07/26/2017

Moody’s Downgrades Kentucky Debt

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On July 20, 2017, Moody’s Investors Service (Moody’s) downgraded the Commonwealth of Kentucky’s issuer rating to Aa3 from Aa2. Simultaneously, other Kentucky government entities were also downgraded, including Kentucky’s general fund appropriation lease revenue bonds to A1 from Aa3, Kentucky’s agency fund appropriation lease-revenue bonds to A2 from A1, the Kentucky Public University Intercept Program to A1 from Aa3, the Kentucky School District Enhancement Program to A1 from Aa3, and the Kentucky Turnpike Authority to Aa3 from Aa2. Reasons cited for the downgrades were the large unfunded pension liability, high fixed government costs and revenue underperformance. Moody’s credit outlook for the state remains stable.

The downgrades have been expected for some time as Kentucky continues to battle one of the largest unfunded pension burdens in the U.S. The state experienced positive revenue growth of 5.3% in fiscal year 2015, but saw a decline of 3.7% in fiscal year 2016, followed by a decline of 1.3% in fiscal year 2017. Despite the credit rating downgrade, the Kentucky Turnpike Authority exceeded revenue projections for the recent fiscal year.

Kentucky’s economy is considered stable and employment continues to strengthen. If the expected manufacturing expansions by Amazon, Ford and Toyota come to fruition, we believe that the credit ratings may see a reversal over the next couple of years. Moody’s mentioned in their report that the State’s current administration has demonstrated a willingness to cut expenditures and balance the budget. As of June 30, Kentucky’s available liquid resources remained at $4 billion, a level that has been maintained over the past four years, and the general fund had a $239 million balance.

The portfolio managers and credit analysts of Aquila Churchill Tax-Free Fund of Kentucky will continue to monitor all credits in the portfolio. The only impact we see at this time is a shift in the quality breakdown directly related the downgrades. Kentucky debt pricing has stabilized in the secondary market due to the lack of new issuance, which was down 38% year-over-year at the end of the second quarter. For the most recent quarter-end performance, holdings and manager commentary please see the Fund page on this web site.


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.

07/13/2017

Got Bonds? An update on Colorado municipal bond issuance

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Colorado started 2017 by “running out of the gate” with strong supply of tax-exempt municipal bonds evidenced by net issuance hitting $1.28 billion in January, due primarily to a record $3.21 billion in general obligation bonds approved across the state during the November 2016 election. Net issuance is the difference between the volume of municipal bonds issued and the amount matured or called. More recently, net issuance in Colorado has declined by $1.54 billion in June, due to $1.82 billion of municipal bonds maturing or being called.

Source: Bloomberg

Demand for Colorado bonds has strengthened in recent months due not only to the impact of declining net issuance, but also the increased dollars sitting on the sidelines as the result of bonds maturing or being called. We expect supply constraints and strong demand for municipal bonds will continue for at least the next several months as municipal bond issuance is unlikely to satisfy investor demand. Lipper US Fund Flows data released recently indicates municipal bond mutual funds have seen an average weekly year-to-date inflow of approximately $236 million as investors are facing increasing difficulty sourcing bonds. In addition, credit spreads between high and low investment grade municipal bonds have tightened to the point that investors are assuming measurable credit risk for the addition of only a few basis points.

Vasilios Gerasopoulos
Vice President, Municipal Bond Credit Analyst
Kirkpatrick Pettis Capital Management

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.

07/13/2017

Got Bonds? An update on Oregon municipal bond issuance

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2017 has seen a significant shift in issuance due to the $1.76 billion in general obligation bonds approved during the November election and the $1.5 billion approved during the May election. As a result, new money issues have lead the charge in Oregon in 2017. Overall, 2017 has been a strong year for issuance with new issues outpacing last year at over twice the issuance through June. Yet, due to a large amount of maturities and calls, demand remains robust with new issues continuing to price aggressively. Net issuance is the difference between the volume of municipal bonds issued and the amount matured or called. Net issuance in Oregon for the first half of the year has been positive. However, in June, net issuance plummeted by $2.56 billion due to $2.17 billion of municipal bonds maturing or being called.

Source: Bloomberg

Demand for Oregon bonds has strengthened in recent months due not only to the impact declining net issuance, but also the increased dollars sitting on the sidelines as the result of bonds maturing or being called. We expect supply constraints and strong demand for municipal bonds will continue for at least the next several months as municipal bond issuance is unlikely to satisfy investor demand. Lipper US Fund Flows data released recently indicates municipal bond mutual funds have seen an average weekly year-to-date inflow of approximately $236 million as investors are facing increasing difficulty sourcing bonds. In addition, credit spreads between high and low investment grade municipal bonds have tightened to the point that investors are assuming measurable credit risk for the addition of only a few basis points.

