk. When interest rates rise, bond prices usually fall. Generally, an increase in the Fund’s average maturity will make it more sensitive to interest-rate risk. Investments in higher-yielding, lower-rated securities involve additional risks as these securities include a higher risk of default and loss of principal. Municipal bond prices can decline due to fiscal mismanagement or tax shortfalls, or if related projects become unprofitable. 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. If the Fund invests heavily in any one state or region, performance could be disproportionately affected by factors particular to that state or region.
4 Ratings are from Moody’s Investors Service, Inc. If not available, we have used ratings from Standard & Poor’s Ratings Services. 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 11-30-12 and do not reflect subsequent downgrades or upgrades, if any.
10 | Massachusetts Tax-Free Income Fund | Semiannual report |
Fund’s investments
As of 11-30-12 (unaudited)
Maturity | |||||
Rate (%) | date | Par value | Value | ||
Municipal Bonds 97.5% | $130,325,280 | ||||
(Cost $117,364,524) | |||||
Massachusetts 82.1% | 109,818,573 | ||||
Boston Housing Authority | |||||
Capital Program Revenue (D) | 5.000 | 04-01-27 | $3,255,000 | 3,599,900 | |
Boston Housing Authority | |||||
Capital Program Revenue (D) | 5.000 | 04-01-28 | 2,000,000 | 2,195,800 | |
Boston Industrial Development | |||||
Financing Authority | |||||
Harbor Electric Energy Company Project AMT | 7.375 | 05-15-15 | 90,000 | 90,430 | |
Boston Water & Sewer Commission | |||||
Sewer Revenue, Series A | 5.750 | 11-01-13 | 95,000 | 99,804 | |
Commonwealth of Massachusetts | |||||
Public Improvements (D) | 5.500 | 11-01-17 | 1,000,000 | 1,227,800 | |
Commonwealth of Massachusetts | |||||
Public Improvements, Series C | 5.500 | 11-01-15 | 1,000,000 | 1,145,040 | |
Commonwealth of Massachusetts | |||||
Series C (D) | 5.500 | 12-01-24 | 2,000,000 | 2,793,200 | |
Commonwealth of Massachusetts, Series E (D) | 5.000 | 11-01-25 | 1,000,000 | 1,354,090 | |
Freetown Lakeville Regional School District (D) | 5.000 | 07-01-23 | 1,000,000 | 1,014,120 | |
Holyoke Gas & Electric Department | |||||
Natural Gas Revenue, Series A (D) | 5.000 | 12-01-31 | 3,410,000 | 3,410,443 | |
Massachusetts Bay Transportation Authority | |||||
Assessment, Series A | 5.000 | 07-01-41 | 1,360,000 | 1,635,346 | |
Massachusetts Bay Transportation Authority | |||||
Sales Tax Revenue, Series A | 5.000 | 07-01-31 | 2,000,000 | 2,718,100 | |
Massachusetts Bay Transportation Authority | |||||
Sales Tax Revenue, Series A | 5.250 | 07-01-35 | 1,310,000 | 1,849,995 | |
Massachusetts Bay Transportation Authority | |||||
Sales Tax Revenue, Series A-2 (Z) | Zero | 07-01-26 | 2,500,000 | 1,461,375 | |
Massachusetts Bay Transportation Authority | |||||
Transit Revenue, Series A | 7.000 | 03-01-14 | 1,000,000 | 1,027,830 | |
Massachusetts Bay Transportation Authority | |||||
Transit Revenue, Series B | 5.250 | 07-01-33 | 2,500,000 | 3,511,450 | |
Massachusetts Development Finance Agency | |||||
Brandeis University, Series 0-1 | 5.000 | 10-01-40 | 1,000,000 | 1,116,200 | |
Massachusetts Development Finance Agency | |||||
Carleton Willard Village | 5.625 | 12-01-30 | 450,000 | 506,853 | |
Massachusetts Development Finance Agency | |||||
Combined Jewish Philanthropies, Series A | 5.250 | 02-01-22 | 835,000 | 841,321 |
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 | |||||
Covanta Energy Project, Series C | 5.250 | 11-01-42 | $1,000,000 | $1,019,600 | |
Massachusetts Development Finance Agency | |||||
Curry College, Series A (D) | 4.500 | 03-01-25 | 1,000,000 | 1,021,650 | |
Massachusetts Development Finance Agency | |||||
Curry College, Series A (D) | 5.250 | 03-01-26 | 1,000,000 | 1,069,620 | |
Massachusetts Development Finance Agency | |||||
Dominion Energy Brayton Point AMT (P) | 5.000 | 02-01-36 | 2,000,000 | 2,086,960 | |
Massachusetts Development Finance Agency | |||||
Draper Laboratory | 5.875 | 09-01-30 | 2,000,000 | 2,409,440 | |
Massachusetts Development Finance Agency | |||||
Emerson College, Series A | 5.000 | 01-01-40 | 2,000,000 | 2,163,300 | |
Massachusetts Development Finance Agency | |||||
Harvard University Series B | 5.000 | 10-15-40 | 1,190,000 | 1,433,510 | |
Massachusetts Development Finance Agency | |||||
Linden Ponds, Inc., Series A-1 | 5.500 | 11-15-46 | 56,460 | 35,806 | |
Massachusetts Development Finance Agency | |||||
