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Connecticut Tax Exempt Fund Update - October 2017

By: Clark Wagner, President, Foresters Investment Management Company, Inc. and Chief Investment Officer, Foresters Financial and Patrick Tucci, co-Portfolio Manager, First Investors Tax Exempt Funds

 

In light of recent budgetary issues affecting the State of Connecticut and the City of Hartford, it is an appropriate time to review how the First Investors state-specific tax exempt funds are managed, specifically the Connecticut Tax Exempt Fund. First Investors state-specific tax exempt funds focus on purchasing high-quality

bonds.1 As of September 30, 2017, the Connecticut Tax Exempt Fund had 59% of its bonds rated AA or higher by the bond rating agencies2 (investment grade is from BBB to AAA) and 26% pre-refunded/escrowed to maturity.3

 

Credit Quality (%)

There are two basic types of municipal bonds; revenue and general obligation (GO).

The Fund’s breakdown as of September 30, 2017 was:

Revenue

79%

 

GO

21%

Revenue bonds are issued by an entity that has a specific stream of revenue dedicated to paying the interest and principal on the bonds. They are not impacted by state or local budgets. Examples are bonds issued for a non-profit hospital such as Yale-New Haven Hospital or an essential service such as a water authority (e.g., South Central CT Regional Water Authority).

 

GO bonds are backed by the full faith, credit and taxing power of the issuer, which is an entity that can raise taxes. An example of this type of bond would be Stamford CT GO. This bond is dependent on the revenues Stamford collects (i.e. taxes and fees) and its surplus funds.

 

Sometimes issuers refinance their existing bonds and replace them with newly issued bonds. The collateral for the principal and interest on the existing bonds is typically exchanged for U.S. Treasury securities or other government securities and these bonds are categorized as “pre-refunded” or “escrowed to maturity”. The chart on the next page shows how many of the Fund’s bonds are insured (principal and interest payments guaranteed by a bond insurance company) and the number that are pre-refunded or escrowed to maturity.    

 

Backed by Bond Insurance

30%

 

Pre-Refunded/ETM4

26%

As of September 30, the Fund owned a City of Hartford CT GO bond, however the principal and interest is guaranteed by U.S. Treasury securities and not by the City of Hartford. The Fund also owned the State of Connecticut GO which is investment grade quality (A1 by Moody’s and A+ by S&P) and is not facing the

same budgetary issues as Hartford.

 

The Fund monitors all of its bond holdings closely and changes are made when appropriate. As of September 30, the State had not yet passed its fiscal 2018 biennial budget. Connecticut continues to operate under an executive order that keeps spending in line with the State’s revenue forecast; by aligning revenues and expenditures, the State then faces little near-term liquidity risk.

 

 

The Connecticut Tax Exempt Fund generally attempts to purchase high-quality securities that are rated as investment grade, at the time of purchase by at least one rating organization or, if unrated, are determined by Foresters Investment Management Company, Inc. to be of investment grade quality at the time of the purchase.
2 Bond rating agencies referred to are Moody’s, S&P and Fitch.
3 Pre-refunded/ETM are bonds secured by U.S. government or other high-quality securities that are not re-rated by a Nationally Recognized Statistical Rating Organization.
4
Some of the bonds that are currently Pre-refunded/ETM may have been previously been backed by bond insurance.
First Investors mutual funds are managed by Foresters Investment Management Company, Inc. and, underwritten and distributed by Foresters Financial Services, Inc.; each is a wholly owned subsidiary of Foresters Financial Holding Company, Inc. Foresters Financial™, Foresters™, and Foresters Investment Management Company, Inc. are the trade names and trademarks of The Independent Order of Foresters, a fraternal benefit society, 789 Don Mills Road, Toronto, Canada M3C 1T9 and its subsidiaries, including Foresters Financial Services, Inc. Foresters Financial Services, Inc. is a registered broker-dealer and subsidiary of Foresters Financial Holding Company, Inc.

Important Disclosures
For more information about any First Investors fund from Foresters Financial Services, Inc., you may obtain a free prospectus by calling 800 423 4026 or visiting our website at foresters.com. You should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. The prospectus contains this and other information about the funds, and should be read carefully before you invest or send money. An investment in these funds is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency.

All investments involve risk, including possible loss of principal. You can lose money by investing in a fund. There is no guarantee that a fund will meet its investment objective. The principal risks of investing in the Connecticut Tax Exempt Fund are: Call Risk, Concentration Risk, Credit Risk, Derivatives Risk, Interest Rate Risk, Liquidity Risk, Market Risk, Municipal Securities Risk, Security Selection Risk and Tax Risk. Past performance is no guarantee of future results.

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