N-CSR 1 a51628.htm AQUILA MUNICIPAL TRUST FORM N-CSR 3/31/2023

 

 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM N-CSR


CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT

INVESTMENT COMPANIES


Investment Company Act file number 811-4503


Aquila Municipal Trust

(Exact name of Registrant as specified in charter)


120 West 45th Street, Suite 3600

New York, New York 10036

(Address of principal executive offices) (Zip code)


Joseph P. DiMaggio

120 West 45th Street, Suite 3600

New York, New York 10036

(Name and address of agent for service)


Registrant's telephone number, including area code:
(212) 697-6666


Date of fiscal year end: 3/31/23


Date of reporting period: 3/31/23


FORM N-CSR


 


 
 
 

 

ITEM 1. REPORTS TO STOCKHOLDERS.

 

                                                   

 

 

 

 

 

 

 

 

 

 

 

 

Annual Report

March 31, 2023 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

 

 

 
 
 

Aquila Churchill Tax-Free

Fund of Kentucky

Navigating Changing
Market Conditions

 

Serving Kentucky investors since 1987

     

 

May, 2023

Dear Fellow Shareholder:

The financial markets have a way of reminding us that it isn’t always smooth sailing. As history has demonstrated, investments can be influenced to varying degrees by changing market conditions. That’s why charting a course for your financial future, and being prepared for inevitable twists and turns, may be important to help one navigate times of volatility and uncertainty. And while the municipal bond market has shown some signs of improvement following a particularly challenging period in 2022, some investors remain leery, wondering what lies ahead. What is the future direction of interest rates? Will inflation continue, or might the economy be headed for a recession? These and other market drivers remain to be seen, which is why we believe it’s important to maintain perspective, as well as a long-term focus.

What’s Driving Fixed Income Markets

The Federal Reserve (the “Fed”) remains front and center when to comes to factors that influence fixed income markets, including the municipal bonds in which your Fund invests. The Fed has continued with a “tight” monetary policy in its quest to manage the U.S. economy. The primary tool employed by the Fed has been to increase interest rates, specifically the Federal Funds rate (the rate that banks charge one another to borrow or lend excess reserves overnight). To date, the Federal Reserve has implemented 10 rate hikes since March of 2022, bringing the Fed Funds rate to a 16-year high, and representing the first time that the Fed’s target rate has been above 5% since 2007. This has had a significant impact on fixed income securities, including municipal bonds, and continues to work its way through the economy.

As a result, interest rates rose fairly dramatically over the past year. And as interest rates rise (along with the resulting yields on fixed income securities), prices of bonds generally fall commensurately. When rising rates and declining prices occur at a relatively rapid pace, this normally creates a shift in market dynamics, and in the overall tenor among investors.

The Federal Reserve has also engaged in efforts to reduce its balance sheet, as it attempts to combat inflation, while also trying to avoid the possibility of an economic recession. The state of the U.S. economy continues to be another key driver of fixed income markets. Although certain economic indicators suggest a resilient economy, the future direction of the economy remains a question mark. As the Fed attempts to perform

 

 

NOT A PART OF THE ANNUAL REPORT

 

 
 
 

a delicate balancing act, market participants are left wondering if the Fed can successfully achieve a so-called “soft landing,” or if the economy may slip into a recession.

Additional factors also contribute to market movements. One such example is recent turmoil in the banking industry which resulted in several high-profile bank failures and subsequent takeovers beginning in March. While the bank failures triggered some concern and uncertainty, they did not necessarily appear to have changed the Fed’s outlook on the economy. With continued elevated inflation data, the Fed went ahead with yet another rate increase on May 3, 2023. Comments by Fed Chair Jerome Powell at a subsequent news conference did, however, indicate to many market observers that the Fed may push pause on further rate hikes. The markets, of course, will be paying close attention as we approach the Fed’s June meeting date, and beyond.

The Effect on Municipal Bonds

The municipal bond market is currently being supported by strong credit fundamentals. Generally speaking, municipalities around the country have recorded high levels of tax receipts and added liquidity. Credit conditions appear to be solid even in the face of interest rate volatility. Moreover, credit rating upgrades continued to significantly outpace downgrades through year-end 2022, based on data from Standard & Poor’s.

Bond issuance has remained relatively low on a year-over-year basis. The combination of robust tax receipts and federal aid programs have left many municipalities with excess budgets. Additionally, bond issuers remain wary given interest rate changes and overall volatility swings. Issuance is generally expected to pick up as the year progresses, although many believe it is likely to remain rather muted.

Maintain a Long-Term Focus

At Aquila Group of Funds, we remain optimistic in the long term for the municipal bond market. Municipal bonds are vital to financing the infrastructure of our local communities and states. Moreover, they may play an important role for investors’ asset allocation. We, therefore, believe it’s important to keep in mind the key benefits that municipal bond funds offer, particularly during periods of market change and uncertainty.

Your Fund has been specifically designed bearing in mind the fact that most people are more sensitive to potential investment losses than they are eager for outsized gains. Important characteristics of your Fund therefore include:

·High-quality municipal bonds – Invests in investment-grade bonds; those in the four highest rating categories, or determined to be of comparable credit quality
·Intermediate bond portfolio – Seeks to minimize share price volatility or interest rate risk
·Broad portfolio diversification – Supports a wide range of projects in communities of all sizes throughout your state, not only reducing risk but also improving the quality of life throughout the state
·Local portfolio management – Provides an up-close perspective and valuable insights on the issuers and economy in the state

 

 

NOT A PART OF THE ANNUAL REPORT

 

 
 
 

Rest assured that your dedicated team of investment professionals continually draws upon their many years of experience in analyzing securities, observing market and economic cycles, and recognizing risks and opportunities. Our goal is to achieve your Fund’s investment objective of delivering the highest level of income exempt from regular federal and state income taxes, as is consistent with preservation of capital.

As always, we encourage you to consult with a trusted financial professional who can help ensure that your investment portfolio remains aligned with your individual needs to meet your long-term financial goals. It’s prudent to focus on your goals, your time frame for achieving them, and your tolerance for risk.

Thank you for your investment and continued confidence in Aquila Group of Funds.

 

  Sincerely,  
   
   
  Diana P. Herrmann, Vice Chair and President  

 

 

                                                                                  

 

Any information in this Shareholder Letter regarding market or economic trends or the factors influencing the Fund’s historical or future performance are statements of opinion as of the date of this report. These statements should not be relied upon for any other purposes. Past performance is no guarantee of future results, and there is no guarantee that any market forecasts discussed will be realized.

 

 

NOT A PART OF THE ANNUAL REPORT

 

 
 
 

Aquila Churchill Tax-Free
Fund of Kentucky

ANNUAL REPORT
Management Discussion

 

Serving Kentucky investors since 1987

     

 

Introduction

During the annual reporting period of April 1, 2022 through March 31, 2023, the Federal Reserve (the “Fed”) continued the path it began in March 2022 to tighten monetary policy. The Fed rapidly raised interest rates from 50 basis points (“b.p.”, one basis point equals 0.01%) beginning March 16, 2022 to the target range of 4.75% – 5.00%, as of your Fund’s March 31, 2023 fiscal year end. (On May 3rd, following your Fund’s year end, the Fed raised rates an additional 25 b.p. and Fed Chair Jerome Powell’s comments at a news conference were generally interpreted by market observers to indicate that the Fed may push pause on further increases.) This increase in interest rates created volatility in the fixed income markets. An example of this volatility is illustrated by the Thomson Reuters Municipal Market Data (“MMD”) AAA 10-year maturity yield which was 2.18% on April 1, 2022, reached its highest yield on October 27, 2022 of 3.41%, before settling in at a yield of 2.27% on March 31, 2023.

The Aquila Group of Funds (“AGOF”) single state municipal bond funds have consistently believed that a high quality, intermediate fund strategy helps to mitigate interest rate volatility. The AGOF single state funds generally performed well versus longer, lower rated national funds during the fiscal year ended March 31, 2023. It appears the high quality intermediate sector was one of the best performing municipal sectors during this time.

Throughout 2023 we believe there will be interest in how the Fed will respond to the economic conditions facing the United States. The “soft landing” versus a recession continues to be debated among economists. As this debate continues, Congress is currently busy trying to solve the debt ceiling issue with the Administration. Any fiscal stimulus that could increase inflation will be a major point of contention between the legislative and executive branches of government. As a result of this uncertainty, there may be market opportunities that the Aquila Group of Funds can implement to mitigate interest rate volatility.

U.S. Economy

Inflation, and how the Federal Reserve responds, remain the key macroeconomic topics. The era of low interest rates has come to an end, as the Fed continues to raise rates in its fight against inflation. As of the year ended March 31, 2023, the Fed had hiked rates nine straight times since it met on March 16, 2022, including March 22, 2023. (And, a 10th increase was implemented on May 3, 2023.) Although yields have risen from their lows, rates remain well below current inflation levels, as inflation over the past year has been running at its fastest pace in decades. U.S. Treasury yields rose and began to invert in April, 2022 and the Treasury yield curve continues to maintain its distinctly inverted

 

 

1  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

MANAGEMENT DISCUSSION (continued)

 

shape. The impact on rates of the Fed’s battle has been astonishing with 2-year Treasury yields increasing 428 b.p. from, March 31, 2022 to 5.06% as of March 8, 2023 and the 30-year U.S. Treasury rose 200 b.p. to 4.02%, as of the beginning of March 2023.

