Investment Commentary - Aquila Group of Funds

[Pages:2]Aquila Tax-Free Fund of Colorado

PORTFOLIO MANAGER COMMENTARY

Q4 2021

A Shares: COTFX

C Shares: COTCX

Y Shares: COTYX

Municipal Bond Market Overview

The fourth quarter of 2021 experienced continued decoupling between municipal and U.S. Treasury yields. Amid investor concerns of elevated inflation, leading to more aggressive monetary-policy tightening from the Federal Reserve, the Bloomberg U.S. Treasury Index returned -2.5% in 2021, marking the first yearly slump since 2013. The prospect of rate hikes has boosted policy-sensitive, short-dated yields on Treasuries. Although both municipal and Treasury yield curves flattened, the ratio of the two has actually declined.

The resilience of munis can largely be attributed to demand. It is no secret that municipal bonds remain one of the few taxexempt investments left to an individual, and investors are anticipating potential tax increases under the current Administration. In addition, the strong performance in the equity markets has anxious investors looking to diversify portfolios, even in the face of continued low yields.

Demand continues to overshadow the current tax-exempt supply. Nationally, long-term municipal issuance increased 1.2% from 2020 levels, according to data compiled by Bloomberg. Driven by inflation and a positive economic outlook, issuers are largely attempting to address long-term financing needs amid the pandemic with skyrocketing prices and material shortages. Taxable issuance in 2021 decreased by $24.4 billion--again, not enough to keep up with demand.

Colorado Municipal Bond Market and Economy

Colorado's economy continues to recover from the pandemic at a rapid pace, as revenue collections and economic activity have exceeded pre-pandemic levels. Price pressures remain, as supply chain issues and labor shortages disruptions cause inflationary issues. According to the Colorado Legislative Council's December 2021 economic forecast, the State's 2021 unaudited General Fund revenues are estimated to be $14.2 billion, up 10.7% from fiscal year 2020.

Record household savings has propelled consumer spending, as the demand for goods continues to outpace supply. Annual retail sales growth from January through September 2021 in rural counties outpaced the growth rate in urban counties. Household finances are strong, as a tight labor market increases wages and salaries. Personal savings has returned to prepandemic levels, as federal enhanced unemployment benefits ended. Consumer spending at restaurants and hotels jumped well-above pre-pandemic levels over the summer. Housing affordability is a challenge for many households and may shape net migration into the state, as home prices continue to soar. According to the Colorado Association of Realtors, demand for housing remains at record levels, with the median selling price for a single-family home reaching historic highs.

The U.S. Bureau of Labor Statistics reports that the State's unemployment rate continued to decline in 2021, dropping from 6.7% in the beginning of the year to 5.1% in November. Colorado's labor force participation rate ranks 4th highest in the nation and 0.5% below the February 2020 rate. Hiring new employees remains difficult, as businesses increase wages and benefits to attract and retain employees. Many restaurant and hospitality firms have decreased hours due to a shortage of workers. Mountain resort counties continue to see a turnaround in labor market indicators, and are no longer among the hardest-hit as they were earlier in the pandemic. Counties in the Pueblo and southern mountain region continue to experience high rates of unemployment.

For 2021, Colorado tax-exempt, non-AMT, issuance increased 17.1% to $10.1 billion versus 2020--its second highest issuance on record. However, sourcing bonds has been a challenge due to strong demand with new issues multiple times oversubscribed, and secondary offerings continuing to price aggressively.

Due to the elimination of tax-exempt advance-refunding bonds, a result of the Tax Cuts and Jobs Act, Colorado taxable municipal bond issuance increased to almost 19% of municipal bonds sold in 2021. Historically, this number has been closer to 3%-10%. Although refunding bonds are a positive development for local government balance sheet metrics, we remain concerned about the reduction in supply of tax-exempt bonds by transferring that issuance to the taxable market.

For more information on this fund and the entire Aquila Group of Funds, please visit

AQUILA TAX-FREE FUND OF COLORADO

QUARTERLY COMMENTARY | Q4 2021

Fund Strategy and Outlook

With a relatively flat yield curve and tight credit spreads, we remain cautious in our selection of municipal bonds. Also, considering that interest rates continue to trade close to cyclical lows, we do not believe it is prudent to aggressively extend duration. Therefore, we are reinvesting maturing bond proceeds and new assets in the 10 to 15-year maturity range, as the municipal yield curve remains positively sloped, and portfolio has balanced exposure to maturities up to that range. Maturity and duration should lengthen slightly. Furthermore, given the uncertainty of our current economic and conditions, pre-refunded holdings could, once again, provide stability. We continue to emphasize high-grade credits and review any special situations to add additional yield.

Credit research remains the cornerstone of our strategy, with vigilant monitoring of pandemic-affected issuers and sectors. Under our overall defensive portfolio strategy, the Fund holds approximately 91% AA or higher credit quality, due to currently narrow credit spreads in the municipal market. As the economy recovers, we have expanded our effort to evaluate currently under-represented sectors and bonds with attractive structures or relative spreads. These present an opportunity to capture incremental yield while diversifying risk.

We continue to maintain a heightened exposure to pre-refunded bonds as a source of liquidity and current yield. Our exposure to pre-refunded bonds remains elevated, due to municipalities refunding existing issues in this low-rate environment to achieve debt service savings. Considering the current status of economic conditions, should credit spreads widen, we would consider strategically adding lower investment-grade holdings to provide greater value. Similarly, should the yield curve steepen, we would consider slightly lengthening duration to take advantage of higher rates.

For specific information about fund characteristics, holdings and performance, please see the Fund Fact Sheet on our website at .

Fund Facts as of 12/31/2021

PORTFOLIO MANAGER CHRIS JOHNS

CREDIT ANALYST VASILIOS GERASOPOULOS

INCEPTION DATE 5/21/1987

TOTAL INVESTMENTS $263.8M

NUMBER OF HOLDINGS 137

Information regarding holdings is subject to change and is not necessarily representative of the entire portfolio. Mutual fund investing involves risk; loss of principal is possible. 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. Fund performance could be more volatile than that of funds with greater geographic diversification.

Independent rating services (such as Standard & Poor's, Moody's and Fitch) assign ratings, which generally range from AAA (highest) to D (lowest), to indicate the credit worthiness of the underlying bonds in the portfolio. Where the independent rating services differ in the rating they assign to an issue, or do not provide a rating for an issue, the highest available rating is used in calculating allocations by rating.

A credit spread or a yield yield spread is the difference between the quoted rates of return on two different investments, usually of different credit qualities but similar maturities.

Modified and effective duration both measure the value of a security in response to a change in interest rates. Effective duration also takes into account the effect of embedded options.

The Bloomberg U.S. Treasury Bond Index measures the performance of the U.S. Treasury bond market, using market capitalization weighting and a standard rule-based inclusion methodology. Indices are unmanaged and are not available for direct investment.

Before investing in the 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 professional, and when you call 800-437-1020 or visit .

NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE | NOT NCUA INSURED Aquila Distributors LLC | 800-437-1020 | | AQLCO-PMC-Q42021

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