Market & economic outlook

06/19/2019

Sandy Rufenacht on Money Life with Chuck Jaffe

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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.

05/24/2019

Oregon Local Bond Measure Election Analysis

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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  In November 2008, Oregon voters approved Ballot Measure 56, which repealed a law requiring more than 50% of a county’s registered voters to vote in bond measure elections held in May and November.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.

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” ›

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” ›

06/14/2017

Active and Passive Management: A Blended Approach

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Building BlocksA 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” ›

06/24/2016

Brexit – Day One

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Global financial markets were turbulent during the first day of trading following the United Kingdom vote to leave the European Union.

Amid the market uncertainty, investors moved assets to the safety of U.S. government bonds, pushing prices higher and yields lower.   Yield on the 10-year Treasury note dropped to an intra-day low of 1.419% (near its record low yield of 1.404%), but by the end of the day, the yield on the 10-year Treasury was 1.575%; down from 1.745% on the previous day.

Thomson Reuters Municipal Market Data reported that municipal bond yields reached all-time lows, with the benchmark 30-year AAA dropping to 2.08%.  Total return on the Barclays 10-Year Municipal Index was 0.82% for June 24th with a yield to worst of 1.57% versus 1.70% on June 23rd.

During periods of market turbulence, a ‘flight to quality’ on the part of investors has resulted in buying US Treasuries and, to a lesser degree, municipal bonds.  That demand typically drives prices higher and yields lower.  Although the Federal Reserve had previously indicated that another rate increase was possible in 2016, it now appears that any increase could be postponed until late 2016 or sometime in 2017. Read more “Brexit – Day One” ›

08/04/2015

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, whereas Morningstar has reported that over 20% of US Bond Funds had roughly an $11.3 billion total exposure to Puerto Rico debt as of 3/31/15; down from two-thirds of funds having exposure a year ago.

On Monday June 29th, Puerto Rico’s Governor Alejandro Garcia Padilla announced that the territory’s approximately $73 billion in municipal debt is unpayable and called for concessions from creditors. Moody’s downgraded Puerto Rico’s general obligation debt into junk territory with a negative outlook on July 1, 2015, which was the seventh downgrade in five years.

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. 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.

07/15/2015

A New Approach to Bonds

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The July 11, 2015 issue of Barron’s features a cover story on investing in bonds which includes a favorable perspective on municipal bonds, amid general concerns regarding rising rates.  While the timing and magnitude of a future Fed Funds rate increase is still uncertain, expectations cluster around a 0.25% increase in September, 2015.  If we do see a rate increase in September, it won’t be the first time that rates have gone up.  Over the past 30 years, interest rates have been declining, but that general trend is marked by periods in which the Fed Funds rate rose by as much as 4%.

The head of a fixed-income asset management company is quoted in the Barron’s article, saying “the rich are getting richer, and they’re getting older”.  The point relates to demand for municipal bonds in that there is a growing population of aging investors attracted to the tax-exempt income offered by municipal bonds.  Recently, the supply of municipal bonds has declined as municipal issuers have worked to manage their budgets.  Supply is likely to decline further in an environment of higher rates which increase the cost of borrowing for these issuers.  Limited supply and heightened demand can provide support for prices. Read more “A New Approach to Bonds” ›

04/21/2015

Rhode Island State Treasurer, Seth Magaziner, speaks to Fund shareholders

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During the Aquila Narragansett Tax-Free Income Fund Annual Shareholder meeting on April 2, 2015, Rhode Island State Treasurer, Seth Magaziner spoke to attendees, sharing his observations on the economy in Rhode Island.  He pointed out that the financial position of the state is steadily improving, having reached a turning point with a new sense of optimism in the air.  Read more “Rhode Island State Treasurer, Seth Magaziner, speaks to Fund shareholders” ›

10/31/2014

PERS Reforms to be Considered by the Oregon Supreme Court

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We believe that one of the benefits of having a portfolio manager and analyst located in the market in which Aquila Tax-Free Trust of Oregon invests, is the opportunity this provides to closely follow public policy developments and legislation, in addition to the financial condition of municipal bond issuers.

Developments related to the Public Employee Retirement System (PERS) provide an example.  In 2013, the Oregon Legislature enacted PERS reforms that reduced the cost-of-living adjustment for all retirees, and eliminated tax remedy payments for beneficiaries who do not live in Oregon and are therefore not subject to Oregon state income tax. These provisions will be considered by the Oregon Supreme Court early in 2015.  While it is possible that the Court could reverse the PERS reforms, we currently view that as the less likely outcome. Read more “PERS Reforms to be Considered by the Oregon Supreme Court” ›