Rising interest rates have also significantly impacted bank portfolios. Deposits in the U.S. banking system rapidly increased by $5.2 trillion from 2019 to the end of 2021, following the onset of the COVID-19 pandemic. However, loan volumes did not keep pace with deposits due to the uncertainty created by the pandemic. As a result, banks added to their securities portfolios and loans as their share of total asset base decreased until 2022. Prior to the sharp increase in interest rates last year, banks were holding elevated levels of long-dated fixed income securities purchased with lower yields, which incurred substantial mark-to-market losses as rates increased. Toward the end of February 2023, Federal Deposit Insurance Corporation (FDIC) Chair, Martin Gruenberg, made cautionary statements regarding the impact higher rates could have on the banking sector and on bank unrealized losses. Two weeks later, Silicon Valley Bank (“SVB”), which was the 16th largest commercial bank in the U.S., collapsed following a run on deposits. The failure of SVB and two other banks prompted the Fed to create an emergency lending facility. Moody’s Investor Service has since lowered its outlook on the U.S. banking system to “Negative” from “Stable”, citing the “rapidly deteriorating operating environment.”

The Fed’s outlook continues to favor additional interest rate hikes as it seeks to contain current inflation levels and the recent banking crisis. Two main takeaways from recent inflation data are that inflation remains both too high relative to the Fed’s 2% target and the rate of inflation has shown signs of decelerating. This slowing began in October 2022, with the release of Consumer Price Index (“CPI”) data. More recently, CPI data released in March 2023 reported the all items CPI increased 5.0% year-to-date, the smallest 12-month gain since May 2021. However, the largest contributor to the increase was the cost of shelter, which remains a concern. Although supply chains have shown signs of recovery, the war in Ukraine continues to pressure commodities and energy prices. Furthermore, recently announced production cuts by the oil cartel OPEC (Organization of the Petroleum Exporting Countries) and its allies have placed upward pressure on the energy components of CPI.

Municipal Market

The past year through the period ending March 31, 2023, was an exceptionally challenging year for municipal bonds, with the Bloomberg Municipal Bond Index*, a broad measure of the overall municipal bond market, performance declining 8.53%, reporting its worst annual performance since 1980. The 10-Year Bloomberg AAA municipal yield more than doubled during the reporting period, from 1.05% on March 31, 2022 to 2.62% on December 31, 2022, to finish up the 12-month period at 2.26% on March 31, 2023. The Bloomberg Municipal Bond Index returns turned positive in the fourth quarter of 2022 and ended-up delivering a 2.20% return in March 2023, the strongest March performance since 2008. As of March 31, 2023, the overall municipal bond market had actually recovered to produce a positive total return for the trailing twelve-month period with the Bloomberg Municipal Bond Index eking out a positive 0.26% total return from March 31, 2022 to March 31, 2023.

 

 

2  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

MANAGEMENT DISCUSSION (continued)

 

One of the most significant developments in the municipal bond market over the past year has been the decline in new issuance. Over the first quarter of 2023, new issuance declined a dramatic 23.8% after falling 21.3% for calendar-year 2022. This lack of new issue supply has made sourcing bonds more challenging. The decline in new issuance is primarily due to the substantial increase in interest rates and the accelerated pace of rate hikes over this past year. This lower new issue environment has resulted in a positive credit trend for municipals, given many local governments are sitting on significant amounts of federal pandemic relief cash and running budget surpluses. In addition, taxable municipal yields have risen in parallel with U.S. Treasury yields, which has rendered many taxable municipal refunding bonds uneconomical. As a result, national taxable municipal issuance was approximately 59% of last year’s issuance over the same period ending March 31, 2023.

However, declining new issue volume trends have been largely offset by a surge in secondary market trading. In 2022, the overall number of trades rose by 66% from 2021 and 17% higher than the previous high reached in 2008, during the Credit Crisis. The total par value of fixed rate municipal securities traded in 2022 totaled $2.5 trillion, over 7x the amount of new issue volume during the year. This was 40% above the $1.6 trillion in total par value traded in 2021. This secondary market environment can be advantageous to the active portfolio efforts that professional municipal bond mutual fund managers seek to exploit on behalf of their shareholders.

With low new issuance and elevated secondary market trading activity, it is not surprising that demand for municipal bonds remains high. The demand for municipal bonds can be seen in the ratio of municipal yields versus U.S. Treasury yields. As of March 31, 2023, the 5-year maturity range of ‘AAA’ rated municipals was yielding 61% of U.S. Treasuries, which compares to 81% as of March 31, 2022. For the 10-year maturity range, municipals were yielding 65% of U.S. Treasuries as of March 31, 2023, compared to 94% as of March 31, 2022. While these ratios can be primarily attributed to high demand in a low issuance market, they are also an indication of the value of the tax-exemption offered by municipal bonds and the credit quality of the municipal asset class in the wake of the banking crisis and current recession concerns.

Credit quality in the municipal sector remains high, although there are specific pockets of concern. The uncertainty experienced in the banking sector last month reinforced the concept that investors view municipal bonds, particularly investment grade state and local government issuers, as high-quality investments. This strong perception of credit quality can largely be attributed to the unprecedented level of federal stimulus programs related to the pandemic and local government budgeting practices, which tend to be risk averse. However, there are certain sectors, such as assisted living and student housing, where investors are typically more cautious when investing.

Kentucky State Economy

The Kentucky State economy continues on a growth trajectory with higher revenue success and finished the State’s fiscal year-end on June 30, 2022 with General Revenues rising 14.6%, while Road Revenues increased 2.0%. Revenue growth for 2021 was reported at 10.9% and 2022 experienced growth of 14.6%, these were the two highest

 

 

3  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

MANAGEMENT DISCUSSION (continued)

 

growth rates reported in consecutive years since 1991. Kentucky ended fiscal year 2022 with a $945 million General Fund surplus, the second highest on record. This placed second to the $1.1 billion surplus of fiscal year 2021. As a result of the December 2021 tornadoes and the 2022 major spring floods in Eastern Kentucky, the State surplus was cut by major expenditures from a legislative perspective to assist the victimized counties.

As of March 31st, 2023, for nine months of fiscal year 2023, General Fund receipts were up 5.8% and the $1,046 billion March 2023 reported tax revenue was the highest on record. The State budget calls for an increase of 3.4% growth, which the State revenue has exceeded so far. Kentucky Budget Director John Hicks stated that increases in sales tax and wage growth continue to be strong. He also noted that General Fund receipts have risen over the last eleven quarters, which reflects the overall sustained prosperity in the Kentucky economy. Hicks commented, “Consistent growth in state revenue reflects business investment, improving wage conditions, and higher levels of ongoing consumption, which in turn feeds back through the economy to create more demand for business activity. Tax revenues rise as a consequence of economic growth.”

Further economic gains are reflected with the fact that the state announced its 3.8% Unemployment Rate in March 2023, which was an all time low for the State. Announcements by major companies regarding future employment opportunities should help the Unemployment Rate go even lower. The following business investment amounts and factory buildouts have recently been announced:

·Ford/SK Industries: $5.8 billion
·Microvast - Lithium Battery Separators: $504 million
·Ascend Elements - Lithium Battery Reclamation: $310 million
·Toyota Motors -EV Interiors, Filters and Power Trains: $225 million
·EnerVenue - Metal Hydrogen Batteries For Utility Storage: $264 million
·Envision Automotive Energy Supply Corp. (AESC) - Battery Cells: $2 billion

These projects should help create new sources of revenue for the State and enable the legislature to continue to generate enough general revenues to offset current state income taxes and eventually eliminate the state income tax in roughly 7-8 years, as prescribed in Kentucky House Bill 8. This, in turn, will move Kentucky towards consumption taxes and away from production taxes.

Fund Performance

 

  Aquila Churchill Tax-Free Fund of Kentucky Performance:
      March 31, 2023
      1-Year Total Return
  Class A Share at NAV (without sales charge)   0.05%
  Class Y Share   0.10%
  Bloomberg Municipal Bond Quality Intermediate Index   2.04%

 

 

4  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

MANAGEMENT DISCUSSION (continued)

 

  Aquila Churchill Tax-Free Fund of Kentucky Portfolio Characteristics:
      March 31, 2022   March 31, 2023
  Weighted Average Maturity   7.78 yrs.   7.47 yrs.
  Option Adj. (Effective) Duration   4.28 yrs.   4.17 yrs.
  Modified Duration   4.22 yrs.   4.05 yrs.

 

  Bloomberg Municipal Bond Quality Intermediate Index Characteristics:
      March 31, 2022   March 31, 2023
  Weighted Average Maturity   6.34 yrs.   6.46 yrs.
  Effective Duration   4.12 yrs.   4.00 yrs.
  Modified Duration   3.86 yrs.   3.80 yrs.

 

Aquila Churchill Tax-Free Fund of Kentucky (the “Fund”) Class Y Shares underperformed the Bloomberg Municipal Bond Quality Intermediate Index (the “Index”) over the reporting period ending March 31, 2023. The combination of the high (51.05%) Single A rated composition of the Fund versus the Index (as shown in the chart below) and the longer weighted average maturity, option adjusted duration and modified duration, resulted in the underperformance.

 

  Aquila Churchill Tax-Free Fund of Kentucky versus the Index
Ratings Breakdown as of March 31, 2023
  Rating   Fund   Index
  A   51.05%   23.85%
  AA   39.50%   57.62%
  AAA     5.05% (incl. Pre-Refunded)   18.50%

 

During the Fund’s fiscal year ended March 31, 2023, the Fund’s Class Y Shares underperformed the Index by -194 b.p.. The vast majority of the underperformance occurred in the first fiscal quarter April 1, 2022 to June 30, 2022, during which time the Fund underperformed by -132 b.p.. It should be noted that the Index does not include any operating expenses nor sales charges, and being nationally oriented, does not reflect state-specific bond market performance.

According to Bloomberg, during the Fund’s fiscal year, double AA rated securities outperformed single A rated securities by 62 b.p.. With this in mind, we believe the Fund’s performance was consistent with its primarily single A credit positioning in a single A rated state.