Linden Ponds, Inc., Series A-1 | 6.250 | 11-15-39 | 1,057,748 | 802,937 | |
Massachusetts Development Finance Agency | |||||
Linden Ponds, Inc., Series B (Z) | Zero | 11-15-56 | 280,825 | 1,488 | |
Massachusetts Development Finance Agency | |||||
Massachusetts College of Pharmacy, | |||||
Series E (D) | 5.000 | 07-01-37 | 1,000,000 | 1,110,420 | |
Massachusetts Development Finance Agency | |||||
Merrimack College, Series A | 5.250 | 07-01-42 | 1,000,000 | 1,115,130 | |
Massachusetts Development Finance Agency | |||||
New England Conservatory of Music | 5.250 | 07-01-38 | 2,000,000 | 2,144,660 | |
Massachusetts Development Finance Agency | |||||
Orchard Cove | 5.250 | 10-01-26 | 1,000,000 | 1,020,350 | |
Massachusetts Development Finance Agency | |||||
Partners Healthcare, Series L | 5.000 | 07-01-36 | 1,000,000 | 1,164,360 | |
Massachusetts Development Finance Agency | |||||
Plantation Apartments, Series A AMT | 5.000 | 12-15-24 | 2,320,000 | 2,399,553 | |
Massachusetts Development Finance Agency | |||||
The Groves in Lincoln, Series A | 7.750 | 06-01-39 | 700,000 | 329,000 | |
Massachusetts Development Finance Agency, | |||||
Southeastern Massachusetts System, | |||||
Series A (D) | 5.625 | 01-01-16 | 500,000 | 502,270 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Civic Investments, Prerefunded to 12-15-12, | |||||
Series B | 9.200 | 12-15-31 | 2,000,000 | 2,047,420 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Emerson Hospital, Series E (D) | 5.000 | 08-15-35 | 1,000,000 | 1,003,940 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Harvard Pilgrim Health Care, Series A (D) | 5.000 | 07-01-18 | 1,000,000 | 1,002,810 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Lahey Clinic Medical Center, Series C (D) | 5.000 | 08-15-23 | 1,000,000 | 1,087,770 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Mass Eye & Ear Infirmary | 5.375 | 07-01-35 | 2,000,000 | 2,198,940 |
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 System | 5.000 | 07-01-22 | $1,000,000 | $1,194,130 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Partners HealthCare, Series J1 | 5.000 | 07-01-34 | 1,000,000 | 1,128,890 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
South Shore Hospital | 5.750 | 07-01-29 | 365,000 | 366,299 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Springfield College | 5.625 | 10-15-40 | 2,000,000 | 2,239,460 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Sterling & Francine Clark, Series A | 5.000 | 07-01-36 | 1,000,000 | 1,092,120 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Suffolk University, Series A | 6.250 | 07-01-30 | 1,000,000 | 1,186,980 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Tufts University | 5.375 | 08-15-38 | 350,000 | 428,432 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Williams College, Series H | 5.000 | 07-01-33 | 1,500,000 | 1,535,415 | |
Massachusetts Health & Educational | |||||
Facilities Authority | |||||
Woods Hole Oceanographic, Series B | 5.375 | 06-01-30 | 1,000,000 | 1,169,920 | |
Massachusetts Housing Finance Agency, | |||||
Series 162 | 3.450 | 12-01-37 | 5,055,000 | 5,091,750 | |
Massachusetts Housing Finance Agency, | |||||
Series B | 4.700 | 12-01-16 | 1,050,000 | 1,050,126 | |
Massachusetts Port Authority | |||||
Boston Fuel Project AMT (D) | 5.000 | 07-01-32 | 1,770,000 | 1,870,784 | |
Massachusetts Port Authority | |||||
Conrac Project — Series A | 5.125 | 07-01-41 | 500,000 | 573,365 | |
Massachusetts Port Authority | |||||
US Airways Project, Series A AMT (D) | 5.750 | 09-01-16 | 825,000 | 827,071 | |
Massachusetts School Building Authority | |||||
Senior, Series B | 5.000 | 08-15-30 | 2,000,000 | 2,500,960 | |
Massachusetts School Building Authority | |||||
Senior, Series B | 5.000 | 10-15-41 | 4,000,000 | 4,784,360 | |
Massachusetts State College Building Authority | |||||
College & University Revenue, Series A | 5.500 | 05-01-49 | 1,000,000 | 1,196,320 | |
Massachusetts State College Building Authority | |||||
College & University Revenue, Series B (D)(Z) | Zero | 05-01-19 | 1,000,000 | 891,930 | |
Massachusetts State Department | |||||
of Transportation | |||||
Highway Revenue Tolls, Escrowed to | |||||
Maturity, Series A (D) | 5.125 | 01-01-23 | 445,000 | 562,863 | |
Massachusetts State Department | |||||
of Transportation | |||||
Highway Revenue Tolls, Series B | 5.000 | 01-01-37 | 3,000,000 | 3,415,260 |
