Aquila Three Peaks Opportunity Growth Fund, was included in a Wall Street Journal Category Kings report for the year-to-date period ending July 31, 2019. The Category Kings report recognizes the top performing funds, based on total return, in 10 Lipper categories for the year-to-date period. Aquila Three Peaks Opportunity Growth Fund Class Y (ATGYX) was listed at #3 in the Lipper Mid Cap Core equity category, out of 381 funds. During this period, the Fund generated a return of 26.7% compared to the Lipper Mid Cap Core category average of 19.6% and the Russell 3000 Index return of 20.48%. The Fund was also listed as a Category King in May; falling in second place in the Mid Cap Core category based on the year-to-date return through May 31, 2019.
Read more “Aquila Three Peaks Opportunity Growth Fund Recognized as a Category King”
All
Kentucky Legislature Ends Special Session with a Pension Bill
The Kentucky Legislature ended their July special session Wednesday with a pension bill signed into law, effectively taking small steps toward solving the state’s hefty pension crisis. The bill narrowly passed in the house earlier in the week, but won by a wide margin in the senate on Wednesday. The bill’s objective is to relieve regional universities and quasi-governmental entities from large increases in pension costs that were handed down July 1, 2019.
As Governor Bevin stated in his press conference, the measure will not eliminate pension benefits for workers. It is designed to encourage agencies that exit the system to cap employees’ benefits and move them into 401k-type plans going forward. Although small, we see this as a positive step that will likely lead to more successful legislative solutions down the road.
With the Churchill Tax-Free Fund of Kentucky, we maintain our objective of managing interest rate risk and credit risk while keeping over 90% of the portfolio rated A or higher. We believe that one of the benefits of owning shares in the Fund is having the resources of local portfolio management and credit analysis. We will be monitoring the progress of pension reform in the state, along with the local economic and political environment.
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 on this site, from your financial advisor, or by calling 800-437-1020.
Sandy Rufenacht on Money Life with Chuck Jaffe
On June 6, 2019, Sandy Rufenacht, co-portfolio manager of Aquila Three Peaks High Income Fund and Aquila Three Peaks Opportunity Growth Fund, was interviewed on Money Life by Chuck Jaffe.
Sandy Rufenacht
Co-Portfolio Manager
During their conversation, Sandy touched on the impact politics can have on bond markets particularly during an election cycle, changes in the rate environment, shifting valuations along the credit-quality curve, and much more.
We hope you enjoy the interview.
Before investing in a Fund, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus. The prospectus is available from your financial advisor, and when you call 800-437-1020 or visit www.aquilafunds.com.
Oregon Scores Well in Volcker Budget Report
Timothy Iltz is Co-Portfolio Manager of Aquila Tax-Free Trust of Oregon
Vice President and Municipal Bond Analyst, Kirkpatrick Pettis Capital Management
The Volcker Alliance, a think tank headed by former Federal Reserve Chairman Paul Volcker, recently released its report, Truth and Integrity in State Budgeting: Preventing the Next Fiscal Crisis. The report covers fiscal years 2016 through 2018 and measures all 50 states in five key budgeting areas: budget forecasting, budget maneuvers, legacy costs, reserve funds, and budget transparency. Each state was given a grade between A and D- for each category and the grades reflect each state’s three-year average for the critical budgeting areas. The report ranked Oregon as one of the top states for managing legacy costs, a measure that evaluates how well states are funding promises made to public employees, including pension funding and health care.
Over the past three years, Oregon has earned an A average for its ability to manage post-employment benefit (OPEB) funding and pension liabilities. The Volcker Alliance reports that Oregon has a public employee pension funded ratio of 83% for 2018, placing the state in the top 6 plans in the nation. Oregon also earned an A average for budget maneuvers, which evaluates whether the state used one-time revenues, borrowings, asset sales, and other measures to achieve short-term budgetary balance. Budget forecasting was the only area where Oregon fell short, with an overall grade of C, which was partially due to the fact that the state does not use consensus revenue forecasts. However, Oregon was noted for its use of multi-year revenue forecasts and revenue growth projections.
In managing the Aquila Tax-Free Trust of Oregon, we maintain a close watch on Oregon’s economy, budget and liabilities, and we are pleased with the results of the Volcker Alliance’s assessment of Oregon’s fiscal health.
Oregon Local Bond Measure Election Analysis
By Timothy Iltz, Co-Portfolio Manager Aquila Tax-Free Trust of Oregon
Vice President and Municipal Bond Analyst, Kirkpatrick Pettis Capital Management
Earlier this week, Oregon residents approved almost $180 million of general obligation bonds, substantially less than the $940 million approved last May. Although results have yet to be certified, and therefore are still preliminary, the bonds approved by this election are in high demand as investors seek high quality tax-exempt investment alternatives. There are four scheduled election dates in Oregon each year: the 2nd Tuesday in March; the 3rd Tuesday in May; the 3rd Tuesday in September; and the 1st Tuesday after the first Monday in November. In November 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. As a result, the May election has become an important election to follow for new bond measures.