Outlook and Strategy

Aquila Churchill Tax-Free Fund of Kentucky continues to implement the longstanding tenets of the Aquila Group of Funds, namely, local management, high quality and intermediate maturity focus. In this volatile market we are seeking to purchase and retain the highest quality securities that we believe the State offers based upon our analytics and credit perspective obtained over our long local tenure in the Kentucky market. Credit research remains a cornerstone for the Fund. The Fund continues to be positioned with

 

 

5  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

MANAGEMENT DISCUSSION (continued)

 

44.56% of the portfolio securities rated AA or higher and 51.05% single A rated. While we have maintained approximately the same rating percentage relationships as in past years, we currently have a slightly higher Non Rated position, given a recent purchase of a Kentucky Housing Private Placement security, structured with a short maturity of 2025 and an above market yield of 4.65%. With the volatility we are experiencing in the fixed income markets, in our opinion, we are keenly aware of value when we see it and are therefore holding a slightly higher percentages of cash which should enable us to purchase securities that we deem will add value to the portfolio, as they become available in both the Primary and Secondary markets.

We believe our current fund maturity and duration exposure leaves us in a desirable position to respond to any favorable shifts that may occur in the yield curve and credit spreads as monetary policy continues to unfold. The volatility the municipal market has experienced in the past quarter may likely continue if the Federal Reserve continues with their strategy of increasing interest rates, along with inflation at recent elevated levels. These periods can introduce valuable opportunities to leverage our demonstrated active management techniques that have enabled the Fund to limit erosion in the monthly distributions, while maintaining a conservative intermediate maturity position.

 

                                                                                  

 

*Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg does not approve or endorse this material or guarantee the accuracy or completeness of any information therein, nor does Bloomberg make any warranty, express or implied, as to results to be obtained therefrom, and, to the maximum extent allowed by the law, Bloomberg shall not have any liability or responsibility for any injury or damages arising in connection therewith.

 

                                                                                  

 

Mutual fund investing involves risk and loss of principal is possible.

The market prices of the Fund’s securities may rise or decline in value due to general market conditions, such as real or perceived adverse economic, political or regulatory conditions, recessions, inflation, changes in interest rates, lack of liquidity in the bond markets, the spread of infectious illness or other public health issues, armed conflict including Russia’s military invasion of Ukraine, sanctions against Russia, other nations or individuals or companies and possible countermeasures, market disruptions caused by tariffs, trade disputes or other factors, or adverse investor sentiment. When market prices fall, the value of your investment may go down. In the past several years, financial markets have experienced increased volatility, depressed valuations, decreased liquidity and heightened uncertainty. These conditions may continue, recur, worsen or spread. Recently, inflation and interest rates have increased and may rise further. These circumstances could adversely affect the value and liquidity of the Fund’s investments, impair the Fund’s ability to satisfy redemption requests, and negatively impact the Fund’s performance. Raising the ceiling on U.S. government debt has become increasingly politicized. Any failure to increase the ceiling on U.S. government debt could lead to a default on U.S. government obligations, with unpredictable consequences for economies and markets.

The global pandemic of the novel coronavirus respiratory disease designated COVID-19 has resulted in major disruption to economies and markets around the world, including the United States. Global financial markets have experienced extreme volatility and severe losses, and trading in many instruments has been disrupted. Liquidity for many instruments has been greatly reduced for periods of time. Some sectors of the economy and individual issuers have experienced particularly large losses. These circumstances may continue to affect adversely the value and liquidity of the Fund’s investments. Following Russia’s invasion of Ukraine, Russian securities have lost all, or nearly all, their market value. Other securities or markets could be similarly affected by past or future geopolitical or other events or conditions.

 

 

6  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

MANAGEMENT DISCUSSION (continued)

 

Governments and central banks, including the U.S. Federal Reserve, have taken extraordinary and unprecedented actions to support local and global economies and the financial markets. These actions have resulted in significant expansion of public debt, including in the U.S. The consequences of high public debt, including its future impact on the economy and securities markets, may not be known for some time.

The U.S. and other countries are periodically involved in disputes over trade and other matters, which may result in tariffs, investment restrictions and adverse impacts on affected companies and securities. For example, the U.S. has imposed tariffs and other trade barriers on Chinese exports, has restricted sales of certain categories of goods to China, and has established barriers to investments in China. Trade disputes may adversely affect the economies of the U.S. and its trading partners, as well as companies directly or indirectly affected and financial markets generally. If the political climate between the U.S. and China does not improve or continues to deteriorate, if China were to attempt unification of Taiwan by force, or if other geopolitical conflicts develop or get worse, economies, markets and individual securities may be severely affected both regionally and globally, and the value of the Fund’s assets may go down.

The value of your investment will generally go down when interest rates rise. A rise in interest rates tends to have a greater impact on the prices of longer term or longer duration securities. In recent years, interest rates and credit spreads in the U.S. have been at historic lows. The U.S. Federal Reserve has raised certain interest rates, and interest rates may continue to go up. A general rise in interest rates may cause investors to move out of fixed income securities on a large scale and could also result in increased redemptions from the Fund.

Investments in the Fund are subject to possible loss due to the financial failure of the issuers of underlying securities and their inability to meet their debt obligations.

The value of municipal securities can be adversely affected by changes in the financial condition of one or more individual municipal issuers or insurers of municipal issuers, regulatory developments, legislative actions, and by uncertainties and public perceptions concerning these and other factors. The Fund may be affected significantly by adverse economic, political or other events affecting state and other municipal issuers in which it invests, and may be more volatile than a more geographically diverse fund. The municipal bond market can be susceptible to unusual volatility, particularly for lower-rated and unrated securities. Liquidity can be reduced unpredictably in response to overall economic conditions or credit tightening. Municipal issuers may be adversely affected by rising health care costs, increasing unfunded pension liabilities, and by the phasing out of federal programs providing financial support. Unfavorable conditions and developments relating to projects financed with municipal securities can result in lower revenues to issuers of municipal securities, potentially resulting in defaults. Municipal securities may be more susceptible to downgrades or defaults during a recession or similar periods of economic stress. Financial difficulties of municipal issuers may continue or get worse, particularly in the event of political, economic or market turmoil or a recession.

A portion of income may be subject to local, state, Federal and/or alternative minimum tax. Capital gains, if any, are subject to capital gains tax.

These risks may result in share price volatility.

Any information in this Annual Report regarding market or economic trends or the factors influencing the Fund’s historical or future performance are statements of opinion as of the date of this report. These statements should not be relied upon for any other purposes. Past performance is no guarantee of future results, and there is no guarantee that any market forecasts discussed will be realized.

 

 

7  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

PERFORMANCE REPORT

 

The following graph illustrates the value of $10,000 invested in the Class Y shares of Aquila Churchill Tax-Free Fund of Kentucky (the “Fund”) for the 10-year period ended March 31, 2023 as compared with the Bloomberg Municipal Bond: Quality Intermediate TR Unhedged Index** (the “Bloomberg Intermediate Index”) and the Consumer Price Index (a cost of living index). The performance of each of the other classes is not shown in the graph but is included in the table below. It should be noted that the Bloomberg Intermediate Index does not include any operating expenses nor sales charges, and being nationally oriented, does not reflect state-specific bond market performance.

 

 

   

Average Annual Total Return

for periods ended March 31, 2023

 
Class and Inception Date   1 Year   5 Years   10 Years   Since
Inception
 
Class A since 5/21/87                  
With Maximum Sales Charge   (2.98)%   0.54%   1.26%   4.48%  
Without Sales Charge   0.05   1.37   1.68   4.60  
Class C since 4/01/96                  
With CDSC*   (1.78)   0.53   0.83   2.74  
Without CDSC   (0.80)   0.53   0.83   2.74  
Class F since 12/21/22                  
No Sales Charge   N/A   N/A   N/A   1.88  
Class I since 8/06/01                  
No Sales Charge   (0.20)   1.22   1.52   3.04  
Class Y since 4/01/96                  
No Sales Charge   0.10   1.52   1.82   3.77  
Bloomberg Intermediate Index   2.04   1.96   1.93   4.77 (Class A)
                3.92 (Class C & Y)
                1.92 (Class F)
                3.45 (Class I)

 

Total return figures shown for the Fund reflect any change in price and assume all distributions within the period including capital gains, were invested in additional shares. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund Shares. The rates of return will vary and the

 

 

8  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

PERFORMANCE REPORT (continued)

 

principal value of an investment will fluctuate with market conditions. Shares, if redeemed, may be worth more or less than their original cost. A portion of each class’s income may be subject to Federal and state income taxes and/or the Federal Alternative Minimum Tax (“AMT”). Past performance is not predictive of future investment results.

 

*     CDSC = 1% contingent deferred sales charge imposed on redemptions made within the first 12 months after purchase.

 

 

                                                                                  

 

**Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg does not approve or endorse this material or guarantee the accuracy or completeness of any information therein, nor does Bloomberg make any warranty, express or implied, as to results to be obtained therefrom, and, to the maximum extent allowed by the law, Bloomberg shall not have any liability or responsibility for any injury or damages arising in connection therewith.

 

 

 

 

 

 

 

 

 

 

 

 

9  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Trustees of Aquila Municipal Trust and the

Shareholders of Aquila Churchill Tax-Free Fund of Kentucky:

 

Opinion on the Financial Statements

 

We have audited the accompanying statement of assets and liabilities of Aquila Churchill Tax-Free Fund of Kentucky (the “Fund”), including the schedule of investments, as of March 31, 2023, the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and financial highlights for each of the five years in the period then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of March 31, 2023, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We have served as the auditor for the Trust since 2005.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of March 31, 2023 by correspondence with the custodian and brokers. We believe that our audit provides a reasonable basis for our opinion.

