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PORTFOLIO MANAGER LETTER – NEBRASKA TAX-FREE INCOME FUND
June 30, 2007 – QUARTERLY REPORT
July 18, 2007
Dear Fellow Shareholder:
The Nebraska Tax-Free Income Fund’s total return for the second quarter of 2007 was -0.2%, which consisted of approximately +1.1% from net interest income (after deducting fees and expenses) and -1.3% from (unrealized) depreciation of our bonds. Our second quarter return was modestly better than the decline of -0.3% for the Lehman Brothers 5-Year Municipal Bond Index, our Fund’s primary benchmark.
The table below shows the results of the Nebraska Tax-Free Income Fund over various time periods through June 30, 2007, along with the Lehman Brothers 5-Year Municipal Bond Index, our primary benchmark. The key measures of the Fund’s portfolio (average maturity and duration) have most closely resembled this Lehman Brothers index. As a reminder, we don’t manage the Fund to mimic any particular index but thought it would be informative to provide an example of a broadly constructed unmanaged index whose credit quality and maturity composition were similar to the Fund.
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Total Return* |
Average Annual Total Returns* |
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1-Year |
3-Year |
5-Year |
10-Year |
15-Year |
20-Year |
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Nebraska Tax-Free Income Fund** |
3.7% |
3.5% |
3.6% |
4.5% |
4.9% |
5.3% |
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Lehman Brothers 5-Year Municipal Bond Index# |
3.8 |
2.8 |
3.2 |
4.5 |
5.0 |
N/A |
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These performance numbers reflect the deduction of the Fund’s annual operating expenses. The current annual operating expenses for the Nebraska Tax-Free Income Fund (the "Fund"), as stated in its most recent Prospectus are 1.03% of the Fund’s net assets. This information represents past performance and past performance does not guarantee future results. The investment return and the principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Current performance may be higher or lower than the performance data quoted above. Click here for performance data current to the most recent month-end.
* All performance numbers assume reinvestment of dividends and/or income.
** As of December 29, 2006, the Fund succeeded to substantially all of the assets of Weitz Income Partners Limited Partnership (the "Partnership"). The investment objectives, policies and restrictions of the Fund are materially equivalent to those of the Partnership and the Partnership was managed at all times with full investment authority by Wallace R. Weitz & Company. The performance information includes performance for the period before the Fund became an investment company registered with the Securities and Exchange Commission. During these periods, the Partnership was not registered under the Investment Company Act of 1940 and therefore was not subject to certain investment restrictions imposed by the 1940 Act. If the Partnership had been registered under the 1940 Act during these periods, the Partnership’s performance might have been adversely affected.
# Index performance is hypothetical and is for illustrative purposes only.
The following table shows a profile of our portfolio as of June 30:
| Average Maturity | 7.3 years |
| Average Duration | 3.3 years |
| 30-Day SEC Yield at 6-30-07 | 3.6% |
| Average Rating | AA+ |
| Income from municipals exempt from federal | |
| and Nebraska income taxes | Over 80% |
| Income subject to alternative minimum tax | Less than 10% |
Portfolio Review and Outlook
Rising bond yields pinched total returns for most bond investors in the second quarter as coupon income was offset by price declines from rising rates (bond prices react inversely to changes in interest rates). For example, municipal bond yields as measured by the Bond Buyer 20 Bond Index (index of 20 general obligation municipal bonds), rose 25 basis points (a basis point is 1/100 of one percent) in the quarter. The result was modest or negative returns for most fixed-income investors in the quarter, our Fund included. Since many of the same variables have similar impacts on both the municipal and taxable bond market, please see the "Overview" section included in the Short-Intermediate Income Fund shareholder letter for additional highlights from the second quarter.
Investment activity was modest during the quarter with our key portfolio metrics (average maturity, duration and rating) remaining mostly unchanged from March 31st. Given the flat yield curve environment (where there is little difference between short-term and long-term interest rates) that persisted for most of the second quarter, much of our investment activity was concentrated in short-term, adjustable rate bonds where the interest rate changes as frequently as every seven days. These bonds currently provide most of the coupon return of bonds with longer maturities and include, for example, those issued for Children’s Hospital in Omaha and BryanLGH Medical Center in Lincoln. Both of these hospitals are well-regarded, fiscally conservative institutions with investment grade balance sheets. The bonds we own have the added security of bond insurance, giving them the highest municipal bond rating (AAA). With today’s low nominal interest-rate environment and flat yield curve, these shorter-term bonds provide solid income while we search for more favorable investment opportunities.
Our overall strategy has been and will continue to be one of attempting to produce reasonable returns over time without exposing the portfolio to excessive credit or interest-rate risks. By keeping the overall maturity of our portfolio short- to intermediate-term, we should continue to earn most of the "coupon" returns of longer-term bonds with lower overall interest-rate risk.
The recent rise in rates (concentrated in the latter half of the second quarter) seems to be creating a more favorable investing climate for fixed-income investors. Fears of increasing inflation appear reasonably offset by concerns that the fallout from the softening housing market may be more broadly felt in the U.S. economy. Should rates continue to move higher, we expect to extend the average life of our portfolio in order to lock in today’s higher yields.
We welcome any questions you may have and appreciate the confidence in and support of the Fund and our firm.
Best Regards,
Thomas D. Carney
Portfolio Manager
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. The Prospectus 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. 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.