See notes to financial statements | Semiannual report | Massachusetts Tax-Free Income Fund | 13 |
Maturity | |||||
Rate (%) | date | Par value | Value | ||
Massachusetts (continued) | |||||
Massachusetts State Department | |||||
of Transportation | |||||
Highway Revenue Tolls, Series C (D)(Z) | Zero | 01-01-20 | $1,000,000 | $872,750 | |
Massachusetts Water Pollution | |||||
Abatement Trust | |||||
Government Fund/Grant Revenue | 5.000 | 08-01-28 | 1,000,000 | 1,241,400 | |
Massachusetts Water Pollution | |||||
Abatement Trust | |||||
Series 9 | 5.250 | 08-01-18 | 60,000 | 67,600 | |
Massachusetts Water Pollution | |||||
Abatement Trust | |||||
Unrefunded 2012 Pooled Loan Program, | |||||
Series 7 | 5.125 | 02-01-31 | 785,000 | 787,905 | |
Massachusetts Water Pollution | |||||
Abatement Trust | |||||
Water Revenue, Series 13 | 5.000 | 08-01-28 | 1,000,000 | 1,154,850 | |
Massachusetts Water Pollution | |||||
Abatement Trust | |||||
Water Revenue, Series 14 | 5.000 | 08-01-32 | 1,000,000 | 1,215,660 | |
Massachusetts Water Resources Authority | |||||
Water Revenue, Series A | 5.000 | 08-01-40 | 1,600,000 | 1,918,288 | |
Massachusetts Water Resources Authority | |||||
Water Revenue, Series B | 5.000 | 08-01-39 | 1,000,000 | 1,176,850 | |
Massachusetts Water Resources Authority | |||||
Water Revenue, Series B (D) | 5.250 | 08-01-29 | 2,500,000 | 3,482,424 | |
Metropolitan Boston Transit Parking Corp. | 5.000 | 07-01-41 | 2,000,000 | 2,268,360 | |
University of Massachusetts Building Authority | |||||
College & University Revenue, Series 1 | 5.000 | 05-01-39 | 1,500,000 | 1,756,020 | |
Puerto Rico 13.6% | 18,207,877 | ||||
Commonwealth of Puerto Rico | |||||
Public Improvement, Series A | 5.750 | 07-01-41 | 1,000,000 | 1,071,980 | |
Commonwealth of Puerto Rico | |||||
Public Improvement, Series B | 5.500 | 07-01-39 | 2,000,000 | 2,095,500 | |
Puerto Rico Aqueduct & Sewer Authority | |||||
Water Revenue, Series A | 6.125 | 07-01-24 | 1,750,000 | 2,033,745 | |
Puerto Rico Aqueduct & Sewer Authority | |||||
Water Revenue, Series A | 5.125 | 07-01-37 | 1,500,000 | 1,534,725 | |
Puerto Rico Highway & | |||||
Transportation Authority | |||||
Fuel Sales Tax Revenue, Escrowed to | |||||
Maturity, Series Y | 6.250 | 07-01-14 | 955,000 | 1,044,359 | |
Puerto Rico Highway & | |||||
Transportation Authority | |||||
Fuel Sales Tax Revenue, Series Y | 6.250 | 07-01-14 | 45,000 | 47,971 | |
Puerto Rico Highway & | |||||
Transportation Authority | |||||
Prerefunded, Series AA (D) | 5.500 | 07-01-19 | 1,640,000 | 2,129,310 | |
Puerto Rico Highway & | |||||
Transportation Authority | |||||
Unrefunded, Series AA (D) | 5.500 | 07-01-19 | 360,000 | 412,384 | |
Puerto Rico Highway & | |||||
Transportation Authority | |||||
Unrefunded, Series H | 5.450 | 07-01-35 | 285,000 | 296,833 |
14 | Massachusetts Tax-Free Income Fund | Semiannual report | See notes to financial statements |
Maturity | |||||
Rate (%) | date | Par value | Value | ||
Puerto Rico (continued) | |||||
Puerto Rico Housing Finance Authority | 5.125 | 12-01-27 | $1,000,000 | $1,109,080 | |
Puerto Rico Sales Tax Financing Corp. | |||||
Sales Tax Revenue, Series A | 5.500 | 08-01-42 | 1,000,000 | 1,083,560 | |
Puerto Rico Sales Tax Financing Corp. | |||||
Sales Tax Revenue, Series A (Zero coupon | |||||
steps up to 6.750% on 8-1-16) | Zero | 08-01-32 | 3,000,000 | 3,168,450 | |
Puerto Rico Sales Tax Financing Corp., Series C | 5.375 | 08-01-38 | 2,000,000 | 2,179,980 | |
Virgin Islands 1.3% | 1,726,825 | ||||
Virgin Islands Public Finance Authority, Series A | 6.750 | 10-01-37 | 1,000,000 | 1,193,200 | |
Virgin Islands Public Finance Authority, | |||||
Series A–1 | 5.000 | 10-01-39 | 500,000 | 533,625 | |
Guam 0.5% | 572,005 | ||||
Guam Government, Series A | 5.750 | 12-01-34 | 500,000 | 572,005 | |
Par value | Value | ||||
Short-Term Investments 4.9% | $6,629,000 | ||||
(Cost $6,629,000) | |||||
Repurchase Agreement 4.9% | 6,629,000 | ||||
Repurchase Agreement with State Street Corp. dated 11-30-12 at | |||||
0.010% to be repurchased at $6,629,006 on 12-3-12, collateralized | |||||
by $6,765,000 U.S. Treasury Cash Management Bill, 0.010% due | |||||
12-31-12 (valued at $6,761,618, including interest) | $6,629,000 | 6,629,000 | |||
Total investments (Cost $123,975,524)† 102.4% | $136,954,280 | ||||
Other assets and liabilities, net (2.4%) | ($3,235,456) | ||||
Total net assets 100.0% | $133,718,824 | ||||
The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund.