 

TAIT, WELLER & BAKER LLP

Philadelphia, Pennsylvania

May 30, 2023

 

 

10  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

SCHEDULE OF INVESTMENTS

MARCH 31, 2023

 

Principal
Amount
  General Obligation Bonds (5.8%)   Ratings
Moody’s, S&P
and Fitch
(unaudited)
  Value
    Bowling Green, Kentucky        
$ 1,605,000   2.000%, 09/01/44 Series 2021A   Aa1/NR/NR   $ 1,060,359
    Lexington-Fayette Urban County, Kentucky        
3,600,000   4.000%, 09/01/29   Aa2/AA/NR   3,666,744
    Louisville/Jefferson County, Kentucky Metro Government        
2,000,000   4.000%, 04/01/35 Series 2022A   Aa1/NR/AAA   2,150,780
    Newport, Kentucky        
620,000   2.000%, 02/01/38 Series 2021 AGMC Insured   NR/AA/NR   470,499
    Rowan County, Kentucky        
835,000   4.000%, 06/01/30 AGMC Insured   A1/AA/NR   866,997
865,000   4.000%, 06/01/31 AGMC Insured   A1/AA/NR   896,720
    Warren County, Kentucky        
695,000   1.750%, 12/01/35 Series 2020   Aa1/NR/NR   553,456
    Total General Obligation Bonds        9,665,555
             
    Revenue Bonds (89.0%)        
     State Agency (26.2%)         
    Kentucky Asset & Liability Commission Federal Highway Notes        
2,000,000   5.250%, 09/01/25 Series A   A2/AA/A+   2,018,780
2,000,000   5.000%, 09/01/26 Series A   A2/AA/A+   2,058,720
1,000,000   5.000%, 09/01/27 Series A   A2/AA/A+   1,049,920
    Kentucky Rural Water Finance Corp.        
240,000   4.500%, 08/01/23 NPFG Insured   Baa2/A+/NR   240,276
255,000   4.500%, 08/01/24 NPFG Insured   Baa2/A+/NR   255,291
290,000   4.500%, 08/01/27 NPFG Insured   Baa2/A+/NR   290,334
245,000   4.600%, 08/01/28 NPFG Insured   Baa2/A+/NR   245,287
315,000   4.625%, 08/01/29 NPFG Insured   Baa2/A+/NR   315,372
175,000   4.000%, 02/01/28 Series 2012C   NR/A+/NR   175,144
100,000   4.000%, 02/01/29 Series 2012C   NR/A+/NR   100,081
120,000   4.000%, 02/01/26 Series 2012F   NR/A+/NR   120,103
125,000   4.000%, 02/01/27 Series 2012F   NR/A+/NR   125,105
130,000   4.000%, 02/01/28 Series 2012F   NR/A+/NR   130,107

 

11  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

SCHEDULE OF INVESTMENTS (continued)

MARCH 31, 2023

 

Principal
Amount
  Revenue Bonds (continued)   Ratings
Moody’s, S&P
and Fitch
(unaudited)
  Value
     State Agency (continued)         
    Kentucky Rural Water Finance Corp. (continued)        
$ 140,000   4.000%, 02/01/29 Series 2012F   NR/A+/NR   $ 140,113
265,000   2.000%, 02/01/35 Series 2020I   NR/A+/NR   225,412
475,000   2.000%, 02/01/36 Series 2020I   NR/A+/NR   386,621
280,000   2.000%, 02/01/37 Series 2020I   NR/A+/NR   217,725
615,000   3.000%, 08/01/31 Series 2021D   NR/A+/NR   612,583
625,000   3.000%, 08/01/32 Series 2021D   NR/A+/NR   620,487
580,000   3.000%, 08/01/33 Series 2021D   NR/A+/NR   571,085
    Kentucky State Office Building COP        
2,250,000   4.000%, 04/15/27   A1/NR/NR   2,357,910
1,640,000   5.000%, 06/15/34   A1/NR/NR   1,717,260
     Kentucky State Property and Buildings Commission        
625,000   4.000%, 04/01/26 Project 105   A1/A-/A+   625,688
655,000   4.000%, 04/01/27 Project 105   A1/A-/A+   655,694
3,000,000   5.000%, 08/01/33 Project 108   A1/A-/A+   3,134,130
5,000,000   5.000%, 08/01/32 Project 110   A1/A-/A+   5,240,800
2,040,000   5.000%, 11/01/27 Project 112   A1/A-/A+   2,214,094
1,425,000   5.000%, 11/01/28 Project 112   A1/A-/A+   1,546,610
2,500,000   5.000%, 02/01/31 Project 112   A1/A-/A+   2,662,150
1,400,000   4.000%, 10/01/30 Project 114   A1/A-/A+   1,457,680
1,000,000   5.000%, 04/01/29 Project 115   A1/A-/A+   1,085,920
2,000,000   5.000%, 05/01/30 Project 117   A1/NR/A+   2,169,280
500,000   5.000%, 05/01/36 Project 117   A1/NR/A+   536,980
1,490,000   5.000%, 05/01/24 Project 119   A1/A-/A+   1,527,786
1,015,000   5.000%, 05/01/25 Project 119   A1/A-/A+   1,062,340
1,000,000   5.000%, 02/01/28 Project 121   A1/NR/A+   1,105,910
1,000,000   5.000%, 05/01/33 Project 126   A1/NR/A+   1,181,550
3,000,000   5.000%, 06/01/33 Project 127A   A1/NR/A+   3,547,650
    Total State Agency        43,727,978
             

 

12  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

SCHEDULE OF INVESTMENTS (continued)

MARCH 31, 2023

 

Principal
Amount
  Revenue Bonds (continued)   Ratings
Moody’s, S&P
and Fitch
(unaudited)
  Value
     Airports (3.8%)         
    Louisville, Kentucky Regional Airport Authority        
$ 2,070,000   5.000%, 07/01/23 AMT   NR/A+/A+   $ 2,079,129
2,325,000   5.000%, 07/01/26 AMT   NR/A+/A+   2,365,618
1,895,000   5.000%, 07/01/27 Series A AMT   NR/A+/A+   1,925,528
    Total Airports        6,370,275
             
     City (1.2%)         
    River City Parking Authority of River City, Inc., Kentucky First Mortgage Refunding        
780,000   2.000%, 12/01/33 Series 2021A   Aa3/AA-/NR   673,709
800,000   2.000%, 12/01/34 Series 2021A   Aa3/AA-/NR   672,648
810,000   2.000%, 12/01/35 Series 2021A   Aa3/AA-/NR   655,371
    Total City        2,001,728
             
     City & County (0.5%)         
    Louisville & Jefferson County Visitors & Convention Commission (Kentucky International Convention Center Expansion Project)        
1,000,000   3.125%, 06/01/41 Series 2016   Aa3/A/NR   860,240
             
     Excise Tax (1.0%)         
    Kentucky Bond Development Corp. Transient Room Tax Revenue (Lexington Center Corporation) Subordinate        
1,585,000   5.000%, 09/01/27 Series 2018B   A3/NR/NR   1,725,621
             
     Healthcare (5.7%)         
    City of Ashland, Kentucky, Medical Center
(King's Daughter)
       
460,000   5.000%, 02/01/31 Series 2019   Baa1/BBB+/A-   495,659
450,000   5.000%, 02/01/32 Series 2019   Baa1/BBB+/A-   483,741
2,600,000   3.000%, 02/01/40 Series 2019 AGMC Insured   A1/AA/A-   2,141,256

 

13  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

SCHEDULE OF INVESTMENTS (continued)

MARCH 31, 2023

 

Principal
Amount
  Revenue Bonds (continued)   Ratings
Moody’s, S&P
and Fitch
(unaudited)
  Value
     Healthcare (continued)         
    Louisville & Jefferson County, Kentucky Metropolitan Government Health System, Norton Healthcare, Inc.        
$ 2,710,000   5.000%, 10/01/27 Series A   NR/A/A+   $ 2,734,661
2,500,000   5.000%, 10/01/31 Series A   NR/A/A+   2,641,075
    Louisville & Jefferson County, Kentucky Metropolitan Government, Louisville Medical Center, Laundry Facility Project        
355,000   4.250%, 05/01/23 Series 2012   NR/A-/NR   355,298
    Warren County, Kentucky, Warren County Community Hospital Corp.        
680,000   4.000%, 10/01/29   NR/AA-/NR   680,612
    Total Healthcare        9,532,302
             
     Higher Education (13.8%)         
    Boyle County, Kentucky Educational Facilities Refunding (Centre College)        
2,050,000   5.000%, 06/01/28 Series 2017   A3/A/NR   2,218,920
1,000,000   5.000%, 06/01/29 Series 2017   A3/A/NR   1,082,560
    Eastern Kentucky University General Receipts        
1,230,000   5.000%, 10/01/30 Series A   A1/NR/NR   1,361,487
870,000   4.500%, 04/01/32 Series A   A1/NR/NR   892,046
    Kentucky Bond Development Corp. Educational Facilities, City of Danville (Centre College)        
305,000   4.000%, 06/01/34 Series 2021   A3/A/NR   314,760
    Kentucky Bond Development Corp. Educational Facilities Revenue Refunding, City of Stamping Ground (Transylvania University Project)        
645,000   3.000%, 03/01/38 Series 2021A   NR/A-/NR   547,986
    Kentucky Bond Development Corp. Industrial Building Revenue, City of Stamping Ground (Transylvania University Project)        
510,000   4.000%, 03/01/33 Series 2019B   NR/A-/NR   524,652
610,000   4.000%, 03/01/34 Series 2019B   NR/A-/NR   624,494

 

14  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

SCHEDULE OF INVESTMENTS (continued)

MARCH 31, 2023

 

