2014 IRS Tax Forms


Each year, the IRS specifies mailing deadlines for a variety of tax forms.

February 17, 2015 is the mailing deadline for 2014 IRS forms 1099-B (Proceeds from Brokerage and Barter Exchange Transactions) and 1099-DIV (Dividends and Distributions).  Forms being sent to Fund shareholders will be mailed by the February 17, 2015 deadline, and may be mailed prior to the deadline.


Barron’s Interviews Sandy Rufenacht


Sandy Rufenacht  Co-Portfolio Manager

Sandy Rufenacht
Co-Portfolio Manager

In December, 2014, Barron’s interviewed Aquila Three Peaks Opportunity Growth Fund Co-Portfolio Manager, Sandy Rufenacht, to discuss the distinctive investment strategy of the fund along with several fund holdings illustrative of the strategy in practice. Research for fund holdings begins in the high-yield corporate bond market. As Sandy explained, “The high yield market is much more focused on not just revenue but cash flow”.

Read more “Barron’s Interviews Sandy Rufenacht”


Aquila Three Peaks Opportunity Growth Fund Recognized as a Category King


Aquila Three Peaks Opportunity Growth Fund was included in a “Category Kings” report by The Wall Street Journal for the one-year period ending December 31, 2014. The Category Kings report recognizes the top 10 performing funds, based on total return, in 22 Lipper categories for the one-year period. Aquila Three Peaks Opportunity Growth Fund class Y (ATGYX) was listed at #4 in the Lipper Midcap Core equity category, out of 386 open-end mutual funds. During this period, the Fund generated a total return of 16.2% compared to the Lipper Midcap Core category average of 8.3% and the Russell 3000 Index return of 12.6%. Read more “Aquila Three Peaks Opportunity Growth Fund Recognized as a Category King”


2014 Capital Gain Distributions


2014 capital gain distributions have been declared by five funds with a record date of December 30, 2014, an ex-date of December 31, 2014, a payable date of December 31, 2014, and a reinvestment date of December 31, 2014.

Shares of the Funds may only be sold by offering the Funds’ Prospectus. 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 adviser, and when you call 800-437-1020.


A Hands-On COO


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.”


Observations & Lessons from Joe Mysak and the Muni Meltdown that Wasn’t


The ever-illuminating (and often entertaining) Joe Mysak knows some things about the municipal bond market.  Mr. Mysak is Municipal Market editor for Bloomberg, and author of the Encyclopedia of Municipal Bonds: A Reference Guide to Market Events, Structures, Dynamics, and Investment Knowledge, and has spent 33 years observing and writing about the municipal bond market.  He was recently inspired to compile some of his observations in an article titled The Muni Meltdown that Wasn’t, published as a Bloomberg Brief in November 2014.

In this article, Mr. Mysak chronicles the “inexpert testimony” regarding the municipal bond market that was widely offered and quoted during 2010, 2011 and 2012 by those he describes as “tourists in MuniLand”.  And, he raises reasonable questions such as, why were those who were not experts on the municipal bond market taken so seriously, why were the opinions of those who are knowledgeable regarding the municipal bond market discounted during that period, and what lessons can investors learn from the episode?

Among the lessons investors can learn, Mr. Mysak offers these:

  • The municipal market is particular and specific to a remarkable degree, so that broad generalizations are likely to be inaccurate.
  • We should recognize that not all points of view offered on the Internet are legitimate and credible, and beware inexpert testimony.
  • Not all states allow municipalities to file for Chapter 9, and where it is allowed, municipalities will do all they can to avoid filing.

The Muni Meltdown that Wasn’t is not a quick read, but it is very much worth the time invested in order to gain an understanding of the municipal bond market from a man who actually does possess expertise on the subject.


Colorado School Bonds Receive Mixed Approvals


After several years of taking a conservative approach to new bond issuance, 14 Colorado school districts requested voter approval for a collective $1.45 billion in school bonds last month. Roughly half, just over $710 million, passed on Election Day.school building

The Colorado School Finance Project released this list shortly after the election. Boulder Valley School District’s hefty request of $576.4 million gained approval, and is the largest bond measure to pass in Colorado’s history. The district plans to take advantage of current low interest rates to fund the addition of new schools, upgrade facilities, and improve security, technology and educational tools.

Additional proposals that passed include Cheyenne Mountain School District 12 with $45 million, Garfield County School District 16 with $30 million, Telluride School District R-1 with $24 million, Platte Valley School District Re-7 with $16.5 million, Ault-Highland Weld School District RE-9 with $10 million, Pawnee School District Re-12 with $4.5 million, Quray School District R-1 with $2.5 million, Arriba-Flagler School District 20 with $516 thousand and Edison School District 54-JT with $325 thousand.

