10/31/2014

PERS Reforms to be Considered by the Oregon Supreme Court

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We believe that one of the benefits of having a portfolio manager and analyst located in the market in which Aquila Tax-Free Trust of Oregon invests, is the opportunity this provides to closely follow public policy developments and legislation, in addition to the financial condition of municipal bond issuers.

Developments related to the Public Employee Retirement System (PERS) provide an example.  In 2013, the Oregon Legislature enacted PERS reforms that reduced the cost-of-living adjustment for all retirees, and eliminated tax remedy payments for beneficiaries who do not live in Oregon and are therefore not subject to Oregon state income tax. These provisions will be considered by the Oregon Supreme Court early in 2015.  While it is possible that the Court could reverse the PERS reforms, we currently view that as the less likely outcome.

As we conduct research and evaluate investment opportunities on behalf of Aquila Tax-Free Trust of Oregon, we incorporate in our analysis the potential fiscal impact of legislation and court proceedings such as those related to PERS.  Our presence in the Oregon market enables us to closely monitor developments such as these.

The Aquila Tax-Free Trust of Oregon focuses on high quality, intermediate maturity bonds in an effort to provide some stability in uncertain market conditions.  Through our emphasis on local research and our disciplined investment approach we strive to provide reduced volatility and double tax-exempt income for our shareholders.

Before investing in a Fund, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus.   The prospectus is available from your financial adviser and when you call 800-437-1020 or visit www.aquilafunds.com.

10/29/2014

Moving Retirement Plan Assets in 2015? Exercise Caution

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The IRS has announced that “beginning as early as January 1, 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own”.

There are some terms to be familiar with here:

  • Rollover – in the context used here, this means that you have “constructive receipt” of assets from a retirement plan – i.e. they come into your possession.  You then have 60 days to complete a rollover into your IRA account.
  • Trustee-to-trustee transfer – assets from your retirement plan account are sent directly from the current trustee for your plan to the trustee for your IRA account, without coming into your possession.

Beginning January 1, 2015, an IRA participant will be allowed only one rollover in any 12-month or 365-day period.  This applies across all IRAs (Traditional, Rollover, Roth, SEP, SARSEP and SIMPLE IRAs).

As an alternative, a participant can make an unlimited number of trustee-to-trustee transfers where assets are delivered directly to the new trustee.

You are likely to receive information on this new restriction from a number of sources, including a mailing from the shareholder servicing agent of Aquila Group of Funds, BNY.

Please discuss your options with your professional tax adviser before you move a retirement plan account, and visit the IRS web site for details regarding the IRS IRA One Rollover Per Year Rule.

10/27/2014

Utah Shareholder Meetings in October

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Aquila Tax-Free Fund For Utah invites you to your Fund’s meeting of shareholders.

The 2014 Annual Shareholder Meeting will be held in Salt Lake City, UT on Tuesday, October 28 at 8:30 a.m. at the Little America Hotel, Ballroom C, located at 500 South Main Street, Salt Lake City, UT.  A buffet breakfast will be served prior to the meeting.

There will also be a Shareholder Outreach Meeting in St. George, UT on Wednesday, October 29 at 2:00 p.m. at the Dixie Center, Entrada Room, located at 1835 Convention Center Drive, St. George, UT.  Light refreshments will be served prior to the meeting.

During the meeting, you will be able to visit with Fund executives, trustees, the portfolio manager, and hear Utah State Senator Lyle Hillyard speak about the Utah economy.

The prospectus is available at the meeting, from your financial advisor, and when you call 800-437-1020, and it is available on this web site.  Before investing in the Fund, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus.

