07/11/2014

Municipal Bonds for America coalition – educating Congressional policy makers

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The Municipal Bonds for America (MBFA) coalition conducted a “Municipal Bonds 101” seminar on July 2, 2014 for an overflow crowd of US Congressional policy makers and staff.  The seminar is the second such event hosted by MBFA with the purpose of educating policy makers on the benefits provided by the municipal bond market and the problems associated with reducing or eliminating the tax exemption applicable to municipal bond income.  Panelists speaking during the seminar included Ron Bernardi, Principal, President and CEO, Bernardi Securities, Mayor Steve Benjamin, Columbia, South Carolina, and Kevin Burke, President and CEO, Airports Council International, North America.

Information regarding the Municipal Bonds for America coalition can be found on their website.

07/09/2014

Aquila Municipal Bond Funds Avoid Puerto Rico

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Each of the municipal bond funds offered in the Aquila Group of Funds adheres to an investment strategy focused on investment grade bonds as a means of managing credit risk, and an intermediate average portfolio maturity as a means of managing interest rate risk.  In keeping with our emphasis on high-quality holdings, the seven state-specific municipal bond funds offered by Aquila have no Puerto Rico holdings, whereas Morningstar has reported that roughly two-thirds of municipal bond funds hold Puerto Rico bonds.

The commonwealth of Puerto Rico has been grappling with budgetary issues which have generated a significant amount of attention in the municipal bond market and in the media.  In late June, the Puerto Rico Governor signed the Puerto Rico Public Company Debt Enforcement and Recovery Act, which would enable public corporations (power and transportation agencies) to restructure their debt through a process similar to bankruptcy.  Puerto Rico, like the states, cannot file for Chapter 9 federal bankruptcy protection, and the new legislation does not apply to general obligation debt of the commonwealth.

Response to the new legislation was swift, with prices on certain Puerto Rico agency bonds dropping abruptly, and lawsuits filed challenging the constitutionality of the legislation.

On the Aquila Group of Funds website, you will find information regarding the investment strategies and full portfolio holdings of each state-specific municipal bond fund.  The investment objectives, risks, charges, expenses, and other information will be found in the Fund prospectus.  Information on the Fund holdings will be found in the Fact Sheet, Annual and Semi-Annual reports, and the Portfolio Holdings report.  We encourage you to review this information, and to visit the web site frequently for updates on each fund, and our perspectives on the markets.

06/27/2014

Long History of Local Investing

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Portfolio managers make the daily decisions that add up to the investment performance that investors see year after year. For our 30th anniversary series, we spoke to our longest-serving portfolio manager, Todd Curtis, who has managed the Aquila Tax-Free Trust of Arizona since its inception in 1986.

PMC AQU 1303 website photo curtis

How did you begin working with Aquila?

Aquila had identified Valley National Bank, headquartered in Phoenix, as the sub-advisor for their Arizona fund. At the time, I was managing municipal bond investments at Valley National Bank, so I was the logical choice to manage the fund for Aquila. I still remember the first bond I bought: a 10-year Chandler Water Revenue bond paying 7% at par, $50,000 face value. I’d love to buy it at that price today.

It was March 14th—the same day that Oregon Senator Bob Packwood introduced legislation to take away the tax exemption on municipal bond income. We weren’t sure we were going to have a fund. Nearly thirty years later, we’re still here.

Is there more to managing the fund than investing in state and local municipal bonds?

Much more. We’re constantly doing analysis, observing the market, managing cash flow. We need to know what’s happening locally—state and city legislation, population growth and trends, what’s going on with parks, infrastructure, and so on. And to buy bonds we like, we need cash. It’s a very intricate process.

A lot of what we do hinges on relationships. Even with electronic trading, relationships still count. There’s a lot of negotiation. And having good relationships can really help.

Aquila is unusual for having local portfolio managers who live and work in the state. How does that help you run the fund?

It gives me a very good sense of creditworthiness—driving around and seeing where the dirt’s getting moved, and of course talking with people in the local community.

For example, I had a fairly heated discussion several years ago with a muni bond broker over a nursing home facility issue we owned at the time. While the broker’s opinion of the bond was more negative than my own, I took the safe road and sold the bond at a profit. Sure enough, a few years later the facility started having problems.

