12/02/2014

A Hands-On COO

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In this installment of our 30th anniversary interviews, Chad Childs, Executive Vice President and Chief Operating Officer (COO) at Aquila Investment Management LLC (sponsor of the Aquila Group of Funds), talks about opportunity, vision, and why it’s better to be local.

How did you begin at Aquila?

It was the fall of 1987. I’d gotten my MBA and was job hunting. My family knew the Herrmanns, so I contacted Lacy just to network, hoping he would pass my resume to some of his Wall Street contacts. Instead, Lacy asked me to come to New York to see him. We scheduled our meeting for Monday, October 19, 1987. Yes, Black Monday. Suffice to say, I didn’t meet with Lacy that day or the next, as all heck broke loose. We met later that week. Aquila was growing–it had launched the Colorado and Kentucky municipal bonds funds the previous May and Lacy needed help running a couple of money market funds. He said let’s give it a year and evaluate. I’ve been here ever since.

What drives you and your colleagues?

Chad Childs, COO, Aquila Investment Management LLC

Chad Childs, COO, Aquila Investment Management LLC

Our organizational structure is flat compared to larger firms. There is less bureaucracy—anyone can directly contribute to the firm’s success. That opportunity is what drives the people at Aquila. There is already enough red tape with the regulations in our industry, so it’s nice not to have to deal with it where we work, on a day-to-day basis.

What do you enjoy most about working at Aquila?

At any small company you have to wear several hats–you have to be prepared to roll up your sleeves and perform a variety of tasks. In larger companies, job functions are more narrowly defined and there’s often less variety. I enjoy being involved in all aspects of the firm, from product development to sales and marketing to operations, even fund governance. I consider myself very fortunate in this regard. I wouldn’t have had the same opportunities at a larger organization.

What accomplishments are you most proud of?

Having helped Aquila successfully transition from an entrepreneurial business to Diana Herrmann’s vision of Aquila as a boutique asset manager. It was important to maintain the foundation that Lacy had created and to move forward.

She had the passion required to succeed. She had a vision for where she wanted to take the business. Our refreshed branding is an important step toward that vision, and we all can be proud of the outcome.

What makes Aquila different from other fund companies?

Aquila is highly service-oriented. Many firms claim this, but we’re really able to do it because of our origins and the way we’re structured and incentivized. Consider how Aquila communicates with the financial community, potential investors, and shareholders. First, we make our portfolio managers available to visit face-to-face with financial advisors to provide timely insights on their investment strategies; local, state, and national issues; interest rates, and the like.

Second, with the municipal bond funds, we offer local annual and outreach shareholder meetings. These gatherings of shareholders and their financial advisors allow them and us to connect and put faces to the names. The meetings also give financial advisors, shareholders, and potential investors the opportunity to talk directly with trustees, portfolio managers, and senior officers to learn first-hand about their investment.

Finally, Aquila’s representatives are local—for example, Sherri Foster in Hawaii, who was featured in a previous Insight. Our representatives meet regularly with financial advisors and their clients, providing information about our investment strategies and updates on the funds.

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

I think shareholders get the most from our local presence–and not just the shareholders in the state-specific municipal bond funds, where Aquila has in-state portfolio managers. I also mean the boots-on-the-ground aspect of our two Aquila Three Peaks funds. Their bottom-up fundamental analysis includes onsite company visits with the objective of knowing as much (or more) about a firm’s financial condition as its own management.

Regarding Aquila’s state-specific municipal bond funds, our local investment professionals have a leg up in conducting due diligence on bond issues. I think their local presence better enables them to understand the credits, compared to a portfolio manager selecting securities from afar. The comfort we offer shareholders all goes back to our local, on-the-ground presence.

How does Lacy’s legacy live on at the firm?

