04/03/2014

We Express our Appreciation to a Retiring Trustee

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We would like to express our appreciation to a trustee who has recently retired from various fund boards after having served shareholders for many years.
PMC AQU 1303 website photo mills
Anne Mills became a trustee on the board of Aquila Tax-Free Trust of Arizona at the inception of the fund in 1986, and joined the boards of Aquila Tax-Free Fund of Colorado and Aquila Churchill Tax-Free Fund of Kentucky when both funds were launched in 1987.  In later years, she also joined the boards of Aquila Narragansett Tax-Free Income Fund and Aquila Tax-Free Fund For Utah.  She was elected Independent Chair of both Aquila Tax-Free Fund of Colorado and Aquila Tax-Free Trust of Arizona in 2005, and served as Independent Chair of Aquila Municipal Trust from October 2013 until her retirement.  In addition, Anne served as a trustee of funds sponsored by Aquila’s predecessor companies.

While serving on fund boards with Aquila Group of Funds, Anne has pursued a number of business interests, and dedicated years of service to a variety of educational, charitable and religious organizations.  She was an active volunteer with her alma mater, Brown University, for which she served as president of the Brown Alumni Association, class gift committee member, and as an Alumni Trustee on the Brown Corporation.  She was a recipient of the Brown Bear Award, given by the Brown Alumni Association, in recognition of her “outstanding and wide-ranging personal service rendered to the University over a period of years.”

Mrs. Mills has provided fund shareholders with years of dedication, professionalism and thoughtful stewardship, and has served as a resource to her fellow trustees.  We are very proud to have worked with Anne, appreciative of her years of service, and we wish her all the best in her future endeavors.

03/28/2014

Celebrating Our 30th Anniversary

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Our History, People and Distinctive Strategy

Diana P. Herrmann, President & CEO, Aquila Investment Management LLC

Diana P. Herrmann, President & CEO, Aquila Investment Management LLC

Lacy Herrmann, Aquila’s founder, was one of the earlier pioneers in money market funds beginning in the mid-1970s. By the early 1980s, a handful of state-specific municipal bond mutual funds were being offered in states with large populations and higher tax rates, such as California, New York and Massachusetts.  Mr. Herrmann was intrigued with the concept of launching similar funds in other states.

Since the inception of Aquila Management Corporation 30 years ago, Aquila Group of Funds has grown into a nine-fund family with seven state specific municipal bond funds, a high-yield corporate bond fund, and an equity fund.  Through the years, however, Aquila has maintained its shareholder- and advisor-centric approach, as CEO, Diana Herrmann explains.

You’ve witnessed the growth of Aquila Group of Funds, and at the same time, you’re very involved in industry organizations, so you have a broad perspective.  What makes Aquila Group of Funds unique?

Our local character makes us distinctive. That local emphasis was integral to the creation of Hawaiian Tax-Free Trust, our first municipal bond fund, and still reflects how we’re structured today. In each of the seven states where we offer a municipal bond fund, we have locally-based portfolio managers, representatives, and board members.

Because they are located in each state, the portfolio managers of our municipal bond funds are attuned to the nuances of the local municipal markets—the economy and policy decisions. They’re in a better position to “kick the tires”—visiting individual projects, monitoring economic developments, staying familiar with local officials responsible for managing budgets, and observing the mood of the electorate as various projects are put to a vote.

Our local presence also helps us understand the markets and the people we serve.  We’ve found time and again that being local helps with everything from conducting due diligence on investments to developing relationships with advisors and shareholders.  And, I think the feedback we receive and our growth validates this strategy.

How does local insight translate to the high-yield bond and equity funds, where you’re investing across the U.S.?

Clearly, high-yield corporate bonds and equities don’t have the state-specific traits of municipal bonds. But, from a research perspective, there is an element of our “local” approach here, too. We’re fundamental managers with a research-intensive approach that emphasizes on-site visits. We go beyond the financial statements to really understand the debt structure, business model, and business execution of a company.  In that respect, and in our moderate approach to risk within the high yield and equity markets, our strategies are very much in synch.

What do you love the most about running the firm?

I love helping shareholders achieve their objectives, and interacting with them whenever possible.  To me, our business is all about our shareholders and their financial advisors.  We’ve always sought to connect with them, to understand their needs, and to provide high-quality service and a lasting benefit to shareholders and advisors.  It’s also very gratifying to know that together, we’re helping the local communities by financing important facilities and infrastructure, such as schools, hospitals and roadways, in the states where we manage municipal bond funds.