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 the following companies:
Insurance coverage | As a % of total investments | ||
ACA Financial Guaranty Corp. | 1.5% | ||
Ambac Financial Group, Inc. | 3.0% | ||
Assured Guarantee Corp. | 0.8% | ||
Assured Guaranty Municipal Corp. | 8.4% | ||
Financial Guaranty Insurance Company | 0.4% | ||
National Public Finance Guarantee Insurance Company | 8.9% | ||
Radian Asset Assurance, Inc. | 0.7% | ||
XL Capital Assurance, Inc. | 0.7% |
(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 11-30-12, the aggregate cost of investment securities for federal income tax purposes was $123,758,812. Net unrealized appreciation aggregated $13,195,468, of which $14,182,744 related to appreciated investment securities and $987,276 related to depreciated investment securities.
See notes to financial statements | Semiannual report | Massachusetts Tax-Free Income Fund | 15 |
Notes to Schedule of Investments (continued)
The Fund had the following sector composition as a percentage of total net assets on 11-30-12:
General Obligation Bonds | 7.2% | |
Revenue Bonds | ||
Education | 18.1% | |
Health Care | 13.6% | |
Transportation | 12.4% | |
Housing | 11.8% | |
Water & Sewer | 11.0% | |
Utilities | 2.6% | |
Development | 2.4% | |
Pollution | 1.9% | |
Facilities | 1.8% | |
Industrial Development | 0.1% | |
Other Revenue | 14.6% | |
Short-Term Investments & Other | 2.5% |
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
Financial statements
Statement of assets and liabilities 11-30-12 (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 $123,975,524) | $136,954,280 |
Cash | 341 |
Receivable for fund shares sold | 191,837 |
Interest receivable | 1,879,962 |
Receivable from affiliates | 1,653 |
Other receivables and prepaid expenses | 14,881 |
Total assets | 139,042,954 |
Liabilities | |
Payable for delayed delivery securities purchased | 5,066,250 |
Payable for fund shares repurchased | 99,576 |
Distributions payable | 74,280 |
Payable to affiliates | |
Accounting and legal services fees | 7,758 |
Transfer agent fees | 6,494 |
Distribution and service fees | 16,529 |
Trustees’ fees | 6,006 |
Other liabilities and accrued expenses | 47,237 |
Total liabilities | 5,324,130 |
Net assets | |
Paid-in capital | $120,165,401 |
Undistributed net investment income | 110,040 |
Accumulated net realized gain (loss) on investments | 464,627 |
Net unrealized appreciation (depreciation) on investments | 12,978,756 |
Net assets | $133,718,824 |
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 ($109,749,828 ÷ 8,137,112 shares) | $13.49 |
Class B ($3,536,185 ÷ 262,225 shares)1 | $13.49 |
Class C ($20,432,811 ÷ 1,514,960 shares)1 | $13.49 |
Maximum offering price per share | |
Class A (net asset value per share ÷ 95.5%)2 | $14.13 |
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.
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
Statement of operations For the six-month period ended 11-30-12 (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 | $2,785,319 |
Expenses | |
Investment management fees | 325,846 |
Distribution and service fees | 277,040 |
Accounting and legal services fees | 13,034 |
Transfer agent fees | 38,304 |
Trustees’ fees | 3,837 |
State registration fees | 9,176 |
Printing and postage | 5,164 |
Professional fees | 24,979 |
Custodian fees | 12,382 |
Registration and filing fees | 8,724 |
Other | 7,014 |
Total expenses | 725,500 |
Less expense reductions | (91,930) |
Net expenses | 633,570 |
Net investment income | 2,151,749 |
Realized and unrealized gain (loss) | |
Net realized gain (loss) on investments | 146,109 |
Change in net unrealized appreciation (depreciation) of investments | 3,383,983 |
Net realized and unrealized gain | 3,530,092 |
Increase in net assets from operations | $5,681,841 |
18 | 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
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 | |
11-30-12 | ended | |
(Unaudited) | 5-31-12 | |
Increase (decrease) in net assets | ||
From operations | ||
Net investment income | $2,151,749 | $4,365,914 |
Net realized gain | 146,109 | 30,787 |
Change in net unrealized appreciation (depreciation) | 3,383,983 | 8,465,998 |
Increase in net assets resulting from operations | 5,681,841 | 12,862,699 |
Distributions to shareholders | ||
From net investment income | ||
Class A | (1,829,219) | (3,695,861) |
Class B | (47,736) | (102,377) |
Class C | (262,721) | (542,889) |
From net realized gain | ||
Class A | — | (65,672) |
Class B | — | (2,260) |
Class C | — | (12,064) |
Total distributions | (2,139,676) | (4,421,123) |
From Fund share transactions | 2,155,002 | 6,490,689 |
Total increase | 5,697,167 | 14,932,265 |
Net assets | ||
Beginning of period | 128,021,657 | 113,089,392 |
End of period | $133,718,824 | $128,021,657 |
Undistributed net investment income | $110,040 | $97,967 |
See notes to financial statements | Semiannual report | Massachusetts Tax-Free Income Fund | 19 |
Financial highlights
The Financial highlights show how the Fund’s net asset value for a share has changed during the period.