Notable bond proposals that failed to gain approval included Adams County School District 12 with $220 million, Brighton County School District 27J with $148 million, El Paso School District 49 with $107.4 million and Adams County School District 14 with $95.7 million.

School district bonds have been an important sector for the Aquila Tax-Free Fund of Colorado. As of October 31, the Fund held 15.38% in bonds issued by school districts. The purchase of new issues is contingent on portfolio selection criteria, the results of credit reviews, the timing of issuance, current exposure to the issuers and the structure and pricing of the bonds.


Trustees: The Shareholders’ Watchdogs


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.


Capital Gain Distribution Estimates – 2014


In the event that 2014 capital gain distributions are declared, the funds are anticipated to have a record date of December 30, 2014, an ex-date of December 31, 2014, a payable date of December 31, 2014, and a reinvestment date of December 31, 2014.

Estimates are subject to change depending on market conditions, board approvals, and other circumstances. This report is the result of estimates and is based on information available as of October 31, 2014. The amount and character of distributions cannot be determined until the anticipated record dates.

Shares of the Funds may only be sold by offering the Funds’ Prospectus. 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 adviser, and when you call 800-437-1020.


The Value of Independent Municipal Bond Credit Research


Timothy Iltz Municipal Bond Analyst

Timothy Iltz,
Municipal Bond Analyst

The value of municipal bond credit research is difficult to measure, particularly by any quantitative measure. Quite often, the value of credit research is not solely the extent to which it may add to performance, but the extent to which it may limit potential drags on performance.

Historically, individual investors and portfolio managers alike have relied heavily upon the credit reports published by the independent ratings agencies. While these reports can be enlightening and often revealing of the credits they review, they can also be confusing to investors. Of particular concern is the recent trend of upgrades versus downgrades, which is an indication of credit trends. Through the second quarter of 2014, Moody’s upgraded the credit ratings of 187 public finance entities and downgraded 3321 while Standard & Poor’s upgraded the credit ratings of 1,256 public finance entities and downgraded 4152. This can make it difficult for investors to compare bonds rated by different ratings agencies and confusing when a single bond is rated by both agencies but given two different credit ratings. As subadviser, our process is to prepare a detailed credit report which includes our independent rating for each of the holdings in the portfolio.

While investment performance is often attributed to a portfolio manager, the confidence to invest portfolio assets during times of fiscal crisis is enhanced by the work performed by the credit team. In addition, we have our own independently developed methodology that is driven by a credit committee that meets on a quarterly basis to discuss the decisions of the portfolio management team and focus the efforts of our credit research. In recent years both higher education and healthcare related financings have received specific attention from our credit committee. The results of our committee’s findings have not been to eliminate all such holdings for the sake of lowering risk, but rather to focus on those aspects of individual holdings which introduce risk, and eliminate holdings that expose the portfolio assets to specifically identified risks, rather than blindly selling bonds that might otherwise add to performance.

Timely decisions on credit quality are one of the many contributions of the credit analyst in assisting the portfolio manager as they seek to achieve the risk-adjusted performance objectives. However, it is through the combined efforts of portfolio management and credit analysis that we are able to execute some of our most effective trades. Recently, a healthcare credit fell below several of our key thresholds for this sector, which alerted our analyst to take a closer review of the credit and ultimately present it to portfolio management as a sale candidate. The portfolio manager determined current spread levels and valuations and was able to sell the bond on far more favorable terms than when the bond was acquired, even though the credit had deteriorated. This trade would not have been possible were it not for timely credit research and effective communication that allowed us to sell the bond prior to the ratings agencies taking potential action alerting the rest of the market to the situation.

By maintaining our detailed independent ratings we are able to better evaluate the published ratings and, we believe, more accurately assign value to the bonds we manage. This insight provides a significant advantage in our quest to locate bonds that are cheap at times when the market may be overly pessimistic regarding an issuers’ prospects. Ultimately, we feel that this credit knowledge has proven to be valuable during the uncharacteristic volatility we have seen over the past few years and has given us the confidence to make long-term commitments to credits that we might otherwise be inclined to sell.

Timothy Iltz
Vice President, Municipal Bond Analyst
Kirkpatrick Pettis Capital Management

Kirkpatrick Pettis Capital Management is the sub-advisor to the Aquila Tax-Free Fund of Colorado and the Aquila Tax-Free Trust of Oregon, two of the Aquila Group of Funds. Before investing in any of the Aquila Group of Funds, carefully read about and consider the investment objectives, risks, charges, expenses and other information found in the prospectus. The prospectus is available from your financial professional, and when you call 800-437-1020, or visit www.aquilafunds.com.