We’ve had tremendous growth in Arizona, and being on the ground has helped us get comfortable owning certain credits. For example, in our due diligence on Glendale’s sports facilities, we did a lot of asking around to gain comfort that the bonds were investable. A non-local manager might easily have passed on that issue.

What’s the benefit of being local to investors and advisors?

Local advisors find it easier to talk to us, in my experience. We make ourselves available for meetings with advisors and their clients. And they appreciate that we know what’s happening locally, from the state legislature to the local sports teams.

Driving to the annual shareholder meeting a few years ago, I took the back roads just to get an up-to-the-minute feel for aspects of the local economy. I was able to report that it looked like there was a really good cotton crop, and that Arizona was doing OK economically. People relate to that. We’re real to them.

What would you say to investors or advisors who attempt to manage a municipal bond portfolio themselves?

The municipal bond market isn’t as transparent as other markets, which makes it difficult for individual investors to buy and sell. Advisors might have better luck, but they’ll see less product than institutional investors, such as the Fund. We see a wider range of bonds. I think we bring a deeper and broader knowledge of the market, a bigger set of offerings, daily experience in the markets. It’s an advantage.

How did you start in this business?

I fell into it. After a short, unpromising time in insurance sales (unfortunately, I will take “no” for an answer), I got an MBA from Arizona State and was hired after graduating by Valley National Bank, as a trust portfolio manager. When Aquila launched this fund with the Bank as sub-advisor, I expressed an interest in this role and have been doing it ever since. It’s been great.

What do you like most about your role?  

When we’re really active, the camaraderie of buying and selling with institutions—kibitzing with them, the back and forth of negotiating, the action of the market. It gets the adrenaline going.

Aquila has been incredibly loyal, while giving us complete independence to do our jobs. There is tremendous oversight along with confidence in our capabilities. It’s a wonderful way to work.

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.

06/20/2014

Finding a Home for Cash in the Municipal Bond Market

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Typically, during the months of June and July, a high volume of municipal bonds will mature or be called, leaving investors to roll those proceeds into other municipal bonds. This year, due to a recent decline in new municipal bond issuance, investors attempting to roll over maturing or called debt may be presented with some challenges.

In an effort to maintain balanced budgets, and during a period when voters have become more selective about approving new borrowing, states and municipalities have been issuing fewer new bonds. Based on data from Thomson Reuters through May 31st, year-to-date issuance has declined by 24.8% relative to the same period in 2013.

The reduced supply has coincided with an increase in demand brought about by higher tax rates that are expected to continue rising in the future. The tax-exempt income provided by municipal bonds, particularly the double-exempt income available on bonds issued in an investor’s state of residence, present investors with attractive taxable-equivalent yields and the opportunity to manage their income tax liability.

As large institutional investors, municipal bond mutual funds maintain numerous trading relationships with counter-parties across the country. Those trading relationships, and the high dollar volume of fund trades, will often make it possible for a mutual fund to acquire bonds in the market when individual investors have difficulty doing so.

Investors receiving proceeds from bonds that are maturing or being called may find that municipal bond mutual funds provide a viable alternative to individual bonds during this period of limited bond supply. Mutual funds also offer investors a range of features and services. To learn more, speak with your financial advisor, and review information found on this site regarding our state-specific municipal bond mutual funds.

 

Mutual fund investing involves risk; loss of principal is possible. 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. Trust performance could be more volatile than that of funds with greater geographic diversification.

Before investing in a Fund offered by 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 on this site, from your financial advisor and when you call 800-437-1020.

06/16/2014

Kentucky Hospital Bonds: Searching for Opportunity amid Turmoil

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During the third quarter of 2013, in an unsettled national municipal bond market environment, hospital bonds saw an increase in selling pressure precipitated by uncertainty surrounding the roll-out of the Affordable Care Act. During that same time period, the United States Department of Justice filed a lawsuit against King’s Daughters Medical Center in Ashland, Kentucky for purportedly submitting false claims to Medicare – bringing further scrutiny to the sector in the state of Kentucky. The hospital charged-off over $40 million in the third quarter due to the impending settlement, and national ratings services consequently downgraded approximately $240 million of King’s Daughters debt. S&P lowered their rating from A+ to A, Moody’s downgraded from A1 to A2, and Fitch later downgraded the debt from A+ to A in the first quarter of 2014.