Principal
Amount
  Revenue Bonds (continued)   Ratings
Moody’s, S&P
and Fitch
(unaudited)
  Value
     Higher Education (continued)         
    Kentucky State University COP        
$ 300,000   4.000%, 11/01/34 Series 2021 BAMI Insured   NR/AA/NR   $ 321,072
310,000   4.000%, 11/01/36 Series 2021 BAMI Insured   NR/AA/NR   320,937
740,000   4.000%, 11/01/38 Series 2021 BAMI Insured   NR/AA/NR   748,036
    Louisville & Jefferson County, Kentucky Metropolitan Government College Improvement (Bellarmine University Project)        
2,270,000   5.000%, 05/01/33   Ba1/NR/NR   2,203,035
    Morehead State University, Kentucky General Receipts        
1,000,000   5.000%, 04/01/29 Series A   A1/NR/NR   1,040,610
1,000,000   4.000%, 04/01/31 Series A   A1/NR/NR   1,024,840
    Murray State University Project, Kentucky General Receipts        
1,850,000   4.500%, 03/01/30 Series A   A1/NR/NR   1,907,461
1,230,000   3.000%, 09/01/35 Series 2022A   A1/NR/NR   1,167,332
    Northern Kentucky University, Kentucky General Receipts        
990,000   3.000%, 09/01/40 Series A AGMC Insured   A1/AA/NR   829,580
    University of Kentucky COP        
1,000,000   4.000%, 05/01/39 2011 Series 2019A   Aa3/AA/NR   1,013,010
    University of Kentucky, Kentucky General Receipts        
2,715,000   3.000%, 04/01/39 Series A   Aa2/AA+/NR   2,445,401
    University of Louisville, Kentucky General Receipts        
1,235,000   3.000%, 09/01/32 Series 2021B BAMI Insured   A1/AA/NR   1,235,284
1,275,000   3.000%, 09/01/33 Series 2021B BAMI Insured   A1/AA/NR   1,259,216
    Total Higher Education        23,082,719
             

 

15  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

SCHEDULE OF INVESTMENTS (continued)

MARCH 31, 2023

 

Principal
Amount
  Revenue Bonds (continued)   Ratings
Moody’s, S&P
and Fitch
(unaudited)
  Value
     Housing (2.4%)         
    Kentucky Housing Corp. Multifamily (Churchill Park)        
$ 3,000,000   4.650%, 05/01/25 144A   NR/NR/NR*   $ 2,999,310
    Kentucky Housing Multifamily Mortgage Revenue        
1,010,000   5.000%, 06/01/35 AMT (mandatory put 6/01/23)   NR/NR/NR*   1,011,555
    Total Housing        4,010,865
             
     Local Public Property (6.4%)         
    Jefferson County, Kentucky Capital Projects        
1,950,000   4.375%, 06/01/24 AGMC Insured   A1/NR/AA+   1,952,535
1,640,000   4.375%, 06/01/28 AGMC Insured   A1/NR/AA+   1,642,083
1,070,000   4.375%, 06/01/27 Series A AGMC Insured   A1/NR/AA+   1,071,359
    Kentucky Association of Counties Finance Corp.
Financing Program
       
515,000   4.000%, 02/01/25   NR/AA-/NR   515,546
30,000   4.250%, 02/01/24 Series A   NR/AA-/NR   30,037
345,000   5.000%, 02/01/24 Series B   NR/AA-/NR   351,790
365,000   5.000%, 02/01/25 Series B   NR/AA-/NR   380,607
385,000   5.000%, 02/01/26 Series B   NR/AA-/NR   410,945
380,000   3.000%, 02/01/30 Series C   NR/AA-/NR   383,241
460,000   3.000%, 02/01/32 Series D   NR/AA-/NR   460,354
470,000   3.000%, 02/01/33 Series D   NR/AA-/NR   465,328
1,210,000   3.000%, 02/01/38 Series E   NR/AA-/NR   1,069,507
    Kentucky Bond Corp. Financing Program        
575,000   2.000%, 02/01/37 First Series A   NR/AA-/NR   429,174
590,000   2.000%, 02/01/38 First Series A   NR/AA-/NR   428,476
600,000   2.000%, 02/01/39 First Series A   NR/AA-/NR   425,394
730,000   3.000%, 02/01/41 Series F   NR/AA-/NR   609,360
    Total Local Public Property        10,625,736
             

 

16  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

SCHEDULE OF INVESTMENTS (continued)

MARCH 31, 2023

 

Principal
Amount
  Revenue Bonds (continued)   Ratings
Moody’s, S&P
and Fitch
(unaudited)
  Value
     School Building (16.1%)         
    Beechwood, Kentucky Independent School District Finance Corp.        
$ 645,000   4.000%, 08/01/31 Series 2022   A1/NR/NR   $ 682,894
    Bullitt County, Kentucky School District Finance Corp.        
970,000   1.875%, 12/01/36 Series 2020   A1/NR/NR   776,921
    Fayette County, Kentucky School District Finance Corp.        
3,000,000   5.000%, 08/01/31   Aa3/AA-/NR   3,145,170
    Hopkins County, Kentucky School District Finance Corp.        
1,500,000   2.000%, 02/01/39 Series 2021   A1/NR/NR   1,112,655
    Jefferson County, Kentucky School District Finance Corp.          
805,000   5.000%, 04/01/28 Series A   Aa3/AA-/NR   839,446
1,075,000   4.500%, 04/01/32 Series A   Aa3/AA-/NR   1,112,410
4,000,000   4.000%, 07/01/26 Series B   Aa3/AA-/NR   4,014,080
1,655,000   4.000%, 11/01/29 Series C   Aa3/AA-/NR   1,667,694
    Johnson County, Kentucky School District Finance Corp.          
1,080,000   4.000%, 04/01/32 Series 2023   A1/NR/NR   1,136,419
    Kenton County, Kentucky School District Finance Corp.        
2,040,000   3.000%, 02/01/31 Series 2022   A1/NR/NR   1,985,634
    Lewis County, Kentucky School District Finance Corp.        
1,600,000   2.000%, 02/01/39 Series 2021   A1/NR/NR   1,204,400
    Logan County, Kentucky School District Finance Corp., Energy Conservation Revenue Bonds        
575,000   4.000%, 04/01/33 Series 2016   A1/NR/NR   593,377
615,000   4.000%, 04/01/34 Series 2016   A1/NR/NR   633,862
    Scott County, Kentucky School District Finance Corp. School Building        
2,000,000   4.000%, 02/01/32   Aa3/NR/NR   2,156,340

 

17  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

SCHEDULE OF INVESTMENTS (continued)

MARCH 31, 2023

 

Principal
Amount
  Revenue Bonds (continued)   Ratings
Moody’s, S&P
and Fitch
(unaudited)
  Value
     School Building (continued)         
    Shelby County, Kentucky School District Finance Corp. School Building        
$ 3,200,000   4.000%, 02/01/28   A1/NR/NR   $ 3,349,856
2,440,000   4.000%, 02/01/29   A1/NR/NR   2,550,703
    Total School Building        26,961,861
             
     Student Loan (2.3%)         
     Kentucky Higher Education Student Loan        
400,000   5.000%, 06/01/24 Senior Series A AMT   NR/A/A   407,868
600,000   5.000%, 06/01/26 Senior Series A AMT   NR/A/A   632,202
500,000   4.000%, 06/01/34 Senior Series A AMT   NR/A/A   496,670
750,000   5.000%, 06/01/28 Senior Series 2019A-1 AMT   NR/A/A   804,765
1,000,000   5.000%, 06/01/28 Senior Series 2021A-1 AMT   NR/A/A   1,073,020
350,000   5.000%, 06/01/31 Senior Series 2021A-1 AMT   NR/A/A   383,880
    Total Student Loan        3,798,405
             
     Turnpike/Highway (7.0%)         
    Kentucky State Turnpike Authority        
4,030,000   5.000%, 07/01/30 Series A   Aa3/A-/A+   4,216,105
1,200,000   5.000%, 07/01/31 Series A   Aa3/NR/NR   1,422,108
1,715,000   5.000%, 07/01/31 Series B   Aa3/A-/NR   1,836,319
2,925,000   5.000%, 07/01/33 Series B   Aa3/A-/NR   3,129,077
900,000   5.000%, 07/01/28 Series 2022B   Aa3/NR/NR   1,012,158
    Total Turnpike/Highway        11,615,767
             
    Utilities (2.6%)        
     Boone County, Kentucky Pollution Control        
1,000,000   3.700%, 08/01/27 Series 2008A   Baa1/BBB+/NR   1,001,310
     Louisville & Jefferson County, Kentucky Metropolitan Sewer District        
1,920,000   4.500%, 05/15/30 Series A   Aa3/AA/NR   1,974,125

 

18  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

SCHEDULE OF INVESTMENTS (continued)

MARCH 31, 2023

 

Principal
Amount
  Revenue Bonds (continued)   Ratings
Moody’s, S&P
and Fitch
(unaudited)
  Value
    Utilities (continued)        
     Murray, Kentucky Electric Plant Board        
$ 1,380,000   3.000%, 12/01/35 Series 2021 AGMC Insured   A1/AA/NR   $ 1,301,271
    Total Utilities        4,276,706
    Total Revenue Bonds        148,590,203
             
    Pre-Refunded\Escrowed to Maturity Bonds (3.7%)††        
    Pre-Refunded Revenue Bonds\ Escrowed to Maturity Bonds (3.7%)        
     Healthcare (3.7%)         
    Hardin County, Kentucky, Hardin Memorial Hospital        
675,000   5.500%, 08/01/23 AGMC Insured ETM   A1/AA/NR   681,055
500,000   5.250%, 08/01/24 AGMC Insured   A1/AA/NR   504,085
    Warren County, Kentucky, Warren County Community Hospital Corp.        
4,975,000   5.000%, 04/01/28   NR/AA-/NR   4,975,000
    Total Pre-Refunded\Escrowed to Maturity Bonds        6,160,140
    Total Municipal Bonds
(cost $169,969,941)
       164,415,898

 

Shares   Short-Term Investment (1.2%)        
2,124,680   Dreyfus Treasury Obligations Cash Management - Institutional Shares, 4.69%** (cost $2,124,680)   Aaa-mf/AAAm/NR   2,124,680
             
    Total Investments
(cost $172,094,621 - note 4)
  99.7%    166,540,578
    Other assets less liabilities   0.3    441,248
    Net Assets   100.0%   $ 166,981,826

 

 

19  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

SCHEDULE OF INVESTMENTS (continued)

MARCH 31, 2023

 

 

Portfolio Distribution By Quality Rating (unaudited)   Percentage of
Investments†
AAA of Fitch   1.3%
Pre-refunded bonds\ETM bonds††   3.7
Aa of Moody's or AA of S&P or Fitch   39.5
A of Moody's or S&P or Fitch   51.1
Baa of Moody's or BBB of S&P   0.6
Ba1 of Moody's   1.4
Not Rated*   2.4
    100.0%

 

 

PORTFOLIO ABBREVIATIONS

AGMC - Assured Guaranty Municipal Corp.