10/24/2014

Rhode Island Receives Credit Ratings Affirmations

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Good news for Rhode Island – earlier this month, Moody’s affirmed the state’s $2.2 billion in general obligation debt at Aa2 and improved the outlook to Stable, ahead of a $208 million capital development bond issuance, of which, $162 million refunded existing debt. Moody’s also assigned an Aa3 credit rating with an outlook of stable to Rhode Island’s $47.7 million in lease participation certificates expected to be issued later in the month. The rating was notched below the state’s GO rating because the bonds will be secured by lease rental payments that are open to legislative appropriation.

Rhode Island continues to deal with high unemployment, a complicated state employee pension overhaul and the issues surrounding the 38 Studios moral obligation debt, but according to Moody’s, the outlook improvement from negative to stable reflects the state’s recent fiscal improvements including maintaining adequate reserves and increasing liquidity. Moody’s also cited reduced risk concerning the current pension system adjustments and improvements in the state’s economic and demographic trends.

Moody’s also affirmed ratings on approximately $1.7 billion of existing notched lease appropriation, certificates of participation, and moral obligation bonds, as well as the Rhode Island Health and Educational Building Corporation Intercept Program.

10/14/2014

The Intern Who Stayed

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Employees define the firm—and throughout our history, Aquila has been privileged to have employees of great commitment and integrity. As part of our ongoing celebration of Aquila’s 30th anniversary, we talk with our longest-serving team member, Sandy Antonucci, Senior Vice President and Chief Technology Officer at Aquila Investment Management LLC (sponsor of the Aquila Group of Funds).

You started at Aquila in 1982 as an intern. How were you hired?

Funny story. [Founder] Lacy Herrmann’s right-hand person Rose Marotta posted a help wanted ad at Baruch College, where I was in school. I wasn’t interested—it was in midtown Manhattan and I thought I would have to get really dressed up, which I couldn’t afford. So a friend of mine who felt I should pursue it called on my behalf and got me the interview.

Well, Rose told Lacy I had a nice telephone voice—she mistakenly thought my friend was me—and I was basically hired before I got there. Having been born and raised in Brooklyn, I still wonder what Rose and Lacy thought when they actually heard me speak.

Since that time, you’ve seen every aspect of the firm. What do you think drives the people at Aquila?

Aquila has a knack for finding and keeping good, hard-working, honest people. We roll up our sleeves and get the job done. People with that personality fit well in our culture.

What do you enjoy most about working at Aquila?

Hands down, it is the flexibility to do different things. I started as a receptionist and am now a Senior Vice President. For most of my career I was the Aquila Chairman’s chief of staff. Aquila gives its people the unique opportunity to pursue what they’re interested in. If you’re willing to do the work, take the initiative, and go above and beyond, Aquila provides the opportunity.

What accomplishments are you most proud to have been part of at Aquila?

Growing the firm to what it is today. When I first joined Aquila’s predecessor firm, we sponsored just one money market fund. As part of my job interview, I typed the offer letter to open our second fund. We opened several more money market funds in rapid succession. Aquila and the single-state municipal bond funds came shortly thereafter. The firm grew from one fund to half a dozen in five years, all with just Lacy and two employees. Lacy always made me feel that I was working with the company, not for the company, so I’ve always felt that Aquila’s success is my success.

How does Aquila differ from other fund companies? 

We’re small, without a traditional corporate hierarchy—more like a family. Everyone is expected to pitch in. When there is a job to do we get it done, regardless of department or title.

There were several times when I thought, “this company is too small, it’s time to leave”. And every time, senior management and I came up with new challenges I could take on. For someone like me who relishes new challenges and gets bored with the status quo, it’s been great.

It’s not for everyone. What company is?! We attract self-starters, people who put the same level of care into the smallest and the biggest tasks, who never say “not my job.”

As a shareholder yourself, how do you think shareholders benefit most from investing with Aquila?

Aquila cares deeply about individual shareholders whether they’re young investors seeking to grow their investments or retirees who depend on their monthly dividends. Every decision comes down to people: how the individual investor is affected.

Tell us about Lacy Herrmann. How does his legacy live on at the firm?