Our locally-based annual shareholder meetings are also distinctive, and have attracted hundreds of shareholders each year. We typically invite guest speakers to discuss the local and national economy, while portfolio managers discuss the current market situation.  Shareholders have the opportunity to ask unscreened questions and mingle with management, trustees, and portfolio managers.

We firmly believe that you learn more speaking with people face-to-face than you do over the phone or online.  Many of our shareholders feel a genuine connection with us, as we do with them.  That’s not common or easy in this industry, but when it happens, there’s nothing better.  It’s a very special feeling.

03/27/2014

Individual Stock Selection

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Individual stock selection and active management are strategies that returned to prominence recently, according to a March 9, 2014 Wall Street Journal article.  “After years of moving in lock step on the back of global economic shocks, individual stocks increasingly have been dancing to their own tune” as evidenced by the steep decline seen in correlations1 between individual stocks in the S&P 500 since the financial crisis.

S&P Dow Jones Indices looks at active management from a different perspective in their S&P Indices Versus Active Funds or SPIVA Scorecard, which evaluates the performance of active versus passive management across multiple categories.  Through year-end 2013 their SPIVA Scorecard reported that, for the one-year period, 63% of funds in the Mid-Cap Growth category and 62% of funds in the Multi-Cap Growth category outperformed their benchmarks – the only two out of twelve style-specific equity categories to outperform passive strategies by such a wide margin over the 1-year period.  Those one-year results were not matched in any of the twelve categories over 3- and 5-year periods.2

Aquila Three Peaks Opportunity Growth Fund employs a fundamental investment strategy focused on measures of corporate performance and balance sheet improvement – characteristics that we search for and evaluate, one company at a time.

“We believe that we take a unique approach to selecting equity investments”, said Sandy Rufenacht, Co-Portfolio Manager.  “We have a long history of conducting research in the high-yield corporate bond market, and investing in high-yield issuers when our research indicates they are successfully and prudently managing leverage and the corporate balance sheet. The characteristics we look for in high-yield debt issuers have helped us identify opportunities for improvement in the equity performance of those companies.  Our experience, research, and strategy in the high-yield debt market is the foundation on which we built the strategy of Aquila Three Peaks Opportunity Growth Fund”.

Take a closer look at the individual stock selection approach of Aquila Three Peaks Opportunity Growth Fund – you may find it is just what you were looking for.

 

1Correlation:  A statistical measure of the movements of two securities in relation to each other.  If perfectly correlated, two securities will move up or down to the same degree and in the same direction. 

2Past performance does not guarantee future results.  An investment cannot be made directly in an index.

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.

03/07/2014

A New Tax Confronts High Income Taxpayers

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“The only things certain in life are death and taxes.” ~ Benjamin Franklin

Starting with the 2013 tax year, high income taxpayers will be subject to a new tax; the 3.8% Net Investment Income Tax (NIIT).  Instituted under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, this tax is in addition to regular taxes and will be imposed on filers with Modified Adjusted Gross Income (MAGI) over certain thresholds.

The good news for investors in municipal bonds is that the interest income from a municipal bond is generally exempt from federal income tax, generally exempt from income tax in the state that issued the bond, and is excluded from the calculation of the MAGI.  The exclusion of municipal bond interest income from the MAGI calculation could help keep some taxpayers below the income thresholds at which the NIIT would otherwise be applicable.  Furthermore, interest from municipal bonds is not considered investment income for the purpose of calculating the NIIT, so it’s also exempt from the 3.8% surtax.

The Certainty of Taxes provides additional information and examples of the impact NIIT has on taxpayers.

Investors will be encountering the NIIT for the first time as they prepare their 2013 tax returns.  Consider whether tax-exempt income provided by municipal bonds would be beneficial in future investment and tax planning.

For additional information on the new tax, visit  IRS publication “Questions and Answers on the Net Investment Income Tax” or consult your professional tax advisor.

For certain investors, some dividends may be subject to federal and state income taxes, including the Alternative Minimum Tax (AMT).  For more information, please consult your professional tax advisor.

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.

The Net Investment Income Tax (NIIT) is a 3.8% tax established by the Patient Protection and Affordable Care Act (PPACA) that applies to the lesser of (1) net investment income or (2) the excess of a taxpayer’s modified adjusted gross income (MAGI) in excess of an applicable threshold amount. For more information, please consult your professional tax advisor.

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.

03/04/2014

State of Oregon Economic Update Brings Mixed Messages

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In the recent economic forecast released by the state of Oregon, the revenue outlook was largely unchanged, but the update included some mixed economic data.  Fee collections and lottery proceeds are down, along with estate and corporate income taxes. However, the labor market continues to grow and the forecast projects an increase in public sector employment. In addition, the report estimates the state is approximately $100 million in unanticipated revenue away from triggering the kicker law, which mandates that a tax rebate be issued to Oregon tax payers when a revenue surplus exists.