In our Guiding Principles including to manage conservatively, focus on what you know best, and put customers first. One of Lacy’s favorite sayings (and he had many) was that he wanted shareholders to sleep well at night, meaning he wanted them to have a level of comfort with our investment strategies. He sought to offer comparatively conservative investments. Our fund family is a direct result of his thinking.

Lacy didn’t want to be all things to all people. He wanted Aquila to focus on what we do best—to provide relatively conservative investments and high-quality service. Lacy always put shareholders first. He was a pioneer in educating shareholders with his “Thought for the Month” mailings and annual/outreach shareholder meetings.  As he also said, “it’s your money invested in projects in your state.”

11/15/2014

Trustees: The Shareholders’ Watchdogs

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Mutual fund boards are the champions of shareholders. But boards and their trustees are still not well understood by investors or their financial advisors. We spoke with three longstanding trustees of the Aquila Group of Funds—John C. Lucking, Thomas A. Christopher, and James A. Gardner—during the September, 2014 quarterly board meetings to learn more about what they do.

Tom Christopher and James Gardner

Tom Christopher and James Gardner

What do mutual fund board trustees do—and why should we care?

TC: We oversee the management and operations of each Aquila fund on behalf of shareholders. We’re the shareholders’ watchdogs. Aquila Group of Funds subcontracts a variety of services—from fund accounting to transfer agency services and, in some cases, to investment sub-advisors (including portfolio managers). As trustees, our job is to review and oversee the performance of those service providers, to verify that agreements with them represent an arm’s-length deal, that they are fair, and competitive.

John Lucking

John Lucking

Every Aquila board includes a member of Aquila’s management team. But by law, a majority of the trustees are independent, as the three of us are.

We’re also shareholders. Every trustee has invested in the funds he or she oversees, oftentimes in substantial amounts. We have skin in the game.

JL: For every decision made by the funds, our job is to ask, “is it good for shareholders.”

JG: That independence is critical. I clearly remember an occasion on which [Aquila founder] Lacy Herrmann realized he wasn’t going to get his way on an issue. He somewhat ruefully commented, “Well, I always said I didn’t want a rubber stamp board.” And I said, “Lacy, we’re your dream come true.”

What convinced you to become an Aquila trustee?

JG: Lacy approached me about helping to build the Oregon board when I was president of Lewis & Clark College in Portland. What sold me was the quality of the operation. I felt I could help fill out the board with people who had the experience, stature, and quality needed.

JL: After getting my PhD in financial modeling at Stanford and working for Phelps Dodge, I became chief economist at Valley National Bank in Phoenix, AZ. At Lacy’s request, I began presenting at Aquila shareholder meetings on the economy and soon was asked to join the board.

One of the big attractions was the people—there’s a variety of backgrounds. The trustees are very concerned with doing a good job and carrying out their fiduciary responsibility. So the variety and the character of the trustees are what I found most attractive.

TC: After a stint at Arthur Young, I relocated to my hometown of Danville, KY to open my own CPA firm. Lacy found me through what was then Aquila’s sub-advisory partner in Kentucky.

The attraction to me was the integrity of the people up and down the line. I recognized the value proposition based on my practice, which included advising wealthy individuals to whom I was already recommending municipal bonds.

In your experience, what makes Aquila unique as a fund manager?

JL: Its integrity. Beyond that, what’s really distinctive about Aquila is its local representation, including on the boards.

The other thing that’s always struck me about Aquila is the annual outreach and shareholder meetings for the municipal bond funds. We learn what shareholders are interested in. And it’s a rigorous exercise to present to a crowd of people with a financial stake in what you’re saying. We’re very prepared.

Is a local portfolio manager really better than a portfolio manager in New York City?

TC: I think so. All the action around state municipal bonds is in the state. Our in-state portfolio managers know the issues way beyond what someone in Manhattan could possibly know. They’ve got access to the local markets and they know the legislation.

How are local trustees important to the funds?

TC: Among the board members, we often have representatives with prior experience in local government. The former Kentucky state budget director for many years, Dr. James Ramsey, is a board member. He knows many of those municipal bond issues inside and out. That’s unique, and makes for strong quality control.

