PORTFOLIO MANAGER'S DISCUSSION & ANALYSIS – NEBRASKA TAX-FREE INCOME FUND

DECEMBER 31, 2009

Portfolio Manager:  Thomas D. Carney

The Nebraska Tax-Free Income Fund had a solid year, returning +7.2% for the 12-months ended December 31, compared to a +7.4% return for the Barclays Capital 5-Year Municipal Bond Index, our Fund’s primary benchmark. For the fourth calendar quarter the Nebraska Tax-Free Income Fund returned -0.4% compared to a +0.5% return for the Barclays Capital 5-Year Municipal Bond Index.

Municipal bond performance was mixed in the fourth quarter as shorter-term bonds (less than 5 years) appreciated modestly while longer-term bonds declined in price. For example, a broad index of shorter-term municipal bonds (those maturing from 1-5 years) composed by Merrill Lynch returned +0.7% in the fourth quarter while a similarly broad longer-term municipal bond index (with bonds maturing from 10-15 years) returned -1.5%. This differential in returns between shorter and longer-term bonds was principally a reaction to movements in the U.S. Treasury bond market, where longer-term yields also rose (prices fell) while short-term bonds were mostly unchanged.

The yield relationship between tax-free municipal bonds and taxable alternatives, like U.S. Treasuries, continued to ‘normalize’ in the quarter and is down significantly from the extremes reached a year ago. High quality 5-year municipal bonds, for example, ended the quarter with a yield representing approximately 60% of U.S. Treasuries, compared to 170% a year ago. This more ‘normal’ historical relationship implies that future returns for municipal bond investors may increasingly depend on movements in taxable alternatives, particularly U.S. Treasury bonds.

Investment activity in the quarter was modest with a continued focus on bonds with shorter maturities (primarily under 7-years) as, we believe, the risk/reward profile of longer-term bonds is less favorable. As a reminder, we invest in a portfolio of bonds of varying maturities that we believe represent attractive risk adjusted returns, taking into consideration the general level of interest rates and the credit quality of the investment.

The average duration of our Fund declined to 3.4 from 3.5 years in the previous quarter and the average maturity fell to 7.0 from 7.2 years. Overall asset quality of our portfolio remains high, with a weighted average credit score or rating of AA-. 

Today’s more normal yield relationship between tax-free municipal bonds and U.S. Treasuries and the overall low level of interest rates leave us with a more subdued outlook for future bond investor returns as those returns are principally driven by the interest income earned (and reinvested) over the life of the investment. While the prospects for inflation, the bond investor’s boogeyman, appear low in 2010, the longer term outlook holds the possibility for much higher rates of inflation. Consequently, we expect to continue to position the Fund defensively relative to interest rate exposure while we patiently seek out areas of opportunity. We will continue to invest one security at a time, relying on a fundamental research-based investment approach and are well positioned to take advantage of any market weakness.

Click here to obtain December 31, 2009 performance information.

Investors should consider carefully the investment objectives, risks, and charges and expenses of the Fund before investing. The Fund’s Prospectus contains this and other information about the Fund and should be read carefully before investing. Portfolio composition is subject to change at any time and references to specific securities, industries, and sectors referenced in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. See the Schedule of Investments in Securities included in the Fund’s quarterly report for the percent of assets of the Fund invested in a particular state.

Weitz Securities, Inc. is the distributor of the Weitz Funds.