In September 2013, the portfolio manager of Aquila Churchill Tax-Free Fund of Kentucky saw value in the hospital sector and began to increase the Fund’s exposure to hospital bonds, including King’s Daughters, based on an increase in the secondary supply of bonds with attractive yields and lower duration. The Fund’s hospital revenue bond sector weighting increased by 1% from September 30, 2013 to May 31, 2014 and the portfolio’s overall maturity and duration were reduced, partly due to the additions.

As of May 30, 2014 the Barclays Municipal Index showed hospital bonds as the second best performing sector year-to-date, just behind IDR/PCR1. According to Barclays research, no hospital or hospital system rated higher than A has ever defaulted. Investors are exercising caution with the sector due to healthcare reform, but the implementation of business changes is expected to take years, during which time historically weaker credits may be acquired by stronger operators.

Although we have found relative value in the hospital sector over the past few quarters, we believe that on-going monitoring of hospital credit quality will be very important as the effects of the Affordable Care Act take hold. As with all of the Fund’s holdings, our local portfolio management will continuously monitor the hospital credits in the course of conducting credit research.

For a full list of Aquila Churchill Tax-Free Fund of Kentucky’s most recent quarter-end holdings click here.

 

1 industrial development revenue/pollution control revenue

The Barclays Municipal Bond Index is an unmanaged index considered representative of the universe of the tax-exempt bond market. Performance of an index does not reflect management fees and expenses which are reflected in Fund performance. An investment cannot be made directly in an index.

Mutual fund investing involves risk; loss of principal is possible. 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. Trust performance could be more volatile than that of funds with greater geographic diversification.

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 on this site, from your financial advisor and when you call 800-437-1020.

04/30/2014

Aquila Three Peaks Opportunity Growth Fund: Fundamental Analysis Matters

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You know you want to participate in the equity market, but how?

A growing number of investors recognize that it may be time to increase their allocation to equity.  What may be less clear is determining how to go about positioning assets in the equity market.

Consider this:  for several years, the Federal Reserve has been providing liquidity to the U.S. economy – liquidity that, to some degree, has contributed to the performance of the equity market.  If boats rose on the Fed’s tide of liquidity, what happens when that tide recedes?

Fundamental analysis matters.

Broad-based passive equity investments, such as equity index funds, may have performed well in a period when most publically traded corporations were benefiting from Fed-supplied liquidity, but without that support, equity investing may need to become more selective, based on sound fundamental investment research.

In selecting investments for Aquila Three Peaks Opportunity Growth Fund, we begin with the universe of companies we know best – those we follow in managing Aquila Three Peaks High Income Fund.  We look for issuers of high-yield corporate debt, in industries with relatively consistent revenue generation (i.e. non-cyclical industries), that have demonstrated the ability to grow even in a low-growth economy, that are generating free cash flow, and that are improving the corporate balance sheet by paying down debt.  We implement this strategy through a fundamental, bottom-up analysis of each company in which we invest.

Federal Reserve Banks Total Assets, Eliminations from Consolidation (WALCL) on the left axis, and S&P 500 Index value on the right axis. Source:  Board of Governors of the Federal Reserve System and Yahoo Finance

Federal Reserve Banks Total Assets, Eliminations from Consolidation (WALCL) on the left axis, and S&P 500 Index value on the right axis.
Source: Board of Governors of the Federal Reserve System and Yahoo Finance

We believe that when companies like these are able to improve the corporate balance sheet, there can be an impact to the performance of their equity.  Even in a relatively low-growth economic environment, which we saw in 2013 and continue to see in 2014, we believe that the types of companies we search for – those in non-cyclical industries that are paying down debt and improving the corporate balance sheet – can continue to grow and deliver value to shareholders.

Fundamental analysis and selectivity may become essential components of an equity investment strategy in a low-growth economic environment that is less influenced by Fed-supplied liquidity.

Looking for an equity strategy?

Once you take a close look at Aquila Three Peaks Opportunity Growth Fund, you may find that it is just what you were looking for.