Lacy was unforgettable—the most optimistic, and happiest person I ever met; someone who genuinely liked and was fascinated by people. He believed in doing business the old fashioned way—with a handshake and your word—and in knowing the people with whom you worked. Lacy’s no longer here, but he set the tone. And I think that will always be how we’ll conduct business at Aquila.

09/03/2014

For Equity Growth, Rufenacht Seeks the Fiscally Responsible

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If the equity markets have had a nice run since 2009, it’s been even better for Aquila Three Peaks Opportunity Growth Fund. For the five-year period ending on June 30, the S&P 500 Index returned a cumulative 120% while Aquila Three Peaks Opportunity Growth Fund had a cumulative total return of 148% based on the public offering price. The annualized total return over the period placed the Fund in the top 21% of its Lipper Mid-Cap Core category. We recently spoke with the fund’s co-portfolio manager Sandy Rufenacht about fiscally responsible companies, how long the equity bull market might last, and his unique approach to stock investing that incorporates his expertise in the high yield bond market.

Would you give us an overview of the fund?

It’s an equity fund that seeks growth by investing in what we believe to be the most fiscally responsible publicly-traded companies that are making positive balance sheet actions.

We’re looking for the same kinds of companies we seek in our companion strategy, the Aquila Three Peaks High Income Fund:  companies demonstrating their fiscal responsibility by paying down debt and generating the free cash flow to do so—cash flow that ideally is earmarked for debt paydown through covenants.

When these companies start paying down debt, generally speaking, good things happen to their stock. We’re agnostic about “growth” and “value” stocks, and we’ll invest across all capitalizations from small to large.

How do you find these fiscally responsible companies?

The universe of companies we consider comes straight from our high-yield bond research, which at any given time includes 70 to 80 publicly-traded companies that are committed to paying down debt.

The search for fiscal responsibility generally rules out industries that are dependent on the economic cycle: steel, paper, chemicals, autos, restaurants, retailers, and airlines. When the economy is doing well, the management teams of companies in these industries tend to think the good times will last and they end up levering up the balance sheet at the worst time—at the top of the cycle, usually around the time the Fed is beginning to raise rates to slow the economy. It makes intuitive sense to add leverage when the economy is doing well, but a company may end up with an over-leveraged balance sheet.

Does your selection process end there?

That’s just the beginning. To find the potential winners, we have to know these companies almost better than their own management. That includes an intimate knowledge of the three main financial statements—the balance sheet, the income statement, the statement of cash flow. But it goes way deeper. For example, we might call a former secretary of the company’s board and ask, what was the CFO’s attitude toward debt when you worked for him? We want to see fiscal responsibility in their DNA.

That gets us to the portfolio of stocks we have a high conviction about. But our process doesn’t stop once a stock is in the portfolio. We’re vigilant about monitoring whether they have sufficient free cash flow. We stay very much on top of them. It takes an enormous amount of research, onsite visits, and time.

This isn’t a conservative strategy, but I think our very careful and constant research is a conservative approach to equity investing.

So you get at equities through the high-yield door, so to speak. How does this give you an edge over other equity managers?

I believe our unusual analytical approach helps us understand companies better and helps us know a little earlier than most when to buy and when to sell.

At Janus Funds, where I once worked, I made a discovery that has defined my career: I saw that high-yield analysts were quicker to realize when to buy and sell equities—quicker than the equity analysts. Why? I think it’s because most equity analysts are focused on revenues, whereas in the high-yield world we’re focused on EBITDA (earnings before interest, taxes, depreciation and amortization). Among other things, EBITDA is better than revenues at helping you understand a company’s ability to pay down debt.

The Fund has done well in this bull market. How will you keep up the pace?

We’ll continue doing what we’re doing. Our process doesn’t change with the economic or market cycle. The better question is, have equities had their run, and is it time to shift to more conservative investments?