AMT - Alternative Minimum Tax

BAMI - Build America Mutual Insurance

COP - Certificates of Participation

ETM - Escrowed to Maturity

NPFG - National Public Finance Guarantee

NR - Not Rated

 

 

* Any security not rated (“NR”) by any of the Nationally Recognized Statistical Rating Organizations (“NRSRO”) has been determined by the Investment Adviser to have sufficient quality to be ranked in the top four credit ratings if a credit rating were to be assigned by a NRSRO.
   
** The rate is an annualized seven-day yield at period end.
   
Where applicable, calculated using the highest rating of the three NRSRO. Percentages in this table do not include the Short-Term Investment.
   
†† Pre-refunded bonds are bonds for which U.S. Government Obligations usually have been placed in escrow to retire the bonds at their earliest call date.  Escrowed to Maturity bonds are bonds where money has been placed in the escrow account which is used to pay principal and interest through the bond’s originally scheduled maturity date.  Escrowed to Maturity are shown as ETM.  All other securities in the category are pre-refunded.
   
  Note: 144A – Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At March 31, 2023, these securities amounted to a value of $2,999,310 or 1.8% of net assets.

 

 

See accompanying notes to financial statements.

 

20  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

STATEMENT OF ASSETS AND LIABILITIES

MARCH 31, 2023

 

ASSETS    
Investments at value (cost $172,094,621) $ 166,540,578
Interest receivable   2,023,250
Receivable for Fund Shares sold   10,968
Other assets   26,443
Total assets   168,601,239
     
LIABILITIES    
Payables:    
Investment securities purchased   1,128,730
Fund shares redeemed   280,025
Dividends   56,721
Management fee   56,150
Distribution and service fees payable   93
Other expenses   97,694
Total liabilities   1,619,413
NET ASSETS $ 166,981,826
     
Net Assets consist of:    
Capital Stock – Authorized an unlimited number of shares, par value $0.01 per share $ 166,678
Additional paid-in capital   173,058,415
Total distributable earnings (losses)   (6,243,267)
  $ 166,981,826
CLASS A    
Net Assets $ 112,565,080
Capital shares outstanding   11,237,271
Net asset value and redemption price per share $ 10.02
Maximum offering price per share (100/97 of $10.02) $ 10.33
     
CLASS C    
Net Assets $ 2,261,639
Capital shares outstanding   225,806
Net asset value and offering price per share $ 10.02
     
CLASS F    
Net Assets $ 256,579
Capital shares outstanding   25,633
Net asset value, offering and redemption price per share $ 10.01
     
CLASS I    
Net Assets $ 6,198,573
Capital shares outstanding   618,958
Net asset value, offering and redemption price per share $ 10.01
     
CLASS Y    
Net Assets $ 45,699,955
Capital shares outstanding   4,560,150
Net asset value, offering and redemption price per share $ 10.02

 

See accompanying notes to financial statements.

 

21  |  Aquila Churchill Tax-Free Fund of Kentucky

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

STATEMENT OF OPERATIONS

YEAR ENDED MARCH 31, 2023

 

Investment Income            
Interest income         $ 5,108,842
             
Expenses            
Management fee (note 3)   $ 675,688      
Distribution and service fee (note 3)     208,520      
Transfer and shareholder servicing agent fees (note 3)     97,921      
Trustees’ fees and expenses (note 7)     57,728      
Fund accounting fees     57,372      
Legal fees     44,641      
Registration fees and dues     25,215      
Auditing and tax fees     22,700      
Shareholders’ reports     12,285      
Compliance services (note 3)     9,827      
Insurance     8,830      
Custodian fees     5,782      
Credit facility fees (note 10)     4,746      
Miscellaneous     21,148      
Total expenses           1,252,403
Net investment income           3,856,439
             
Realized and Unrealized Gain (Loss) on Investments:            
Net realized gain (loss) from securities transactions     (694,653)      
Change in unrealized appreciation (depreciation) on investments     (3,502,698)      
Net realized and unrealized gain (loss) on investments           (4,197,351)
Net change in net assets resulting from operations         $ (340,912)

 

 

See accompanying notes to financial statements.

 

22  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

STATEMENT OF CHANGES IN NET ASSETS

 

    Year Ended
March 31, 2023
  Year Ended
March 31, 2022
OPERATIONS:            
Net investment income   $  3,856,439   $  3,778,341
Realized gain (loss) from securities transactions     (694,653)     (5,762)
Change in unrealized appreciation (depreciation) on investments     (3,502,698)     (11,699,561)
Change in net assets resulting from operations     (340,912)     (7,926,982)
             
DISTRIBUTIONS TO SHAREHOLDERS (note 9):            
Class A Shares     (2,670,642)     (2,777,064)
             
Class C Shares     (42,566)     (56,656)
             
Class F Shares     (320)    
             
Class I Shares     (133,166)     (129,140)
             
Class Y Shares     (1,094,253)     (986,166)
Change in net assets from distributions     (3,940,947)     (3,949,026)
             
CAPITAL SHARE TRANSACTIONS (note 6):            
Proceeds from shares sold     25,370,047     23,209,081
Reinvested dividends and distributions     3,233,465     3,208,855
Cost of shares redeemed     (36,245,727)     (22,813,782)
Change in net assets from capital share transactions     (7,642,215)     3,604,154
             
Change in net assets     (11,924,074)     (8,271,854)
             
NET ASSETS:            
Beginning of period     178,905,900     187,177,754
End of period   $  166,981,826   $  178,905,900

 

 

See accompanying notes to financial statements.

 

23  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2023

 

1. Organization

Aquila Churchill Tax-Free Fund of Kentucky (the “Fund”) is one of six series of Aquila Municipal Trust, a Massachusetts business trust registered under the Investment Company Act of 1940 (the “1940 Act“) as a non-diversified, open-end management investment company. The Fund, which commenced operations on October 12, 2013, is the successor to Churchill Tax-Free Fund of Kentucky. Churchill Tax-Free Fund of Kentucky transferred all of its assets and liabilities in exchange for shares of the Fund on October 11, 2013 pursuant to an agreement and plan of reorganization (the “reorganization”). The reorganization was approved by shareholders of Churchill Tax-Free Fund of Kentucky on September 17, 2013. The reorganization was accomplished by exchanging the assets and liabilities of the predecessor fund for shares of the Fund. Shareowners holding shares of Churchill Tax-Free Fund of Kentucky received corresponding shares of the Fund in a one-to-one exchange ratio in the reorganization. Accordingly, the reorganization, which was a tax-free exchange, had no effect on the Fund’s operations. The Fund is authorized to issue an unlimited number of shares. Class A Shares are sold at net asset value plus a sales charge of varying size (depending upon a variety of factors) paid at the time of purchase and bear a distribution fee. Class C Shares are sold at net asset value with no sales charge payable at the time of purchase but with a level charge for service and distribution fees for six years thereafter. Class C Shares automatically convert to Class A Shares after six years. Class F and Class Y Shares are sold only through authorized financial institutions acting for investors in a fiduciary, advisory, agency, custodial or similar capacity and are not offered directly to retail customers. Class F and Class Y Shares are sold at net asset value with no sales charge, no redemption fee, no contingent deferred sales charge (“CDSC”) and no distribution fee. Class I Shares are offered and sold only through financial intermediaries and are not offered directly to retail customers. Class I Shares are sold at net asset value with no sales charge and no redemption fee or CDSC, although a financial intermediary may charge a fee for effecting a purchase or other transaction on behalf of its customers. Class I Shares carry a distribution and a service fee. All classes of shares represent interests in the same portfolio of investments and are identical as to rights and privileges but differ with respect to the effect of sales charges, the distribution and/or service fees borne by each class, expenses specific to each class, voting rights on matters affecting a single class and the exchange privileges of each class.

2. Significant Accounting Policies

The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies.

a)Portfolio valuation: Municipal securities are valued each business day based upon information provided by a nationally prominent independent pricing service and periodically verified through other pricing services. In the case of securities for which market quotations are readily available, securities are valued by the pricing service at the mean of bid and ask quotations. If a market quotation or a valuation from the pricing service is not readily available, the security is valued using other fair value methods. Rule 2a-5 under the 1940 Act provides that in the event that market quotations are not readily available, such securities must be valued at their fair value as determined in

 

 

 

24  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

NOTES TO FINANCIAL STATEMENTS (continued)

MARCH 31, 2023

 

good faith by each Fund’s Board of Trustees. Rule 2a-5 further provides that the Board may choose to designate a “valuation designee” to perform the fair value determination. The Aquila Municipal Trust Board has designated Aquila Investment Management LLC as the valuation designee (the “Valuation Designee”) to determine the fair value of Fund securities in good faith. Aquila Investment Management LLC as Valuation Designee, selects an appropriate methodology or methodologies for determining and calculating the fair value of Fund investments and applies such methodology or methodologies in a consistent manner, including specifying the key inputs and assumptions specific to each asset class or portfolio holding.

b)Fair value measurements: The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access.

Level 2 – Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.

Level 3 – Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Fund’s own assumptions about the assumptions a market participant would use in valuing the asset or liability, based on the best information available.