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

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

04/30/2014

We Interview Anne Mills, Retiring Trustee

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Looking Out for Shareholders

Aquila’s locally-based trustees play a crucial role in advocating on behalf of fund shareholders. As PMC AQU 1303 website photo millsAnne J. Mills looks back on her tenure as a trustee on seven Aquila fund boards, we talked to her about what trustees do and what she’s seen in almost 30 years as a trustee.

How did you become involved with the Aquila Group of Funds?

Lacy Herrmann [Aquila’s founder] and I met in the mid-1980s, when we were both running for president of our college’s alumni board.  He beat me, although I did win a few years later.

In 1986 he was starting Aquila Tax-Free Trust of Arizona and was looking for trustees. He wanted people with a diversity of experience and opinions.  Even then, he was conscious of building boards that would include both male and female trustees.

I was an executive in financial planning at IBM at the time, so I offered that experience. When he started Aquila Churchill Tax-Free Fund of Kentucky a year later, he recruited me and a fellow alumna, an extremely accomplished woman who had been the CEO of the Smithsonian Institution, the National Gallery, and the Metropolitan Museum in New York.

Lacy was a delightful, bright, wonderful person who had a knack for attracting very competent, accomplished people to the Aquila Group of Funds boards.

What does a mutual fund trustee do—and why should shareholders care?

The sole purpose of a fund’s board is to represent shareholders.  Trustees watch over implementation of the investment strategy and cost containment, seek to insure that shareholders receive the best support and service that can be provided, and strive to be sure that conflicts of interest are avoided, among other duties.  It’s a fiduciary responsibility, which in fact is the highest level of responsibility in financial services. Shareholders should care because we’re the ones who exercise care on their behalf.

My expertise is financial controls.  I’m always on watch for things that might go wrong—trying to ensure they don’t, and if they do, understand why, and then seek to ensure that processes are analyzed to avoid recurrences and that corrective procedures are implemented.  Other trustees bring other skills.  For example, many Aquila fund boards include a CPA and a local economist.

We all feel our fiduciary duty very deeply.  And we’re all shareholders [in the funds we oversee], so we see the same reporting and communications that other shareholders do, and participate in the same investment experience.

What makes the Aquila Group of Funds’ trustees unique?

Many of us are locals who live in the state represented by the fund.  In attending the local shareholder meetings held for each of the funds, each of us has built relationships with shareholders state by state.  It’s a more personal relationship with shareholders than I think almost any other mutual fund company can claim.

Local board representation and local meetings are a real benefit for shareholders, in my view.  Shareholders who attend our meetings get a good feel for the high-quality investments in their fund, and how their money is managed in an effort to reduce risk. Investors understand more about how their money is managed, and can evaluate the risks associated with these portfolios.

It also benefits financial advisors.  When they attend our shareholder meetings, they along with fund shareholders have the opportunity to meet and ask questions of the trustees and management.

As a trustee, what are you most proud of having accomplished on behalf of shareholders?

I’d say restructuring five municipal bond funds [the Arizona, Colorado, Kentucky, Rhode Island and Utah funds] into one business trust, Aquila Municipal Trust.  When these funds started nearly 30 years ago each was set up as a separate trust, with local trustees and local infrastructure to gain recognition and break into each state.  It was very useful and helped establish the funds.

Over time, it was felt that restructuring the trusts would benefit shareholders by providing efficiencies in the oversight and administration of the funds.

“Restructuring the trusts” sounds dry but it should represent efficiencies for the benefit of shareholders.

What does the future hold for you, and for Aquila?

I’m 75 and have retired in accordance with our retirement policy, although I’m still a consultant to the Aquila Municipal Trust board.  My husband and I still split our time between Arizona and Colorado.  I’ll continue as a trustee emerita at Brown University; at Ottawa University, where I’m a life trustee; and at the American Baptist Foundation, where I’m the founding chair and still serve on the investment committee. I also volunteer for a number of organizations.

Today, 30 years after the founding of the Aquila Group of Funds, the business pressures have changed and the roles of the trustees have changed significantly.  I think the Aquila Group of Funds is managed exceptionally well.  I feel I’m leaving the Funds in very good hands.