JG: Shareholders are reassured when they attend a shareholder or outreach meeting and they know the trustees. Or they’ve heard about us in the local media.

JL: I’ll see people I’ve known for 20 years at these meetings. That relationship and my investments in the funds are additional incentives in fulfilling this role.

JG: We oversee the analysis of holdings in the funds. We’re aware of the risks and the capacity of the issuers to pay on the bonds. In times of investor fear about municipals, for example when Puerto Rico and Detroit have been in the news, this oversight can be reassuring to shareholders.

You’ve all been trustees for 20 years or more. What has changed the most?

JG: Governmental and regulatory oversight has increased exponentially. That puts a premium on the independence and strength of vision of each board. Take the nominating process. This involves an independent search for people with experience, integrity, and background—people who will contribute as independent trustees. The quality of boards is enhanced by the process.

Another change is the quality of legal, accounting, and other service providers to the funds. It’s a much more sophisticated, demanding environment.

JL: You want to be at the forefront of change, not dragged into it. We’ve made a real effort to be up-to-speed on regulatory, legal, and financial issues.

TC: The most positive change I’ve seen in the last couple of years is the chief compliance officer (CCO) function. He reports directly to the boards, and we ask him very pointed questions about potential risks. Again, we’re looking at matters from the perspective of shareholders. We hired the CCO, and he reports ultimately to us.   In fact, we approve a portion of his salary in order to reinforce that alignment.  That’s a major change.

He’s the watchdog’s watchdog?

TC: Yes!

JL: That due diligence Tom and Jim describe is something that financial advisors and shareholders may not be familiar with. It’s very important and we devote a lot of time to meeting with the CCO.

TC: The focus on the CCO role, including the CCO’s relationship with the board, was greatly enhanced about a decade ago—it’s a good, healthy thing for shareholders.

Who else assists with your watchdog role?

JG: Our legal counsel.  Tom and I chaired the legal succession committee, which was created to address the reality that, several years ago, a number of lawyers with the law firm that represented both the funds and the independent trustees were about to retire. The succession process took a year. We reached out to the best law firms in the country and scrutinized their expertise, commitment, fee structure. As a result, we’ve hired what we believe to be some of the nation’s best lawyers specializing in the fund industry. This process involved all the trustees of each board, was carefully deliberated, and by consensus we got a really good result.

Let’s say something goes wrong in the operation of a fund. What’s your role as trustees?

TC:  Again, we represent the shareholders. If an error were to occur, we would seek to understand the cause, how the error was made, and who would pay to get the error corrected if there were a cost involved. We wouldn’t allow shareholders to foot the bill.  And, we would expect the responsible party to put steps in place to make sure it doesn’t happen again.

Do you meet quarterly?

TC: We meet quarterly in person. We have many phone meetings throughout the year, as needed. If an important matter comes up, we’ll meet. We act immediately.

JL: I’ve been on a conference call from southwest Africa. We also meet by phone—for example, before our quarterly in-person meetings—so we’re better prepared.

TC: Hurricane Sandy is a good example. As Sandy was about to hit, we were on the phone—ensuring that appropriate safeguards were in place and being implemented, and determining how our systems would function in the midst of the crisis. There was constant contact.

What will you accomplish in today’s meetings?

JG: It’s a big weekend. It’s the annual contract renewals for advisors and sub-advisers. This comes after intensive scrutiny—we hired independent consultants to look at our advisors’ performance, expense ratios, and profitability. They did superb work.

TC: I’m on a subcommittee that reviews the advisor’s financial statements in thorough detail. I’ll report tomorrow on our analysis. We want to make sure that our advisor is financially sound.

JL: Before arriving here, we read a number of documents, one 567 pages and another 205 pages. We’re expected to voice any issues we come across.