The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.

The following is a summary of the valuation inputs, representing 100% of the Fund’s investments, used to value the Fund’s net assets as of March 31, 2023:

 

  Valuation Inputs*   Investments
in Securities
  Level 1 – Quoted Prices — Short-Term Investment   $ 2,124,680
  Level 2 – Other Significant Observable Inputs – Municipal Bonds*     164,415,898
  Level 3 – Significant Unobservable Inputs    
  Total   $ 166,540,578
  * See schedule of investments for a detailed listing of securities.      

 

c)Subsequent events: In preparing these financial statements, the Fund has evaluated events and transactions for potential recognition or disclosure through the date these financial statements were issued.

 

 

25  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

NOTES TO FINANCIAL STATEMENTS (continued)

MARCH 31, 2023

 

d)Securities transactions and related investment income: Securities transactions are recorded on the trade date. Realized gains and losses from securities transactions are reported on the identified cost basis. Interest income is recorded daily on the accrual basis and is adjusted for amortization of premium and accretion of original issue and market discount.
e)Federal income taxes: It is the policy of the Fund to continue to qualify as a regulated investment company by complying with the provisions of the Internal Revenue Code applicable to certain investment companies. The Fund intends to make distributions of income and securities profits sufficient to relieve it from all, or substantially all, Federal income and excise taxes.

Management has reviewed the tax positions for each of the open tax years (2020 – 2022) or expected to be taken in the Fund’s 2023 tax returns and has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements.

f)Multiple Class Allocations: All income, expenses (other than class-specific expenses), and realized and unrealized gains or losses are allocated daily to each class of shares based on the relative net assets of each class. Class-specific expenses, which include distribution and service fees and any other items that are specifically attributed to a particular class, are also charged directly to such class on a daily basis.
g)Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
h)Reclassification of capital accounts: Accounting principles generally accepted in the United States of America require that certain components of net assets relating to permanent differences be reclassified between financial and tax reporting. These reclassifications had no effect on net assets or net asset value per share. For the year ended March 31, 2023, there were no items identified that have been reclassified among components of net assets.
i)The Fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification Topic 946 “Financial Services-Investment Companies”.

3. Fees and Related Party Transactions

a)Management Arrangements:

Aquila Investment Management LLC (the “Manager”), a wholly-owned subsidiary of Aquila Management Corporation, the Fund’s founder and sponsor, serves as the Manager for the Fund under an Advisory and Administration Agreement with the Fund. Under the Advisory and Administration Agreement, the Manager provides all investment management and administrative services to the Fund. The Manager’s services include providing the office of the Fund and all related services as well as managing relationships

 

 

26  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

NOTES TO FINANCIAL STATEMENTS (continued)

MARCH 31, 2023

 

with all the various support organizations to the Fund such as the transfer and shareholder servicing agent, custodian, legal counsel, auditors and distributor. For its services, the Manager is entitled to receive a fee which is payable monthly and computed as of the close of business each day at the annual rate of 0.40% on the Fund’s net assets.

Under a Compliance Agreement with the Manager, the Manager is compensated by the Fund for compliance related services provided to enable the Fund to comply with Rule 38a-1 of the Investment Company Act of 1940, as amended (the “1940 Act”).

Specific details as to the nature and extent of the services provided by the Manager are more fully defined in the Fund’s Prospectus and Statement of Additional Information.

b)Distribution and Service Fees:

The Fund has adopted a Distribution Plan (the “Plan”) pursuant to Rule 12b-1 (the “Rule”) under the 1940 Act. Under one part of the Plan, with respect to Class A Shares, the Fund is authorized to make distribution fee payments to broker-dealers or others (“Qualified Recipients”) selected by Aquila Distributors LLC (the “Distributor”) including, but not limited to, any principal underwriter of the Fund, with which the Distributor has entered into written agreements contemplated by the Rule and which have rendered assistance in the distribution and/or retention of the Fund’s shares or servicing of shareholder accounts. The Fund makes payment of this distribution fee at the annual rate of 0.15% of the Fund’s average net assets represented by Class A Shares. For the year ended March 31, 2023, distribution fees on Class A Shares amounted to $173,066 of which the Distributor retained $9,635.

Under another part of the Plan, the Fund is authorized to make payments with respect to Class C Shares to Qualified Recipients which have rendered assistance in the distribution and/or retention of the Fund’s Class C shares or servicing of shareholder accounts. These payments are made at the annual rate of 0.75% of the Fund’s average net assets represented by Class C Shares and for the year ended March 31, 2023, amounted to $21,979. In addition, under a Shareholder Services Plan, the Fund is authorized to make service fee payments with respect to Class C Shares to Qualified Recipients for providing personal services and/or maintenance of shareholder accounts. These payments are made at the annual rate of 0.25% of the Fund’s average net assets represented by Class C Shares and for the year ended March 31, 2023, amounted to $7,326. For the year ended March 31, 2023, the total of these payments with respect to Class C Shares amounted to $29,305 of which the Distributor retained $8,236.

Under another part of the Plan, the Fund is authorized to make payments with respect to Class I Shares to Qualified Recipients. Class I payments, under the Plan, may not exceed for any fiscal year of the Fund a rate (currently 0.10%), set from time to time by the Board of Trustees, of not more than 0.25% of the average annual net assets represented by the Class I Shares. In addition, Class I has a Shareholder Services Plan under which it may pay service fees (currently 0.25%) of not more than 0.25% of the average annual net assets represented by Class I Shares. That is, the total payments under both plans will not exceed 0.50% of such net assets. For the year ended March 31, 2023, these payments were made at the average annual rate of 0.35% of such net assets and amounted to $21,522 of which $6,149 related to the Plan and $15,373 related to the Shareholder Services Plan.

 

 

27  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

NOTES TO FINANCIAL STATEMENTS (continued)

MARCH 31, 2023

 

Specific details about the Plans are more fully defined in the Fund’s Prospectus and Statement of Additional Information.

Under a Distribution Agreement, the Distributor serves as the exclusive distributor of the Fund’s shares. Through agreements between the Distributor and various brokerage and advisory firms (“financial intermediaries”), the Fund’s shares are sold primarily through the facilities of these financial intermediaries having offices within Kentucky, with the bulk of any sales commissions inuring to such financial intermediaries. For the year ended March 31, 2023, total commissions on sales of Class A Shares amounted to $14,634 of which the Distributor received $3,393.

c)Transfer and shareholder servicing fees:

The Fund occasionally compensates financial intermediaries in connection with the sub-transfer agency related services provided by such entities in connection with their respective Fund shareholders so long as the fees are deemed by the Board of Trustees to be reasonable in relation to (i) the value of the services and the benefits received by the Fund and certain shareholders; and (ii) the payments that the Fund would make to another entity to perform similar ongoing services to existing shareholders.

4. Purchases and Sales of Securities

During the year ended March 31, 2023, purchases of securities and proceeds from the sales of securities aggregated $15,800,434 and $21,617,656, respectively.

At March 31, 2023, the aggregate tax cost for all securities was $172,094,621. At March 31, 2023, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost amounted to $932,053 and aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value amounted to $6,486,096 for a net unrealized depreciation of $5,554,043.

5. Portfolio Orientation

Since the Fund invests principally and may invest entirely in double tax-free municipal obligations of issuers within Kentucky, it is subject to possible risks associated with economic, political, or legal developments or industrial or regional matters specifically affecting Kentucky and whatever effects these may have upon Kentucky issuers’ ability to meet their obligations. At March 31, 2023, the Fund had all of its long-term portfolio holdings invested in municipal obligations of issuers within Kentucky.

 

 

28  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

NOTES TO FINANCIAL STATEMENTS (continued)

MARCH 31, 2023

 

6. Capital Share Transactions

Transactions in Capital Shares of the Fund were as follows:

 

    Year Ended
March 31, 2023
  Year Ended
March 31, 2022
    Shares   Amount   Shares   Amount
Class A Shares                    
Proceeds from shares sold    616,846   $  6,126,649    649,893   $  7,077,451
Reinvested dividends and distributions    243,218      2,412,332    229,741      2,480,053
Cost of shares redeemed    (1,670,464)      (16,564,312)   (1,193,302)      (12,856,736)
Net change    (810,400)      (8,025,331)    (313,668)      (3,299,232)
                     
Class C Shares                    
Proceeds from shares sold    1,154      11,555    25,109      270,493
Reinvested dividends and distributions    4,055      40,232    4,988      53,912
Cost of shares redeemed    (152,941)      (1,518,081)    (147,776)      (1,602,993)
Net change    (147,732)      (1,466,294)    (117,679)      (1,278,588)
                     
Class F Shares                    
Proceeds from shares sold    25,603      253,677      
Reinvested dividends and distributions    32      320      
Cost of shares redeemed    (2)      (15)      
Net change    25,633      253,982      
                     
Class I Shares                    
Proceeds from shares sold   1     5      
Reinvested dividends and distributions    13,431      133,168    11,967      129,139
Cost of shares redeemed    (13,779)      (136,619)    (12,282)      (132,542)
Net change    (347)      (3,446)    (315)      (3,403)
                     
Class Y Shares                    
Proceeds from shares sold    1,920,139      18,978,161    1,464,106      15,861,137
Reinvested dividends and distributions    65,232      647,413    50,592      545,751
Cost of shares redeemed    (1,830,572)      (18,026,700)    (764,925)      (8,221,511)
Net change    154,799      1,598,874    749,773      8,185,377
Total transactions in Fund shares    (778,047)   $  (7,642,215)    318,111   $  3,604,154

 

 

29  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

NOTES TO FINANCIAL STATEMENTS (continued)

MARCH 31, 2023

 

7. Trustees’ Fees and Expenses

At March 31, 2023, there were 9 Trustees, one of whom is affiliated with the Manager and is not paid any fees. The total amount of Trustees’ service fees (for carrying out their responsibilities) and attendance fees paid during the year ended March 31, 2023 was $55,660. Attendance fees are paid to those in attendance at regularly scheduled quarterly Board Meetings and meetings of the independent Trustees held prior to each quarterly Board Meeting, as well as additional meetings (such as Audit, Nominating, Shareholder and special meetings). Trustees are reimbursed for their expenses such as travel, accommodations and meals incurred in connection with attendance at Board Meetings and at the Annual Meeting of Shareholders. For the year ended March 31, 2023, due to the COVID-19 pandemic, such meeting-related expenses were reduced and amounted to $2,068.