From our vantage, equities are still the place to be. The Fed has forced investors into riskier asset classes—hence the run-up in equities. Even with a lot of money still on the sidelines, even with continued fund outflows, even with occasional scares, there simply isn’t much of a payoff in less risky investments. Yet.

When will equities lose favor to less risky asset classes? When the Fed starts raising interest rates. Until recently, it’s been a tepid, almost fragile economy, despite the Fed’s stimulus. But I think that’s changing. I think things are better than GDP growth or employment numbers indicate. Whether you’re in Las Vegas, Phoenix, Austin, San Diego, Miami, New York, there are construction cranes again. Things have rebounded quickly. The Fed has accomplished its goals. It’s going to happen.

I don’t know when it will happen. Nobody does. But we have what I think is a dependable leading indicator. In our experience, high-yield bond yield spreads tend to widen before a major turn in the equity markets. So we watch high-yield spreads very carefully.

Can you dial down the fund’s risk in that scenario?

Yes. We’ve written into the prospectus an ability to invest up to 30% of the portfolio in high-yield securities. Historically, high-yield bonds are lower-risk (in terms of volatility) than equities. And we tend to invest on the more conservative end of the high-yield bond spectrum, because of the research-intensive approach I outlined earlier.

By monitoring the tone of both the high-yield and the equity market, looking for the types of leading indicators that we’ve seen in previous market cycles, we would seek to adjust the fund portfolio – ideally, ahead of other market participants.

Before investing in one of the Aquila Group of Funds, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus. The prospectus is available here, from your financial advisor, or by calling 800-437-1020.

Mutual fund investing involves risk; loss of principal is possible.

Investment Considerations for Aquila Three Peaks High Income Fund: Investments in bonds may decline in value due to rising interest rates, a real or perceived decline in credit quality of the issuer, borrower, counterparty, or collateral, adverse tax or legislative changes, court decisions, market or economic conditions. The Fund’s portfolio will typically include a high proportion, perhaps even 100%, of high-yield / high-risk securities rated below investment grade. High-yield corporate bonds generally have greater credit risk than other types of fixed-income securities and may be especially sensitive to economic and political changes or adverse developments specific to the company that issued the bond. The return of principal for the bond holdings in this fund is not guaranteed.

Investment Considerations for Aquila Three Peaks Opportunity Growth Fund: An investment involves certain risks including market risk, financial risk, interest rate risk, credit risk, and risks associated with investments in highly-leveraged companies, lower-quality debt securities, foreign markets and foreign currencies, and potential loss of value.

09/02/2014

Rhode Island ends Fiscal Year with a Surplus

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Governor Lincoln Chafee announced Friday, August 29 that Rhode Island ended fiscal year 2014 in June with a $68 million general fund surplus which was $8.7 million more than the General Assembly expected. According to a report from Rhode Island’s Department of Administration’s Office of Accounts and Control, general fund revenue expenditures were $16.1 million less than budgeted. The state also saw expenditures fall below budget by $18 million in 2011, $29 million in 2012 and $17.8 million in 2013.

The fiscal year 2014 preliminary closing statement showed that the state’s budget reserve and cash stabilization account is fully funded with a balance of $177 million. The Rhode Island capital plan fund available balance is $124.4 million.

Moody’s Investors Service rates Rhode Island general obligation bonds Aa2. Fitch Ratings and Standard & Poor’s rate them AA.

08/04/2014

I’ve Loved This Work from the Start

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For our 30th anniversary series, Aquila Tax-Free Fund of Colorado and Aquila Tax-Free Trust of Oregon portfolio manager Chris Johns talks about persistence, the value of knowing your investors, and why he still finds the municipal bond market so fascinating.

 

You’ve been involved with Aquila Tax-Free Fund of Colorado since its inception, correct?

Yes. In 1985 the United Bank of Denver—the initial sub-adviser for the Fund—was approached by Aquila founder Lacy Herrmann about starting a state-specific municipal bond fund for Colorado. As the bank’s bond expert, I was assigned to the project. The proposal got as far as senior management of the bank, who declined.