By election measure, 75% of the bond issues were approved; however, 72% of the total requested par amount was approved by voters. Oregon typically sees more ballot measures during general elections, which are held in November of even-numbered years. Accordingly, the current election falls flat versus the 2018 November general election, which approved a healthy $1.4 billion of new supply.
Source: Kirkpatrick Pettis Capital Management and various Oregon County Clerks.
Source: Kirkpatrick Pettis Capital Management and various Oregon County Clerks.
Election results were lower than last year for several reasons. The primary reason is the large election-dominating measures have already passed. In November, Metro passed its $650 million housing bond issue, Eugene School District passed its $319 million general obligation bond, last May Salem-Keizer School District passed a $619 million bond, Corvallis School District passed a $199 million bond. By comparison, the largest measure presented to voters this week was the $82 million bond for Central Point School District (Jackson County School District No. 6). Furthermore, unlike previous elections the Portland metropolitan area was relatively unrepresented, except for the Lake Oswego parks bond.
However, what this election did see was a variety of measures that are often more difficult to pass, such as the Lake Oswego bonds for parks and recreation. Projects like this are often viewed by voters as less important than schools or essential services, such as water and sewer, and are therefore often rejected by voters in favor of more essential projects. Although Lake Oswego’s bonds are passing, Redmond presented a similar issue to voters, which was only able to capture 45% of votes. Santiam School District has never successfully passed a general obligation bond measure and last asked voters for a bond in 2008 when it requested $14.5 million, which voters rejected by 61%. This election saw Santiam School District passing by 52%.
Furthermore, a significant marketing point for several of the schools issues was the Oregon School Capital Improvement Matching program, which is a grant program offered by the Oregon Department of Education, supporting communities that pass general obligation bonds for school improvements. An example from this election is Elkton School District, which asked voters to approve a $3 million bond, which if approved, will be matched by an additional $3 million from the State. Measures such as this present a good value to property taxpayers, since half of the project is funded by the matching grant. Elkton’s measure is currently passing, with 62% of votes approving the measure.
Overall, this election will provide a significant source of additional supply to the bond market and many of these issues may become portfolio holdings. The year has been off to a slow start, and while this election will help alleviate some of the supply concerns, we expect that issuance will be lower this year than last year.
Municipal Market Complexity and New Issue Investing
One of the challenges municipal bond investors face when navigating the municipal bond market on their own, is accessing bonds in the new issue market. The advent of retail order periods for some larger issues has 
improved retail access. However, both the inherent structure of new municipal bond issues, and the origination process itself, create challenges for retail investors hoping to place small orders for new issues.
Compared to new issues in the corporate bond market, new issues in the municipal bond market are much smaller, and the quantities of bonds available in each maturity can be very limited. This is because municipal bond issues are more akin to a long-term “loan” with a mortgage amortization structure. Each maturity in a municipal bond issue, in essence, is similar to the principal portion of an annual mortgage payment. Much like a loan, the annual debt service (principal and interest payments) is designed to be somewhat consistent over time, as with a home loan or car loan. The result is that municipal bond issues are comprised primarily of a series of consecutive “serial” maturities, in addition to, potentially 1 to 3 longer “term” maturities.
Read more “Municipal Market Complexity and New Issue Investing”
I’ve Loved This Work from the Start
For our 35th 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. Read more “I’ve Loved This Work from the Start”
Are You Free of Your Tax Bill for the Year?
Tax Day is next week and as you send in your 2018 tax forms, you might be surprised to learn that the nation will still be working to pay this year’s taxes.
Every year the Tax Foundation calculates Tax Freedom Day®, which determines the day the country has earned enough money collectively to pay its total tax bill. The calculation considers all federal, state, and local taxes and divides them by the nation’s income. For 2019, Tax Freedom Day falls on April 16th. So, the average taxpayer will spend 106 days working to pay their taxes.
In another calculation, the Tax Foundation incorporates the federal deficit. When that is included, we will have to work another 22 days; until May 8th, to reach Tax Freedom Day.
The Foundation figures that Americans will spend more on taxes in 2019 than on food, clothing and housing combined.
Take a look at our full report, Have you paid your taxes yet?, which includes the Tax Freedom Day® for each of the seven states where we manage a single state municipal bond fund. Check out the entire 2019 Tax Freedom Day® report to see where Tax Freedom Day® falls for all 50 states. Read more “Are You Free of Your Tax Bill for the Year?”
Arizona’s Dynamic Healthcare Sector
Anthony Tanner, CFA®, is the Lead Portfolio Manager of Aquila Tax-Free Trust of Arizona
Here in Arizona, the healthcare sector is a vital component of the economy and a key contributor to the state’s growth. Demographic trends, such as the aging of the population and longer life expectancies, together with advancements in treatment and technology, have made healthcare a significant growth sector in Arizona. Beyond hospital and clinical care providers, Arizona’s dynamic healthcare sector encompasses institutions such as:
• Barrow Neurological Institute, a world-renowned neurology and neurosurgery care center.