JG: The expectation is that everyone will have read the materials and will participate in the meeting. After thorough discussion and consideration, we will ask legal counsel whether there is anything else we should consider.

What’s really important about these meetings is the insight around the table. We’ve got the experience and the sophistication to dig into the substantive issues.

TC: Right—everyone has a specialty. I don’t try to analyze the economy; I let John do that. If it’s an accounting issue, they look to me.

We did this before it was required by the SEC—just the independent board members, spending a few hours together before the full board meeting. We’ll call in the CCO, the CFO, the auditors as needed—all independently and without Aquila management present. Everything is handled at arm’s length to make sure that the independence is there and that we know the full story. At the end of the day, it’s for the shareholders.

JG: While the SEC was deciding whether to require a greater level of board independence, we went ahead and did it.

JL: We also go through a process of assessing the board every year to, among other things, make sure the trustees feel they’re getting what they need to do their jobs.

It sounds like a lot of work. What do you enjoy about being a trustee?

JG: Other trustees. Their different backgrounds, the seriousness with which they do their jobs.

JL: Exactly. I enjoy the association.

TC: Ditto. And regarding backgrounds, I think it’s critical in the mutual fund business to have experienced, knowledgeable trustees. This is a difficult industry to get your arms around. Very few people know how funds get distributed, or how the landscape and the rules change. It’s important to have a seasoned, experienced group of trustees. People like Dr. Ramsey.

JL: And Gary Cornia, who’s done research on municipal bonds.

JG: Or on the Oregon board, Ed Jensen, the former COO of US Bancorp; Ralph Shaw, who served as Chairman of Governor’s Council of Economic Advisors of State of Oregon; and John Mitchell, a leading economist in the northwest U.S.

JL: And Lyle Hillyard, who is a Utah state senator.

Tell us what accomplishments you’re most proud of as trustees?

TC: Cutting expenses for shareholders’ benefit. And, restructuring various funds into separate series of one trust. This project was designed to result in efficiencies in the administration and oversight of the funds for the ultimate benefit of the shareholders.  And, shareholders should experience additional savings.

JL: Restructuring the funds has taken the longest amount of time and the most dogged determination to get accomplished. And it’s our most significant accomplishment.

JG: I’m proudest of the quality of the people we’ve been able to attract and retain on the Oregon board. That, and a quarter century of clean audits.

What are your biggest goals for the next few years?

TC: To replace knowledgeable trustees as they retire in line with our retirement policy with competent, experienced trustees. It’s challenging.

JL: We’re going to see more change in this industry, and we need to make sure we’re prepared—to be aware of what’s changing and determine how best to react. I don’t think the change will be revolutionary, but it’s going to be evolutionary, at a pace that’s going to keep us busy.

JG: The nominating process is a challenge and really important for the future. Finding the right experience, expertise—and then, on top of that, the diversity, youth, geographical representation.

Another challenge is how the boards relate to each other. Bringing them together, but in a way that still respects each board’s legal autonomy and fiduciary duty. It sounds abstract but it’s a big challenge and a big opportunity.

What has Lacy’s legacy been on the organization?

TC: Lacy was innovative and definitely ahead of his time on a lot of things. And Diana Herrmann has significantly improved the organization in the last five years. She’s doing an excellent job of moving Aquila forward as a fund family, and as a member of the individual boards that we all serve on. I think Aquila has the highest level of true professionals on its staff today relative to any time in its history.

So my compliments are to Diana. Like her father, she’s doing the right things for the right reasons, and it’s all in the shareholders’ interests. I want to be on the board that has that attitude, and with an advisor who shares that attitude.

JG: I agree—and the board has had a role there, too. Lacy’s legacy is real, vital, and central to the firm. But the boards’ innovations and changes have also been very valuable to shareholders and the organization.

Aquila is maturing, in cadence with what’s going on in the economic, regulatory, and legal environments. And the trustees have been innovative the whole way.

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.

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.

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.

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.

 

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.