For more detailed information, see the executive summary or the full economic and revenue forecast released by Oregon’s Department of Administrative Services.

02/26/2014

University of Colorado Requests that S&P Remove Credit Ratings from Debt

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On January 13, 2014, Standard & Poor’s Ratings Services withdrew all its ratings from the University of Colorado and University of Colorado Board of Regents’ debt at the request of the issuers.  The University was last rated AA- by S&P and is currently rated Aa2 by Moody’s and AA+ by Fitch.  Since the S&P ratings were withdrawn at the issuer’s request due to the expense of maintaining the ratings and not for credit related reasons, this change is not a cause for concern.

However, this decision is notable for an entity the size and profile of the University and underscores the importance of local credit research as prominent issuers continue to consolidate and withdraw their credit ratings.

In our most recent credit review conducted in October of 2013, we noted that the University’s market position and strategy have enabled the University to increase its net financial position in each of the last five fiscal years to approximately $3 billion, with $1 billion unrestricted.

 

02/25/2014

Oregon Taxpayers Reap Savings from School Bond Program

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In its 2014 Legislative Update, the Oregon State Debt Policy Advisory Commission recently reported an estimate suggesting that the Oregon School Bond Guaranty Program has saved Oregon taxpayers approximately $6.0 million per year, or $120 million over a twenty year period.  This State guaranty applies to local school district and community college debt service payments of $407 million, which is equivalent to approximately 5.9% of total General Fund revenues for the fiscal year, and 12.4% of overall state aid for schools and community colleges.

Source: State of Oregon State Debt Policy Advisory Commission 2014 Legislative Update

Source: State of Oregon State Debt Policy Advisory Commission 2014 Legislative Update (click to enlarge)

Since 2003, the amount of state school aid that has been diverted each year to pay school district pension obligation bond debt service has grown substantially.  The Commission projects that Oregon will divert approximately $229 million in state school aid for this purpose in FY 2014, or 7.0% of combined annual state aid for school districts and community colleges in the state.

The Oregon School Bond Guaranty Program benefits local governments and taxpayers with lower borrowing rates and provides investors with the additional security of a State Guaranty.  The primary cost of the program is the contingent liability presented to the state, which the Commission has recommended that limits be placed on the use of state aid and intercepts going forward.

02/06/2014

Hawaii – Positive Economic News

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The Hawaii Tourism Authority reported on January 30, 2014 that Hawaii visitor arrivals in 2013 set a new record of 8.24 million visitors for the year.  This represents an increase of 2.6% over 2012. Annual total visitor expenditures also increased 2% to $14.5 billion. Arrivals from the mainland were up slightly over 2012, while arrivals from Japan rose 3.9% and arrivals from Canada grew by 2.1%.  Arrivals from smaller visitor markets (Oceania, Europe, Latin America) continue to show strong growth rates.

After another record-setting year for tourism and continued growth in construction, the state reported an increase in net assets of $307 million, the first gain since 2006. This is in addition to the state’s $844 million budget surplus at the end of the previous fiscal year.  Conservative fiscal management is expected to continue into 2014 as lawmakers are focused on recapitalizing reserve funds.

01/24/2014

2014 Colorado Municipal Market Outlook

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The National Perspective

Over the course of 2014, a number of economic and policy variables are likely to impact the municipal bond market.  Consensus expectations of the Federal Reserve indicate a gradual tapering of the Fed’s asset purchase program.  While the initial market response may be negative, over time more attractive valuations may draw buyers to the market.  The long end of the yield curve has flattened while we’ve seen a steepening on the short end.  Estimates of the 2014 year-end yield on the 10-year Treasury fall near 3.50%.  Municipal bonds remain attractive relative to Treasuries.  In this environment, the bond markets could produce low, but positive, total returns for the year.

A number of near-term events could generate volatility in the bond market.  During the first quarter, Washington will be required to address the debt ceiling and the Federal budget.  In the recent past, these debates, along with the scenario of a disaster narrowly averted, have created inflection points in the bond markets which provided attractive valuations. Although tax reform proposals may emerge this year, it seems unlikely that legislation will be enacted, particularly with legislators focused on mid-term elections.  Headline risk is likely to remain a factor in connection with Detroit, Illinois, Puerto Rico and the pension liabilities of individual municipal credits.

