Letter to the Shareholders: September 30, 2016

Dear Shareholder:

I have a story to tell of something that I witnessed on the bridge of a U. S. Navy Destroyer about sixty years ago. To appreciate it, you have to understand that one of the first rules of the road requires that when two ships are approaching one another, the ship to the right, by law, has to maintain his course and speed. He has the right of way and, must not change his speed or direction until the other ship is clear of him. If you change your course or speed and there is a collision, you will likely end up paying damages. That’s why the Captain of our ship had standing orders to call him to the bridge anytime a passing vessel got close.

One night we were steaming south to Guantanamo Bay, Cuba, east of Charleston, S.C., about one hundred miles off shore. Suddenly a look-out on the bridge reported a light on the horizon. The officer who had the con, acknowledged the report. He also ordered the look-out to keep reporting on the contact. He didn’t believe a light more than seven miles away was a threat to anything, least of all, a collision. After awhile the look-out reported that it was the masthead light of a ship bearing 135 degrees and about 6 miles away. The bearing was not changing. We kept watching and, by now, the ship could be seen clearly in the moonlight. The bearing was not changing. That meant we were on a collision course and we had the responsibility of right of way.

The officer called the Captain to report. The Captain was on the bridge in about two minutes. He took the con (a navy way of saying he took control of the engine and rudder command responsibility.) and we began to wait. The mystery ship was getting closer and closer and the bearing was not changing. We were getting very close to a collision. A signalman had been trying to get an answer from the freighter on several commercial radio frequencies to no avail. Another sailor was flashing a powerful signal light at the bridge of the stranger. She would not acknowledge anything. There was time to remember that many international commercial crews put their ships on autopilot when in the open sea, and go to bed!

It was getting very close now. We could see flakes of rust under peeling paint. The big freighter towered over us; we could hear the wash of its bow wave. Our Captain opened his mouth to give an order but just then a lookout shouted “it’s turning to starboard”, and it was. The big ship’s bow swept down our port side and disappeared as the churning propeller followed. The Captain stood quietly, looking aft at the now disappearing freighter. He uttered one word: “Chicken”. Then he went back to his cabin to sleep.

It’s ironic but true; obeying the letter of the law nearly got us all killed.

I always want our shareholders to be in the know. Interest rates are very low (bond prices high) and there doesn’t seem to be any enthusiasm in financial markets, including the bond market. The Federal Reserve wants to raise interest rates, but can’t do it because the economy is not recovering fast enough. Bond prices may stay high (interest rates low) for some time. The Japanese have had low interest rates for many years, even decades. The Fed met on September 21 and decided to keep the fed funds rate unchanged. Perhaps more importantly, they also reiterated their belief that economic conditions will evolve in a manner that will warrant only gradual increases in the fed funds rate.

I think our portfolios of high quality investment grade bonds should hold up well, whatever occurs. The majority of our shareholders are “true” bond investors who understand the importance and value of buying a reliable stream of income. Investors should look to income and not price appreciation to drive returns for the rest of this year.

I think bonds will remain at or near their current levels until the end of the year. The state of the economy will also have the effect of holding prices of bonds up, if it continues to remain soft. Anything can happen. I think you will be happy to be with us if you are a dedicated fixed income investor.

If you are one of those folks who is looking for more income, look us over on our website which can be found at www.dupree-funds.com. There you will find a copy of our Prospectus and performance data for each of our 10 funds. We might just be the place to put some more of your un-invested cash to work.

Thanks for being a part of our business. We appreciate each and every one of you.


Thomas P. Dupree, Sr.