One year later Lacy approached us again. A few things had changed on the bank’s side to make the idea more attractive and this time management approved it. Through Aquila’s persistence, the fund got off the ground.

As a portfolio manager, is there anything you do that sets you apart?

Aquila Group of Funds portfolio managers visit with financial advisors. I do, both in Colorado and in Oregon. It’s a bit unusual in our industry. Advisors like having that access and the ability to hear straight from us. To them, it’s a real benefit.

That helps you better manage the fund?

Yes, in terms of understanding the investor’s perspective. We’re often asked by advisors to present our strategy to their clients. Talking to advisors and investors gives you a very good sense of what’s on their minds—their concerns about bonds, interest rates, the general economic landscape.

These conversations help me address those concerns and align the funds’ risk profiles with those of our investors. We know who our investors are and have something to measure against.

Why couldn’t savvy investors or advisors manage municipal bonds themselves?

The rapidly changing condition of municipal issuers that we’ve seen since 2008 still puts a premium on the in-depth research we do. We’re continually monitoring the health of bond issuers. It’s possible that the bond you bought five years ago might have deteriorating credit quality today, which you wouldn’t know without research. The value of our research alone is worth the price of admission so to speak.

Today, information on corporate bonds and stocks is available at the push of a button. Not so with muni bonds, whose issuers publish one audited financial statement annually that becomes public six months after the end of the fiscal year. It would be very hard for investors to manage a muni bond portfolio using just these statements, whereas our relationships with bond issuers help us get at the information we need.

We’re also active managers, applying our expertise every day in managing the portfolio as interest rates change and the various bond sectors react. Most investors and advisors don’t have the expertise and information to do this themselves.

How does your research measure up to the big fund companies on the East and West coasts?

We invest in our back yard and we know it very well. Particularly in Colorado, where there are no state general obligation bonds but a lot of smaller issuers instead, research can be onerous for a fund manager. Larger muni bond funds generally won’t take the time to research these smaller issuers because these bonds aren’t a meaningful investment as a percentage of their overall portfolios, whereas we focus intensely even on these smaller, thinly-traded securities.

What was your path to this career?

I was very lucky. The University of Cincinnati, which I attended, has a Division of Professional Practices, a program that supplies companies with student interns.

As a finance major participating in that program, my first assignment was at a bank in Toledo, Ohio in their trust and investments department. By the time I graduated I’d been there for six quarters, and that’s where I landed a job. I loved it from the start.

What’s the best part about your work?

The municipal bond market itself. Most of our trades are over-the-counter: each trade is unique, so we negotiate them all. It demands conversations between people—completely unlike the other capital markets, where everything is electronic. I find it fascinating.

I also enjoy analyzing the structure of bonds. And I take pride in their ultimate use. I believe we’re providing a social good through the investments in Colorado and Oregon that are paid for by our municipal bonds.

It’s also great to be doing this with Aquila. We get to meet investors and advisors, and their confidence in us only further sharpens our resolve to do the right thing for them. Aquila’s senior management shares this focus on advisors and their clients, and has from its beginning. We’re all stakeholders in what we believe is most important: our shareholder’s best interests.

Before investing in one of the Aquila Group of Funds, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus. The prospectus is available here, from your financial advisor, or by calling 800-437-1020.

07/15/2014

Island Hopping

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Continuing our 30th anniversary series, Aquila Regional Sales Manager Sherri Foster recalls the beginnings of Aquila, reveals what fund salespeople do, and explains why working in Hawaii isn’t what you think.

Your career with Aquila started with a chance meeting. What happened?

It was the summer of 1984 and I was a realtor in Lahaina, Maui. Lacy Herrmann (Aquila founder) and his wife Betsey wandered into my office. They were on a cruise and were walking through town. I showed them a condo, we talked, and they returned to their ship.