CLASS A SHARES Period ended | 11-30-121 | 5-31-12 | 5-31-11 | 5-31-10 | 5-31-092 | 8-31-08 | 8-31-07 |
Per share operating performance | |||||||
Net asset value, beginning | |||||||
of period | $13.13 | $12.22 | $12.53 | $12.10 | $12.28 | $12.37 | $12.64 |
Net investment income3 | 0.23 | 0.49 | 0.50 | 0.49 | 0.38 | 0.51 | 0.53 |
Net realized and unrealized gain | |||||||
(loss) on investments | 0.36 | 0.91 | (0.30) | 0.46 | (0.17) | (0.08) | (0.27) |
Total from investment operations | 0.59 | 1.40 | 0.20 | 0.95 | 0.21 | 0.43 | 0.26 |
Less distributions | |||||||
From net investment income | (0.23) | (0.48) | (0.49) | (0.49) | (0.39) | (0.50) | (0.52) |
From net realized gain | — | (0.01) | (0.02) | (0.03) | —4 | (0.02) | (0.01) |
Total distributions | (0.23) | (0.49) | (0.51) | (0.52) | (0.39) | (0.52) | (0.53) |
Net asset value, end of period | $13.49 | $13.13 | $12.22 | $12.53 | $12.10 | $12.28 | $12.37 |
Total return (%)5,6 | 4.517 | 11.67 | 1.67 | 8.04 | 1.847 | 3.55 | 2.02 |
Ratios and supplemental data | |||||||
Net assets, end of period | |||||||
(in millions) | $110 | $105 | $92 | $105 | $95 | $97 | $80 |
Ratios (as a percentage of average | |||||||
net assets): | |||||||
Expenses before reductions | 0.998 | 1.00 | 1.00 | 1.00 | 1.098,9 | 0.98 | 0.98 |
Expenses net of fee waivers | |||||||
and credits | 0.848 | 0.87 | 0.95 | 1.00 | 1.098,9 | 0.97 | 0.98 |
Net investment income | 3.448 | 3.82 | 4.04 | 4.00 | 4.398 | 4.08 | 4.16 |
Portfolio turnover (%) | 8 | 11 | 17 | 10 | 17 | 22 | 25 |
1 Six months ended 11-30-12. 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 Total returns would have been lower had certain expenses not been reduced during the applicable periods shown.
7 Not annualized.
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 B SHARES Period ended | 11-30-121 | 5-31-12 | 5-31-11 | 5-31-10 | 5-31-092 | 8-31-08 | 8-31-07 |
Per share operating performance | |||||||
Net asset value, beginning | |||||||
of period | $13.13 | $12.22 | $12.53 | $12.09 | $12.28 | $12.37 | $12.64 |
Net investment income3 | 0.18 | 0.39 | 0.41 | 0.41 | 0.32 | 0.42 | 0.44 |
Net realized and unrealized gain | |||||||
(loss) on investments | 0.36 | 0.92 | (0.29) | 0.46 | (0.19) | (0.08) | (0.27) |
Total from investment operations | 0.54 | 1.31 | 0.12 | 0.87 | 0.13 | 0.34 | 0.17 |
Less distributions | |||||||
From net investment income | (0.18) | (0.39) | (0.41) | (0.40) | (0.32) | (0.41) | (0.43) |
From net realized gain | — | (0.01) | (0.02) | (0.03) | —4 | (0.02) | (0.01) |
Total distributions | (0.18) | (0.40) | (0.43) | (0.43) | (0.32) | (0.43) | (0.44) |
Net asset value, end of period | $13.49 | $13.13 | $12.22 | $12.53 | $12.09 | $12.28 | $12.37 |
Total return (%)5,6 | 4.127 | 10.85 | 0.96 | 7.37 | 1.227 | 2.83 | 1.31 |
Ratios and supplemental data | |||||||
Net assets, end of period | |||||||
(in millions) | $4 | $3 | $3 | $5 | $7 | $10 | $12 |
Ratios (as a percentage of average | |||||||
net assets): | |||||||
Expenses before reductions | 1.698 | 1.70 | 1.70 | 1.70 | 1.798,9 | 1.68 | 1.68 |
Expenses net of fee waivers | |||||||
and credits | 1.598 | 1.62 | 1.65 | 1.70 | 1.798,9 | 1.67 | 1.68 |
Net investment income | 2.688 | 3.08 | 3.33 | 3.29 | 3.698 | 3.39 | 3.46 |
Portfolio turnover (%) | 8 | 11 | 17 | 10 | 17 | 22 | 25 |
1 Six months ended 11-30-12. 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 Total returns would have been lower had certain expenses not been reduced during the applicable periods shown.