• TGen, or the Translational Genomics Research Institute, an Arizona-based, nonprofit medical research institute that conducts groundbreaking research on the genetic components of complex diseases, including cancer, neurological disorders, and infectious disease.
• The Phoenix Biomedical Campus, a 30-acre urban medical and bioscience campus in downtown Phoenix. This collaboration among University of Arizona, Arizona State University, and Northern Arizona University includes biomedical-related research, academic, and clinical facilities. It is home to the highest concentration of research scientists and complementary research professionals in the region.
• Bioscience funding leaders including the Flinn Foundation.
The expansion of the Arizona healthcare sector is also necessary in serving a population that continues to grow faster than the national average and captures a significant share of the shifting national population. The state ranked 4th in both population growth at 1.7% and absolute population increase at 122,000 in 2018. Arizona continues to attract a significant portion of those relocating, ranking 3rd for net migration. In 2019 the state is expected to see an increase in population above 100,000 for the third consecutive year.
Healthcare is an important engine of growth and employment stability in Arizona. Even during the Great Recession, employment in the healthcare sector expanded at a time when Arizona shed nearly 300,000 jobs and total employment contracted 11% (Nevada was the only state with a steeper decline in the period).
An advanced, diverse, and thriving healthcare industry is critical to Arizona, serving both as a magnet for attracting new residents, and providing world-class medical care to a state population that surpassed 7 million last year. Aquila Tax-Free Trust of Arizona (“ATFTA”) participates in this important economic driver through investments that support important healthcare projects. Last fall, the Fund added new holdings in this sector through two new issues sold to expand existing facilities, at a time when other parts of the country are seeing hospital systems shutter facilities as their populations stagnate or even decline.
In October, we made a new investment in the Maricopa Integrated Hospital System through a purchase of AAA-rated general obligation bonds sold through the Maricopa Special Healthcare District. In addition to providing funds for system-wide improvements to its existing county-wide facilities, $100 million of this $422 million issue is going toward the building of an extension of the Creighton University Medical School in central Phoenix. The four-year medical school is slated to open in August 2021 with 85 students; the facility will also be part of a health sciences campus with nursing and physical therapy programs. It will be a branch of the Omaha-based school and not a separately accredited medical school.
Read more “Arizona’s Dynamic Healthcare Sector”
Understanding Interest Rate Risk in Bond Funds
After almost a decade of extremely accommodative monetary policy from the Federal Reserve, with a zero-bound Fed Funds target rate, the Fed began increasing rates in December of 2015, and since then, rates have increased 10 times by a total of 225 basis points. Fed Chair Powell indicated after the March Federal Open Market Committee meeting that we will not see additional rate increases in 2019, but understanding interest rate risk remains an important aspect of investing in bond funds.
A common misconception of investing in bond funds is that when interest rates rise, bonds fall out of favor. While the inverse relationship between interest rates and bond prices does exist, there are many factors to consider when making a decision about current and future bond holdings – and whether to hold individual bonds or invest in a bond mutual fund.
Duration
A bond fund’s duration, specifically modified duration, is an indicator of how sensitive the net asset value is to a change in interest rates. Duration provides investors with another aspect of comparison between bonds with different maturities and coupon rates. Simply stated, for every 1% change in interest rates, positive or negative, the price of a bond fund will inversely decline or increase by its modified duration. For example, if a fund’s modified duration is 5 years, the net asset value could be expected to rise 5% for every 1% decline in interest rates, and fall by 5% for every 1% increase in interest rates. Bond funds with longer average maturities and lower average coupons have a longer 
duration, and therefore generally experience a higher degree of price fluctuation, while bond funds with shorter average maturities and higher average coupons have a shorter duration and generally experience a lesser degree of price fluctuation.
Price Returns and Total Returns
The good news is that performance of bond funds is not solely tied to the incremental changes in interest rates. Bond fund total returns are generated from two sources; interest payments on bonds (paid as fund distributions) and changes in bond prices. While interest rates rise, active portfolio managers have opportunities to purchase bonds at higher yields, and over time, a portfolio’s income may off-set a decline in the value of individual bonds, mitigating the impact of that decline on a Fund’s total return.
Since its inception in 1980, approximately 98.7% of the Bloomberg Barclays Municipal Bond Index total return has been generated by income.
Active Bond Fund Management
Periods of rising rates can be challenging for investors who purchase individual bonds or funds aligned with a bond index. Active bond fund managers have the ability to take strategic steps in an effort to mitigate, to some degree, the impact of market volatility. With the ability to actively manage fund holdings over time, these managers may implement a number of strategies in order to adjust fund holdings based on market expectations. Fund holdings may be altered by quality rating in an effort to manage credit risk – a risk which may increase along with rising rates. Holdings may also be altered by maturity date and coupon, thereby adjusting portfolio duration, or the sensitivity of the portfolio to movements in rates. Reducing portfolio duration would reduce sensitivity to a change in rates.
Read more “Understanding Interest Rate Risk in Bond Funds”