Tim Iltz
Vice President, Municipal Bond Credit Analyst
Kirkpatrick Pettis Capital Management


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.

06/14/2017

Active and Passive Management: A Blended Approach

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A heightened focus regarding fees and investor protection has generated an increased number of headlines around the decades-old debate between active and passive fund management. Historically, investors have viewed the two theories of management as one-verses-the-other, and many investors have been known to fluctuate between the two based on which style is in favor; in recent years, the trend has tilted toward passive management. Lower volatility, monetary policy and economic recovery have made it more difficult for active managers to consistently beat their benchmarks. However, history tells us that when passive management becomes oversaturated, the pendulum often swings back toward active. While we don’t anticipate a major shift away from passive, there are attractive aspects of active management that should be considered – and we believe that a combination of both styles creates a strong and timeless portfolio.

The shift to passive fund management

Investing in passive mutual funds is unquestionably a way to reduce investment fees that can drag on fund performance while maintaining exposure to a wide variety of investment styles. Fee-conscious investors, Financial Advisors and Broker Dealers are all embracing the idea of balancing less active portfolio management and research against the potential of earning benchmark returns from simply tracking the overall market.

Passive funds are particularly attractive in areas where markets are extremely efficient, where information is readily available, and where the ability to uncover opportunities to beat the market is rare. Take the U.S. large-capitalization segment for example; only 5% of portfolio managers in that segment who beat their index for three consecutive years also beat their index the following three years, according to S&P Dow Jones Indices*. Passive funds can also be an attractive tax-efficient investment; particularly those that track more narrowly focused benchmarks.

Overall, the mutual fund industry has benefited from the increase in the number of passive funds. Low-cost providers have driven down the cost of active funds, while sharpening the focus of active managers on performance and fund expenses.

Do investors still benefit from active management?

We think so. While passive funds may be attractive from a fee and tax-efficient standpoint, they do have drawbacks. Markets have inefficiencies, which passive managers cannot exploit. Managers following an index lack the ability to make adjustments based on market conditions and research discoveries. For instance, active managers can judge when to raise cash levels, in order to reduce potential downside exposure, when markets react to external events. Active managers also have the ability to weight holdings according to where they see value, while most passive approaches are weighted to align with the chosen index, for instance by market capitalization – giving more exposure to well-established companies that may have less growth potential.

Read more “Active and Passive Management: A Blended Approach”

05/26/2017

Oregon Local Bond Measure Election Results

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Local bond measures won at Oregon’s May 16, 2017 special election. Although results have yet to be certified, and are therefore still preliminary, $1.5 billion of general obligation bonds were approved by voters across the State. By election measure, 62% of the issues were approved; however 83% of the total requested par amount was approved. For a special election, these results compare favorably with the November 2016 general election, which approved $1.76 billion of issuance. Oregon typically sees more ballot measures during general elections, which are held in November of even-numbered years. However, even the 2014 general election only produced $615 million of potential new supply to the bond market.

In 2008, Oregon voters approved Ballot Measure 56 which repealed a law requiring more than 50% of a county’s registered voters to vote in bond measure elections held in May and November. This has benefitted local governments with bond measures and local citizens supporting those measures. According to election results compiled by the Oregon Secretary of State, no Oregon counties received more than 50% of ballots from eligible voters. Josephine County had Oregon’s highest voter turnout this election, with 46.36% of registered voters casting ballots. The County’s large turnout was largely attributed to several local option levies including a public safety levy which was approved following 5 separate failed attempts at elections from 2012 to 2016.

Oregon chart 1

Source: Kirkpatrick Pettis Capital Management and various Oregon County Clerks.

The majority of the bonds approved were for school districts making capital improvements to existing facilities and constructing new facilities to accommodate enrollment growth. School district’s accounted for over 90% of the total requested amount and over 70% by number of measures. Most notably, Portland Public Schools passed its $790 million construction bonds, which is the largest bond any local government has placed on a ballot in Oregon history. Overall, this election should provide a substantial amount of supply to the bond market, particularly following the success at the November 2016 general election. Collectively, the elections approved over $3.26 billion of new bonds, with many of these issues of acceptable size and credit quality for the portfolio.

Source: Kirkpatrick Pettis Capital Management and various Oregon County Clerks.

Source: Kirkpatrick Pettis Capital Management and various Oregon County Clerks.

Voters also appear to be less price-conscious, given the high percentage of measures passed with relatively high taxes rates. Of the measures presented with estimated tax rates over $1.00 per $1,000 of assessed value, 75% were approved and both measures over $2.00 were approved. However, certain governments continue to face opposition. Mt. Hood Community College’s $75 million issue to build a new technology center and seismically upgrade campus buildings was defeated by 57% of voters. This marks Mt. Hood’s sixth defeat for a bond since 1974.