7 Not annualized.
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 |
CLASS C SHARES Period ended | 11-30-121 | 5-31-12 | 5-31-11 | 5-31-10 | 5-31-092 | 8-31-08 | 8-31-07 |
Per share operating performance | |||||||
Net asset value, beginning | |||||||
of period | $13.13 | $12.22 | $12.53 | $12.10 | $12.28 | $12.37 | $12.64 |
Net investment income3 | 0.18 | 0.39 | 0.41 | 0.41 | 0.32 | 0.42 | 0.44 |
Net realized and unrealized gain | |||||||
(loss) on investments | 0.36 | 0.92 | (0.29) | 0.45 | (0.18) | (0.08) | (0.27) |
Total from investment operations | 0.54 | 1.31 | 0.12 | 0.86 | 0.14 | 0.34 | 0.17 |
Less distributions | |||||||
From net investment income | (0.18) | (0.39) | (0.41) | (0.40) | (0.32) | (0.41) | (0.43) |
From net realized gain | — | (0.01) | (0.02) | (0.03) | —4 | (0.02) | (0.01) |
Total distributions | (0.18) | (0.40) | (0.43) | (0.43) | (0.32) | (0.43) | (0.44) |
Net asset value, end of period | $13.49 | $13.13 | $12.22 | $12.53 | $12.10 | $12.28 | $12.37 |
Total return (%)5,6 | 4.127 | 10.85 | 0.96 | 7.29 | 1.317 | 2.83 | 1.31 |
Ratios and supplemental data | |||||||
Net assets, end of period | |||||||
(in millions) | $20 | $19 | $17 | $19 | $14 | $12 | $10 |
Ratios (as a percentage of average | |||||||
net assets): | |||||||
Expenses before reductions | 1.698 | 1.70 | 1.70 | 1.70 | 1.798,9 | 1.68 | 1.68 |
Expenses net of fee waivers | |||||||
and credits | 1.598 | 1.62 | 1.65 | 1.70 | 1.798,9 | 1.67 | 1.68 |
Net investment income | 2.688 | 3.07 | 3.34 | 3.30 | 3.678 | 3.38 | 3.46 |
Portfolio turnover (%) | 8 | 11 | 17 | 10 | 17 | 22 | 25 |
1 Six months ended 11-30-12. 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 Total returns would have been lower had certain expenses not been reduced during the applicable periods shown.
7 Not annualized.
8 Annualized.
9 Includes the impact of proxy expenses, which amounted to 0.04% of average net assets.
22 | Massachusetts Tax-Free Income Fund | Semiannual report | See notes to financial statements |
Notes to financial statements
(unaudited)
Note 1 — Organization
John Hancock Massachusetts Tax-Free Income Fund (the Fund) is a 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. 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 securities and assets, where reliable market quotations are not 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, which include price verification procedures. The frequency with which these fair valuation procedures are used cannot be predicted.
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 or trends, 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.
Semiannual report | Massachusetts Tax-Free Income Fund | 23 |
Changes in valuation techniques may result in transfers into or out of an assigned level within the disclosure hierarchy.
As of November 30, 2012, all investments are categorized as Level 2 under the hierarchy described above.
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 may have a lien, security interest or security entitlement in any Fund property that is not otherwise segregated or pledged, to the maximum extent permitted by law, to the extent of 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. Commitment fees for the six months ended November 30, 2012 were $688. For the six months ended November 30, 2012, the Fund had no borrowings under the line of credit.
Expenses. Within the John Hancock Funds complex, expenses that are directly attributable to an individual fund are allocated to such 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.
24 | Massachusetts Tax-Free Income Fund | Semiannual report |
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.
As of May 31, 2012, 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 and distributable earnings, 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 wash sale loss deferrals, distributions payable and accretion on debt securities.
New accounting pronouncement. In December 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-11 (ASU 2011-11), Disclosures about Offsetting Assets and Liabilities. The update creates new disclosure requirements requiring entities to disclose both gross and net information for derivatives and other financial instruments that are either offset in the Statement of assets and liabilities or subject to an enforceable master netting arrangement or similar agreement. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. ASU 2011-11 may result in additional disclosure relating to the presentation of derivatives and certain other financial instruments.
Note 3 — Guarantees and indemnifications
Under the Trust’s organizational documents, its Officers and Trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust including 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).
Semiannual report | Massachusetts Tax-Free Income Fund | 25 |
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 investment management fees incurred for the six months ended November 30, 2012 were equivalent to a net annual effective rate of 0.50% 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, 2012 amounted to an annual rate of 0.02% 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 pays 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% |
The Distributor has contractually agreed to waive 0.15% of the distribution and service fees for Class A shares and 0.10% of the distribution and service fees for Class B and Class C shares. The current waiver expires on September 30, 2013, unless renewed by mutual agreement of the Fund and the Distributor based upon a determination that this is appropriate under the circumstances at the time.
Accordingly, these fee limitations amounted to $80,282, $1,792 and $9,856 for Class A, Class B and Class C shares, respectively, for the six months ended November 30, 2012.
Sales charges. Class A shares are assessed up-front sales charges, which resulted in payments to the Distributor amounting to $92,710 for the six months ended November 30, 2012. Of this amount, $1,287 was retained and used for printing prospectuses, advertising, sales literature and other purposes, $84,171 was paid as sales commissions to broker-dealers and $7,252 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
26 | Massachusetts Tax-Free Income Fund | Semiannual report |
these shares. During the six months ended November 30, 2012, CDSCs received by the Distributor amounted to $1,696 and $63 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, 2012 were:
DISTRIBUTION AND | TRANSFER | |||
CLASS | SERVICE FEES | AGENT FEES | ||
Class A | $160,566 | $31,457 | ||
Class B | 17,917 | 1,054 | ||
Class C | 98,557 | 5,793 | ||
Total | $277,040 | $38,304 |
Trustee expenses. The Fund compensates each Trustee who is not an employee of the Adviser or its affiliates. Under the John Hancock Group of Funds Deferred Compensation Plan (the Plan) which was terminated in November 2012, these Trustees could have elected, for tax purposes, to defer receipt of this compensation. Any deferred amounts were invested in various John Hancock funds. 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. Plan assets will be liquidated in accordance with the Plan documents.