At the same time, there are significant positive factors influencing the municipal market.  The financial condition of most municipalities has improved with modest economic growth and a corresponding increase in revenues.  State tax collections have been growing for over 3 years now, while defaults are occurring at the slowest pace since 2008.  Valuations have become attractive and declining new issuance is supporting those valuations to some degree.  With the on-set of tax season, as the impact of recent tax changes becomes clear, interest in tax-exempt municipal income is likely to rise.  Should rates rise, the municipal tax-exemption becomes even more attractive.

We believe that municipal bonds could outperform other fixed income categories in 2014. In the second half of 2013 the yield on a typical “A” rated municipal bond was at least as much as an equivalent “A” rated corporate bond. This enticed investors seeking total return to buy municipal bonds, even when they did not need the tax advantages of municipal bonds.  Another year of anticipated lower municipal bond issuance (reduced supply) and higher tax rates (heightened demand) could make municipal bonds more attractive in 2014.

The Local Perspective:  Colorado

Colorado municipal bond new issuance declined by 26% to $6.6 billion in 2013 from the record high of the previous year.  Major issuers during the year were City and County of Denver, RTD, Denver Public Schools, and Denver International Airport.  We expect new supply will remain at or below current levels as the number of refunding issues will decline in the higher rate environment and voters are less enthusiastic about approving new capital projects.

The improving commercial and residential real estate markets have provided a positive impact on property tax collections which is an important revenue source for municipal bond repayment.  This has been especially helpful to elementary school funding which had suffered in the years following the recession.  Sales tax revenues have surpassed the pre-recession highs at the state level and capital gains taxes have provided a significant boost to State coffers.  Overall, the credit quality of investment grade municipal bonds has improved in the past year.

The Aquila Tax-Free Fund of Colorado will maintain its defensive posture by focusing on high quality, intermediate maturity bonds.  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 advisor and when you call 800-437-1020 or visit www.aquilafunds.com.

01/23/2014

2014 Oregon Municipal Market Outlook

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The National Perspective

Over the course of 2014, a number of economic and policy variables are likely to impact the municipal bond market.  Consensus expectations of the Federal Reserve indicate a gradual tapering of the Fed’s asset purchase program.  While the initial market response may be negative, over time more attractive valuations may draw buyers to the market.  The long end of the yield curve has flattened while we’ve seen a steepening on the short end.  Estimates of the 2014 year-end yield on the 10-year Treasury fall near 3.50%.  Municipal bonds remain attractive relative to Treasuries.  In this environment, the bond markets could produce low, but positive, total returns for the year.

A number of near-term events could generate volatility in the bond market.  During the first quarter, Washington will be required to address the debt ceiling and the Federal budget.  In the recent past, these debates, along with the scenario of a disaster narrowly averted, have created inflection points in the bond markets which provided attractive valuations. Although tax reform proposals may emerge this year, it seems unlikely that legislation will be enacted, particularly with legislators focused on mid-term elections.  Headline risk is likely to remain a factor in connection with Detroit, Illinois, Puerto Rico and the pension liabilities of individual municipal credits.

At the same time, there are significant positive factors influencing the municipal market.  The financial condition of most municipalities has improved with modest economic growth and a corresponding increase in revenues.  State tax collections have been growing for over 3 years now, while defaults are occurring at the slowest pace since 2008.  Valuations have become attractive and declining new issuance is supporting those valuations to some degree.  With the on-set of tax season, as the impact of recent tax changes becomes clear, interest in tax-exempt municipal income is likely to rise.  Should rates rise, the municipal tax-exemption becomes even more attractive.

We believe that municipal bonds could outperform other fixed income categories in 2014. In the second half of 2013 the yield on a typical “A” rated municipal bond was at least as much as an equivalent “A” rated corporate bond. This enticed investors seeking total return to buy municipal bonds, even when they did not need the tax advantages of municipal bonds.  Another year of anticipated lower municipal bond issuance (reduced supply) and higher tax rates (heightened demand) could make municipal bonds more attractive in 2014.

The Local Perspective:  Oregon

Tax-exempt issuance increased by 27% to $3.9 billion in 2013 led by large issues from Portland Sewer System, Oregon Department of Transportation , and Portland schools.  We expect new issuance to be slightly lower in 2014 due to a light bond election calendar, a reduced number of refundings in a higher rate environment, and tepid voter attitude toward approving new capital projects.

Credit quality of Oregon issuers has improved as the economy continues its slow recovery.  The Oregon unemployment rate has fallen below 8% as we have seen gains in both the private and public sector employment rolls.  The improving residential real estate market has had a positive impact on property tax collections in most areas of the state which is an important source of revenue for municipal bond repayment.

The Aquila Tax-Free Trust of Oregon will focus 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.