That winter I followed up with a phone call.  Lacy ended up buying the condo.  He now owned real estate on Maui and had a relationship with Hawaiian Trust Company (acquired in 1985 by current Fund Advisor, Bank of Hawaii).  And he noticed that Hawaii didn’t have a state-specific municipal bond fund.

That was the beginning of the Aquila municipal bond funds. Lacy had Hawaiian Tax-Free Trust up and running that February and asked me to be his local sales liaison. I had a lot to learn about mutual funds and bonds.

Lacy knew I had strong sales skills and was confident that I could succeed in a sales role with Aquila. And here I am, 30 years later. If I’m not the oldest fund wholesaler in the industry, I must be the longest-tenured wholesaler.

What exactly does a fund wholesaler do?

We’re the connection between the fund company and the financial advisors who recommend our funds to their clients.

Every week I meet with advisors from firms such as Morgan Stanley, Merrill Lynch, UBS, Wells Fargo; independent advisors with LPL, Raymond James, Edward Jones; and dozens of banks, credit unions, and smaller advisory firms throughout Hawaii. About 1,200 to 1,500 of my “clients” or advisors are actively investing in Hawaiian Tax-Free Trust.

I meet with them, train them, update them on our performance and characteristics. And together, we meet with their clients—fund shareholders or potential shareholders—who want to talk with someone from Aquila who is local rather than in New York or California.

I’m largely independent, which is appealing. But the requirements of the role also mean I’m sometimes working on weekends, preparing for the next week’s presentations.

Monday is my office day. The rest of the week I’m meeting with advisors on the islands of Oahu, Hawaii, Maui and occasionally Lanai.

That sounds nice.

The travel is overrated. I’m in nice places but I live out of a suitcase. People who meet me will say, “you’re really lucky to live in Hawaii – do you drink Mai Tais and live on the beach?” I don’t remember the last time I was on the beach. We may be more relaxed in Hawaii but we’re just as focused and serious about our businesses as anyone on the mainland. Hawaii has its challenges. We have a five or six-hour time difference with our New York headquarters. When they’re sitting down to dinner I’m still here in the hot seat.

Are there any other fund wholesalers based in Hawaii?

I used to be the only one. Now, to my knowledge, it’s me and one other wholesaler with an annuity firm.

Does being local help?

Absolutely. I’m available in person for advisors and their clients every week, versus every three to four months for wholesalers who live on the mainland. If they need to talk to an Aquila portfolio manager in Honolulu or the Three Peaks managers in Colorado, we can get them on the phone.

Advisors and shareholders also love the local focus of our state-specific municipal bond funds – not just in Hawaii but also our six other state-specific funds. We’re invested in their infrastructure. In Hawaii, that’s over 200 different bonds, financing projects all over the state. Their money stays in their state, helping to build infrastructure they can see. I’m an investor myself and I love that part of it.

With hundreds of fund companies out there, what does Aquila offer investors that you think is unique?

When you’re small like us, you go the extra mile. Our local presence is a big part of that. That local access and transparency was Lacy’s vision and it’s still the Aquila way.

One example:  I often conduct educational seminars for financial advisors. In addition to the advisors’ clients and their friends, we often open our seminars to the public by advertising them in the local media.

At one of these Saturday seminars a woman with slippers and pedal pushers came in the door. She didn’t look penniless, but she also didn’t look like someone who would pull her checkbook out and write a $1 million check for an investment in the Trust, which she did.

She saw the ad, showed up, liked the potential dividends and tax savings (Hawaii is one of the highest-taxed states in the U.S.), and warmed to our conservative strategy. And the only reason we connected is because at Aquila we make ourselves accessible at a very local level.

Advisors and shareholders also like knowing that as an employee, working at Aquila is great. We’re a small, family-owned firm with great working relationships and enormous loyalty. I always feel better about doing business with companies whose employees are happy to be there.