Note 5 — Fund share transactions
Transactions in Fund shares for the six months ended November 30, 2012 and for the year ended May 31, 2012 were as follows:
Six months ended 11-30-12 | Year ended 5-31-12 | |||
Shares | Amount | Shares | Amount | |
Class A shares | ||||
Sold | 516,403 | $6,811,265 | 1,097,597 | $14,049,257 |
Distributions reinvested | 107,162 | 1,419,630 | 209,373 | 2,670,749 |
Repurchased | (503,797) | (6,663,263) | (839,299) | (10,657,208) |
Net increase | 119,768 | $1,567,632 | 467,671 | $6,062,798 |
Class B shares | ||||
Sold | 30,047 | $394,803 | 34,239 | $440,045 |
Distributions reinvested | 2,622 | 34,724 | 5,564 | 70,923 |
Repurchased | (34,926) | (460,925) | (53,032) | (670,986) |
Net decrease | (2,257) | ($31,398) | (13,229) | ($160,018) |
Semiannual report | Massachusetts Tax-Free Income Fund | 27 |
Six months ended 11-30-12 | Year ended 5-31-12 | |||
Shares | Amount | Shares | Amount | |
Class C shares | ||||
Sold | 127,724 | $1,683,777 | 278,261 | $3,553,172 |
Distributions reinvested | 16,455 | 217,926 | 34,021 | 433,893 |
Repurchased | (97,488) | (1,282,935) | (269,191) | (3,399,156) |
Net increase | 46,691 | $618,768 | 43,091 | $587,909 |
Net increase | 164,202 | $2,155,002 | 497,533 | $6,490,689 |
Note 6 — Purchase and sale of securities
Purchases and sales of securities, other than short-term securities, aggregated $17,374,684 and $9,722,873, respectively, for the six months ended November 30, 2012.
28 | Massachusetts Tax-Free Income Fund | Semiannual report |
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 6–8 and June 3–5, 2012 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
On June 3–5, 2012, the Board consisted of nine individuals, seven of whom were 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 independent legal counsel to assist them in connection with their duties. The Board has appointed an Independent Trustee as Chairman. On June 3–5, 2012, the Board had four standing committees that were composed entirely of Independent Trustees: the Audit Committee; the Compliance Committee; the Nominating, Governance and Administration Committee; and the Contracts & Operations Committee. Additionally, on June 3–5, 2012, Investment Performance Committee A was a standing committee of the Board composed of Independent Trustees and one Trustee who is affiliated with the Adviser. Investment Performance Committee A was responsible for overseeing and monitoring matters relating to the investment performance of the Fund. The Board also designated an Independent Trustee as Vice Chairman to serve in the absence of the Chairman. 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 6–8, 2012 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 Lipper, a Thomson Reuters company (Lipper), 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 Expense Group, each as determined by Lipper, and with the Fund’s benchmark index. The Category includes all funds that invest similarly to the way the Fund invests. The Expense 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
Semiannual report | Massachusetts Tax-Free Income Fund | 29 |
institutional clients and other investment companies, 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 6–8, 2012, the Board reviewed materials relevant to its consideration of the Agreements. As a result of the discussions that occurred during the May 6–8, 2012 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 3–5, 2012, the Board, including the Independent Trustees, formally considered the continuation of the Advisory Agreement and the Subadvisory Agreement, 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 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 investment manager analytical capabilities, market and economic knowledge and execution of its Subadviser oversight responsibilities. The Board further considered the culture of compliance, resources dedicated to compliance, compliance programs, record of compliance with applicable laws and regulations, 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
30 | Massachusetts Tax-Free Income Fund | Semiannual report |
Adviser’s and its affiliates’ policies and procedures for assuring compliance with applicable laws and regulations.
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 Lipper, which included a comprehensive analysis of the Fund’s performance. The Board also examined materials discussing Fund performance and the Fund’s investment objective, strategies and outlook. The Board also reviewed a narrative and statistical analysis of the Lipper data that was prepared by the Adviser, which analyzed various factors that may affect the Lipper rankings. The Board reviewed information regarding the investment performance of the Fund as compared to its Lipper Category as well as its benchmark index (see chart below). The Board was provided with a description of the methodology used by Lipper to select the funds in the Category. The Board also considered updated performance information provided by the Adviser at its May and June 2012 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, 2011 and that of its Category average and benchmark index over the same periods:
1 YEAR | 3 YEAR | 5 YEAR | 10 YEAR | |
MA Tax-Free Income Fund Class A Shares | 11.71% | 8.43% | 4.53% | 4.99% |
Massachusetts Municipal Debt Cat. Average | 10.94% | 9.78% | 3.80% | 4.56% |
Barclay Muni Bond TR Index | 10.70% | 8.57% | 5.22% | 5.38% |
The Board noted that the Fund’s performance compared favorably to its Category’s average performance for all periods, except for the three-year period over which it underperformed. The Board also noted that the Fund underperformed its benchmark index’s performance, except for the one-year period over which it outperformed. The Board was aware that the benchmark is composed of securities that materially differ from the Fund’s investment focus on Massachusetts issuers.