Nevertheless, given the success of recent elections, local governments are already making plans for the November 2017 election. In a unanimous vote, the Hillsboro School District board approved a plan to present a $408 million capital construction bond on the November ballot. The District is issuing the bonds to finance capital construction related to an anticipated 2,000 new students expected to move into the District over the next several years.

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

05/19/2017

Diana Herrmann discusses Fund strategy with Providence Business News

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Following the recent 25th annual shareholder meeting of Aquila Narragansett Tax-Free Income Fund, Diana Herrmann, President of the Fund and CEO of Aquila Investment Management LLC, was interviewed by Providence Business News.  During the interview, Ms. Herrmann discussed the important role the Fund has played in supporting economic and infrastructure development in Rhode Island, and in providing Rhode Island residents with income exempt from both state and federal income tax.

Ms. Herrmann pointed out that “Aquila Narragansett Tax-Free Income Fund has financed major Rhode Island projects such as the enhancement of T.F. Green Airport and the construction of the Rhode Island Convention Center, Women & Infants Hospital, the University of Rhode Island’s Ryan Center and Bradford Boss Ice Arena, as well as local projects involving Rhode Island’s other colleges and universities (such as Brown University, Bryant University, Johnson & Wales University, New England Institute of Technology and Providence College) and clean water projects throughout the state”.

You’ll find the full interview on the Providence Business News site.

Shares of the Fund may only be sold by offering the Fund’s 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.

05/15/2017

Liz Claman interviews Aquila fund manager

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Fox Business Network anchor, Liz Claman, recently interviewed Chris Johns, Portfolio Manager of Aquila Tax-Free Fund of Colorado and Aquila Tax-Free Trust of Oregon, for Asset TV, regarding activity in the municipal bond market since the 2016 election and key aspects of the Aquila state municipal bond fund strategy in the current market environment.


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.

If you experience difficulty viewing this video on your equipment, you may also view it by registering (at no cost) on the Asset TV site.

05/04/2017

Aquila Municipal Bond Funds Continue to Avoid Puerto Rico Debt

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

Yesterday Puerto Rico officially requested to enter bankruptcy to restructure roughly $70 billion in outstanding municipal bond debt. The restructuring will be the largest in the history of the US municipal bond market and signals the start of a long legal battle between the government and its creditors. The market has been anticipating this outcome for several years while the territory struggled with recession, declining reserves and a declining population.

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

04/20/2017

Aquila Tax-Free Fund of Colorado Annual Shareholder Meeting

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Shareholders of Aquila Tax-Free Fund of Colorado are cordially invited to attend their annual shareholder meeting Wednesday, May 17, 2017 at 2:00 p.m. at the Wellshire Event Center, Cambridge Room, 3333 S. Colorado Blvd., Denver, Colorado. Light refreshments will be served prior to the meeting.

Attendees will have the opportunity to visit with Fund Executives, Trustees, the Portfolio Manager and hear Tom Binnings, Senior Partner of Summit Economics LLC, an applied economics research and consulting firm. Mr. Binning has more than 35 years of experience in project management, economic and market research, business start-ups and turnarounds, real estate development, business analytics, public policy, and strategic planning. Mr. Binnings will speak about the Colorado and national economy.

Please plan to attend. We look forward to seeing you on May 17.

04/19/2017

Aquila Tax-Free Trust of Oregon Annual Shareholder Meeting

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Shareholders of Aquila Tax-Free Trust of Oregon are cordially invited to attend their annual shareholder meeting Thursday, May 11, 2017 at 11:00 a.m. at the Oregon Convention Center, Meeting Rooms F150-151, 777 NE Martin Luther King Jr. Blvd., Portland, Oregon. Light refreshments will be served prior to the meeting and parking will be validated at the end of the meeting.

Those unable to attend the Portland meeting may be interested in attending a special outreach informational meeting in Eugene at 2:00 p.m. on Wednesday, May 10, 2017. That meeting will take place at the Valley River Inn, North & Middle Columbia Ballrooms, 1000 Valley River Way, Eugene, Oregon. Light refreshments will also be served prior to the meeting.

Attendees to both meetings will have the opportunity to visit with Fund Executives, Trustees, the Portfolio Manager and hear renowned Oregon economist and Trustee, John Mitchell, speak about the Oregon and national economy. Mr. Mitchell is principal of M & H Economic Consultants of Portland. He is a past chairman of the Oregon Council of Economic Advisors, and former chief economist of U.S. Bancorp.

Please plan to attend one of these meetings. We look forward to seeing you in either Portland or Eugene.