05/22/2019

Municipal Market Complexity and New Issue Investing

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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”

04/30/2019

I’ve Loved This Work from the Start

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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”

04/11/2019

Are You Free of Your Tax Bill for the Year?

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Tax return form with pen and calculator

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?”

03/25/2019

Arizona’s Dynamic Healthcare Sector

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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”

03/21/2019

Understanding Interest Rate Risk in Bond Funds

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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”

03/07/2019

Aquila Tax-Free Trust of Oregon Annual Shareholder Meeting in Portland

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Shareholders of Aquila Tax-Free Trust of Oregon are cordially invited to attend their annual shareholder meeting Wednesday, April 24th, 2019 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.

John Mitchell

John Mitchell

Attendees 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. We look forward to seeing you on April 24th.

03/07/2019

Celebrating Our 35th 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 35 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. Read more “Celebrating Our 35th Anniversary”

02/25/2019

Early tax returns are demonstrating the importance of tax-exempt income

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Many Americans are anxious to find out what the Tax Cuts and Jobs Act of 2017 (TCJA) means for their 2018 filings, and early returns being filed now are giving us some clues. It appears that quite a few taxpayers will either be getting smaller refunds than last year, or may even be owing the government more money than they had in the past.

There were some very visible changes to tax law with the TCJA of 2017. One was the standard deduction increase which is now $12,000 for single filers, and $24,000 for married filing jointly – up from $6,350 and $12,700, respectively. While this may seem like a boon for most taxpayers who can now take almost double the standard deduction available in the previous year, the benefit has been dampened by another more visible tax law change – the State and Local Tax deduction limit, commonly referred to as the “SALT” deduction. The $10,000 cap on SALT deductions may not seem like a big deal at first, but the Personal Property Tax deduction – property taxes paid on homes, cars, boats, etc. – is no longer unlimited. This hits high-tax states such as New York, California, and Connecticut, among others, particularly hard. Taxpayers in these states may have been accustomed to deducting as much as two to three times the current cap for their property taxes alone. The SALT cap potentially puts many more families close to the standard deduction, where it may no longer make sense for them to itemize their taxes. Read more “Early tax returns are demonstrating the importance of tax-exempt income”

02/05/2019

Aquila Churchill Tax-Free Fund of Kentucky Annual Shareholder Meeting

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Shareholders of Aquila Churchill Tax-Free Fund of Kentucky are cordially invited to attend their annual shareholder meeting Wednesday, April 17, 2019 at 8:30 a.m. at The Olmsted, 3701 Frankfort Avenue, Louisville, Kentucky. A buffet breakfast will be served prior to the meeting. Ryan Barrow

Attendees will have the opportunity to visit with Fund Executives, Trustees, the Portfolio Manager, and hear Ryan Barrow, Executive Director of the Kentucky Finance and Administration Cabinet, which is part of the Office of Financial Management. The Office is responsible for the investment and debt management functions of the Commonwealth, including conducting the state’s bond sales, which provide financing for major projects such as those in which your fund invests. Mr. Barrow was named one of 40 rising stars by Bond Buyer in 2016.

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

02/05/2019

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 continue to have no Puerto Rico holdings.

The commonwealth of Puerto Rico has been grappling with budgetary issues since 2014, which has generated attention in the municipal bond market, and in the media as the island territory has worked toward recovery over the past several years.

In June of 2014, the Puerto Rico Governor signed the Puerto Rico Public Company Debt Enforcement and Recovery Act, which would enable public corporations (power and transportation agencies) to restructure their debt through a process similar to bankruptcy. Puerto Rico, like the states, cannot file for Chapter 9 federal bankruptcy protection. Response to the legislation was swift, and prices on certain Puerto Rico agency bonds dropped abruptly, and lawsuits were filed challenging the constitutionality of the legislation. The US District Court of Puerto Rico found the recovery act unconstitutional, followed by the US Court of Appeals for the First Circuit, and in June of 2016, the Supreme Court ruled the legislation was impermissible. The Supreme Court voted 5-2, stating that the Commonwealth was not entitled to establish its own restructuring process, which is prohibited by the Bankruptcy Code.

The Associate Press reported on February 4, 2019, that a federal judge approved a large debt restructuring deal for Puerto Rico, which involves over $17 billion worth of government bonds backed by a sales-and-use-tax. Read more “Aquila Municipal Bond Funds Continue to Avoid Puerto Rico Debt”