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 Expense 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 other registered investment companies, institutional investors and separate accounts.
Semiannual report | Massachusetts Tax-Free Income Fund | 31 |
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 Expense Group median. The Board also considered expense information regarding the Fund’s total operating expense ratio (Gross Expense Ratio) and, if different, the Fund’s total operating expense ratio after taking into account any fee waiver or expense waiver agreement by the Adviser (Net Expense Ratio). The Board considered information comparing the Gross Expense Ratio and Net Expense Ratio of the Fund to that of the Expense Group median.
The Board noted that the Fund’s advisory fee ratio was three basis points above the Expense 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 2011 financial statements in relation with the Fund’s Expense Group median provided by Lipper in April 2012:
FUND — CLASS A SHARES | EXPENSE GROUP MEDIAN | |
Advisory Fee Ratio | 0.50% | 0.47% |
Gross Expense Ratio | 0.89% | 0.87% |
Net Expense Ratio (Excluding Leverage Expense) | 0.89% | 0.83% |
The Board viewed favorably the Fund’s agreement with John Hancock Funds, LLC, the Fund’s distributor, to limit the Rule 12b-1 fees on the Fund’s Class A shares at 0.15% until September 30, 2013 and the favorable impact of this agreement on the Class’s Gross Expense Ratio.
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, 2011 compared to available aggregate profitability data provided for the year ended December 31, 2010. 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 a limited number of other 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 limited.
The Board considered limited profitability information with respect to the Subadviser, which is affiliated with the Adviser. In addition, as noted above, the Board considered basic assumptions and methodology for allocating expenses in the Subadviser’s profitability analysis.
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.
32 | Massachusetts Tax-Free Income Fund | Semiannual report |
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 and the Subadvisory Agreement each 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.
Semiannual report | Massachusetts Tax-Free Income Fund | 33 |
Special Shareholder Meeting
On November 15, 2012, a Special Meeting of the Shareholders of John Hancock Tax-Exempt Series Fund and each of its series, including John Hancock Massachusetts Tax-Free Income Fund, was held at 601 Congress Street, Boston, Massachusetts, for the purpose of considering and voting on the following proposal:
Proposal: Election of thirteen (13) Trustees as members of the Board of Trustees of John Hancock Tax-Exempt Series Fund.
TOTAL VOTES | TOTAL VOTES WITHHELD | |
FOR THE NOMINEE | FROM THE NOMINEE | |
Independent Trustees | ||
Charles L. Bardelis | 9,979,481.77 | 374,984.67 |
Peter S. Burgess | 10,179,276.29 | 175,190.15 |
William H. Cunningham | 10,178,553.36 | 175,913.07 |
Grace K. Fey | 10,176,099.03 | 178,367.41 |
Theron S. Hoffman | 9,977,980.92 | 376,485.52 |
Deborah C. Jackson | 10,175,038.24 | 179,428.20 |
Hassell H. McClellan | 10,177,775.26 | 176,691.18 |
James M. Oates | 10,178,553.36 | 175,913.07 |
Steven R. Pruchansky | 9,979,481.77 | 374,984.67 |
Gregory A. Russo | 10,178,215.32 | 176,251.12 |
Non-Independent Trustees | ||
James R. Boyle | 10,179,276.29 | 175,190.15 |
Craig Bromley | 10,177,775.26 | 176,691.18 |
Warren A. Thomson | 10,177,775.26 | 176,691.18 |
34 | Massachusetts Tax-Free Income Fund | Semiannual report |
More information
Trustees | Investment adviser |
James M. Oates, Chairman | John Hancock Advisers, LLC |
Charles L. Bardelis* | |
James R. Boyle† | Subadviser |
Craig Bromley† | John Hancock Asset Management a division of |
Peter S. Burgess* | Manulife Asset Management (US) LLC |
William H. Cunningham | |
Grace K. Fey | Principal distributor |
Theron S. Hoffman* | John Hancock Funds, LLC |
Deborah C. Jackson | |
Hassell H. McClellan | Custodian |
Steven R. Pruchansky, Vice Chairman | State Street Bank and Trust Company |
Gregory A. Russo | |
Warren A. Thomson† | Transfer agent |
John Hancock Signature Services, Inc. | |
Officers | |
Hugh McHaffie | Legal counsel |
President | K&L Gates LLP |
Andrew G. Arnott | |
Executive Vice President | |
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
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 1-202-551-8090 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 | 35 |
1-800-225-5291
1-800-554-6713 (TDD)
1-800-338-8080 EASI-Line
www.jhfunds.com
77SA 11/12 | |
This report is for the information of the shareholders of John Hancock Massachusetts Tax-Free Income Fund. | 1/13 |
It is not authorized for distribution to prospective investors unless preceded or accompanied by a prospectus. |
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/ Hugh McHaffie |
------------------------------- | |
Hugh McHaffie | |
President | |
Date: | January 22, 2013 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: | /s/ Hugh McHaffie |
------------------------------- | |
Hugh McHaffie | |
President | |
Date: | January 22, 2013 |
By: | /s/ Charles A. Rizzo |
-------------------------------- | |
Charles A. Rizzo | |
Chief Financial Officer | |
Date: | January 22, 2013 |