 

04/15/2014

Are You Free of Your Tax Bill for the Year?

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As you put the 2013 tax season behind you, think about how much of what you earn is allocated to pay taxes each year. This year, Americans will pay a total of $4.5 trillion, or 30.2% of their income in taxes. Consider how many days of work will be dedicated to paying that bill. Every year the Tax Foundation1 establishes Tax Freedom Day®, which marks the day when the nation has earned enough money collectively to pay its total tax bill. For 2014, Tax Freedom Day® falls on April 21st; three days later than 2013 due to the country’s delayed economic recovery. This means the average taxpayer will spend 110 days working to pay their taxes. If federal borrowing is included in the equation, it moves Tax Freedom Day® out another 15 days to May 6th.

Take a look at our full report, Have you paid your taxes yet?, which includes the Tax Freedom Day® for each of the seven states where we manage a single state municipal bond fund. Check out the entire 2014 Tax Freedom Day® report to see where Tax Freedom Day® falls for all 50 states.

1The Tax Foundation is a nonpartisan educational organization founded in 1937 to educate taxpayers about sound tax policy and the size of the tax burden borne by Americans at all levels of government.  For more information, visit www.taxfoundation.org.

Mutual fund investing involves risk; loss of principal is possible.  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.  Fund performance could be more volatile than that of funds with greater geographic diversification.  

For certain investors, some dividends may be subject to federal and state taxes, including the Alternative Minimum Tax.  Consult your professional tax adviser. 

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 advisor, when you call 800-437-1020, or visit www.aquilafunds.com.   

 

04/08/2014

Municipal Bonds: Better Than You Think

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For many years, the municipal bond market has provided investors with the benefit of earning income that is generally exempt from both federal and state income taxes. While several headline topics have raised concerns among municipal bond investors in recent years, our evaluation of current economic and market factors indicates to us that the condition of the municipal bond market may be better than you think.

Our new white paper, Municipal Bonds Better Than You Think, takes a look at the economic and market factors that have influenced the municipal bond market over the past several years, and reviews why we follow our specific investment approach in managing municipal bond funds.

 

Mutual fund investing involves risk; loss of principal is possible. 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. Fund performance could be more volatile than that of funds with greater geographic diversification.

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 on this site, from your financial advisor and when you call 800-437-1020.

04/04/2014

One Hundred Years of the Federal Income Tax

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It was 100 years ago this year that the first Form 1040 was Sixteenth Amendmentsent out to taxpayers as ratification of the Sixteenth Amendment to the US Constitution made it possible for the federal government to tax personal incomes.

The new tax started at 1% on personal incomes of more than $3,000 (over $71,000 in today’s dollars) for single filers or $4,000 for couples and included a surtax of 6% on incomes over $500,000. Taxpayers were required to complete the new form and submit it to local tax collectors for review by March 1, 1914, where it was forwarded to Washington for a second review at Bureau of Internal Revenue (predecessor of the IRS) headquarters. The total tax due was to be presented to the taxpayer by June 1, 1914 and final tax payment received by June 30, 1914.

Much like today’s taxes, the process was confusing to all involved and prompted the LA Times to lament “The present income tax law is so confusing to the ordinary taxpayer that assistance in the preparation of the income statement is almost necessary.”

The maximum income tax rate has been up and down throughout the last 100 years starting at 7% in 1913 and rising to a high point of 94% during the final years of World War II (1944-45). It stayed over 90% until 1964 when under President Johnson, it was reduced to 77%. Highest Marginal Tax Rates 1913-2013 with SourceIt was reduced again in 1965 to 70% where it stayed until 1981. In that year, Congress enacted the largest tax cut in US history by dropping the highest marginal rate to 50% under The Economic Recovery Tax Act of 1981. The trend continued downward until the maximum income tax rate hit 31% in 1991 and 1992, the lowest point since 1931 when rates were 25%. It is probably safe to say that our current rates which range from 10% to a marginal rate of 39.6% will undergo future changes.  As recently as 2013, we saw the addition of the Net Investment Income Tax (NIIT – see our report Certainty of Taxes for more information on this tax) and changes to the capital gains rate.  There may be more changes to come.

For a more expansive history of our tax structure see our report on the Sixteenth Amendment.