8. Securities Traded on a When-Issued Basis

The Fund may purchase or sell securities on a when-issued basis. When-issued transactions arise when securities are purchased or sold by the Fund with payment and delivery taking place in the future in order to secure what is considered to be an advantageous price and yield to the Fund at the time of entering into the transaction. These transactions are subject to market fluctuations and their current value is determined in the same manner as for other securities.

9. Income Tax Information and Distributions

The Fund declares dividends daily from net investment income and makes payments monthly. Net realized capital gains, if any, are distributed annually and are taxable. Dividends and capital gains distributions are paid in additional shares at the net asset value per share or in cash, at the shareholder’s option.

The Fund intends to maintain, to the maximum extent possible, the tax-exempt status of interest payments received from portfolio municipal securities in order to allow dividends paid to shareholders from net investment income to be exempt from regular Federal and Commonwealth of Kentucky income taxes. Due to differences between financial statement reporting and Federal income tax reporting requirements, distributions made by the Fund may not be the same as the Fund’s net investment income, and/or net realized securities gains. Further, a small portion of the dividends may, under some circumstances, be subject to taxes at ordinary income and/or capital gain rates. For certain shareholders, some dividend income may, under some circumstances, be subject to the Alternative Minimum Tax. As a result of the passage of the Regulated Investment Company Modernization Act of 2010 (the “Act”), losses incurred in this fiscal year and beyond retain their character as short-term or long-term, have no expiration date and are utilized before capital losses incurred prior to the enactment of the Act. At March 31, 2023, the Fund had capital loss carry forwards of $694,311 where the $675,352 retains its character of short-term and $18,959 retains is character of long-term; both have no expiration. This carryover is available to offset future net realized gains on securities transactions to the extent provided for in the Internal Revenue Code. As of March 31, 2023, the Fund had post-October losses of $6,104, which is deferred until fiscal 2023 for tax purposes.

 

 

30  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

NOTES TO FINANCIAL STATEMENTS (continued)

MARCH 31, 2023

 

The tax character of distributions was as follows:

 

      Year Ended
March 31, 2023
  Year Ended
March 31, 2022
  Net tax-exempt income   $ 3,869,954   $ 3,777,511
  Ordinary Income     70,993     329
  Capital gains         171,186
      $ 3,940,947   $ 3,949,026

 

As of March 31, 2023, the components of distributable earnings on a tax basis were:

 

  Unrealized depreciation   $ (5,554,043)
  Accumulated net realized loss on investments     (694,311)
  Post October losses     (6,104)
  Undistributed tax-exempt income     67,912
  Other temporary differences     (56,721)
      $ (6,243,267)

 

The difference between book basis and tax basis undistributed income is due to the timing difference, and other temporary differences, in recognizing dividends paid and the tax treatment of market discount amortization and the deduction of distributions payable.

10. Credit Facility

Since August 30, 2017, Bank of New York Mellon and the Aquila Group of Funds (comprised of nine funds) have been parties to a $40 million credit agreement, which currently terminates on August 23, 2023 (per the August 24, 2022 amendment). In accordance with the Aquila Group of Funds Guidelines for Allocation of Committed Line of Credit, each fund is responsible for payment of its proportionate share of

a)a 0.17% per annum commitment fee; and,
b)interest on amounts borrowed for temporary or emergency purposes by the fund (at the applicable per annum rate selected by the Aquila Group of Funds at the time of the borrowing of either (i) the adjusted daily simple Secured Overnight Financing Rate (“SOFR”) plus 1% or (ii) the sum of the higher of (a) the Prime Rate, (b) the Federal Funds Effective Rate, or (c) the adjusted daily simple Secured Overnight Financing Rate plus 1%).

There were no borrowings under the credit agreement during the year ended March 31, 2023.

11. Risks

Mutual fund investing involves risk and loss of principal is possible. The market prices of the Fund’s securities may rise or decline in value due to general market conditions, such as real or perceived adverse economic, political or regulatory conditions, recessions, inflation, changes in interest rates, lack of liquidity in the bond markets, the spread of

 

 

31  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

NOTES TO FINANCIAL STATEMENTS (continued)

MARCH 31, 2023

 

infectious illness or other public health issues, armed conflict including Russia’s military invasion of Ukraine, sanctions against Russia, other nations or individuals or companies and possible countermeasures, market disruptions caused by tariffs, trade disputes or other factors, or adverse investor sentiment. When market prices fall, the value of your investment may go down. In the past several years, financial markets have experienced increased volatility, depressed valuations, decreased liquidity and heightened uncertainty. These conditions may continue, recur, worsen or spread. Recently, inflation and interest rates have increased and may rise further. These circumstances could adversely affect the value and liquidity of the Fund’s investments, impair the Fund’s ability to satisfy redemption requests, and negatively impact the Fund’s performance. Raising the ceiling on U.S. government debt has become increasingly politicized. Any failure to increase the ceiling on U.S. government debt could lead to a default on U.S. government obligations, with unpredictable consequences for economies and markets.

The global pandemic of the novel coronavirus respiratory disease designated COVID-19 has resulted in major disruption to economies and markets around the world, including the United States. Global financial markets have experienced extreme volatility and severe losses, and trading in many instruments has been disrupted. Liquidity for many instruments has been greatly reduced for periods of time. Some sectors of the economy and individual issuers have experienced particularly large losses. These circumstances may continue to affect adversely the value and liquidity of the Fund’s investments. Following Russia’s invasion of Ukraine, Russian securities have lost all, or nearly all, their market value. Other securities or markets could be similarly affected by past or future geopolitical or other events or conditions.

Governments and central banks, including the U.S. Federal Reserve, have taken extraordinary and unprecedented actions to support local and global economies and the financial markets. These actions have resulted in significant expansion of public debt, including in the U.S. The consequences of high public debt, including its future impact on the economy and securities markets, may not be known for some time.

The U.S. and other countries are periodically involved in disputes over trade and other matters, which may result in tariffs, investment restrictions and adverse impacts on affected companies and securities. For example, the U.S. has imposed tariffs and other trade barriers on Chinese exports, has restricted sales of certain categories of goods to China, and has established barriers to investments in China. Trade disputes may adversely affect the economies of the U.S. and its trading partners, as well as companies directly or indirectly affected and financial markets generally. If the political climate between the U.S. and China does not improve or continues to deteriorate, if China were to attempt unification of Taiwan by force, or if other geopolitical conflicts develop or get worse, economies, markets and individual securities may be severely affected both regionally and globally, and the value of the Fund’s assets may go down.

 

32  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

NOTES TO FINANCIAL STATEMENTS (continued)

MARCH 31, 2023

 

The value of your investment will generally go down when interest rates rise. A rise in interest rates tends to have a greater impact on the prices of longer term or longer duration securities. In recent years, interest rates and credit spreads in the U.S. have been at historic lows. The U.S. Federal Reserve has raised certain interest rates, and interest rates may continue to go up. A general rise in interest rates may cause investors to move out of fixed income securities on a large scale and could also result in increased redemptions from the Fund.

Investments in the Fund are subject to possible loss due to the financial failure of the issuers of underlying securities and their inability to meet their debt obligations.

The value of municipal securities can be adversely affected by changes in the financial condition of one or more individual municipal issuers or insurers of municipal issuers, regulatory developments, legislative actions, and by uncertainties and public perceptions concerning these and other factors. The Fund may be affected significantly by adverse economic, political or other events affecting state and other municipal issuers in which it invests, and may be more volatile than a more geographically diverse fund. The municipal bond market can be susceptible to unusual volatility, particularly for lower-rated and unrated securities. Liquidity can be reduced unpredictably in response to overall economic conditions or credit tightening. Municipal issuers may be adversely affected by rising health care costs, increasing unfunded pension liabilities, and by the phasing out of federal programs providing financial support. Unfavorable conditions and developments relating to projects financed with municipal securities can result in lower revenues to issuers of municipal securities, potentially resulting in defaults. Municipal securities may be more susceptible to downgrades or defaults during a recession or similar periods of economic stress. Financial difficulties of municipal issuers may continue or get worse, particularly in the event of political, economic or market turmoil or a recession.

A portion of income may be subject to local, state, Federal and/or alternative minimum tax. Capital gains, if any, are subject to capital gains tax.

These risks may result in share price volatility.

 

 

33  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

FINANCIAL HIGHLIGHTS

 

For a share outstanding throughout each period

 

    Class A
    Year Ended March 31,
    2023   2022   2021   2020   2019
Net asset value, beginning of period   $10.25   $10.93   $10.79   $10.64   $10.48
Income from investment operations:                    
Net investment income(1)   0.22   0.22   0.23   0.24   0.25
Net gain (loss) on securities (both realized and unrealized)   (0.22)   (0.67)   0.14   0.15   0.18
Total from investment operations     (0.45)   0.37   0.39   0.43
Less distributions (note 9):                    
Dividends from net investment income   (0.23)   (0.22)   (0.23)   (0.24)   (0.25)
Distributions from capital gains     (0.01)       (0.02)
Total distributions   (0.23)   (0.23)   (0.23)   (0.24)   (0.27)
Net asset value, end of period   $10.02   $10.25   $10.93   $10.79   $10.64
Total return (not reflecting sales charge)   0.05%   (4.25)%   3.48%   3.72%   4.10%
Ratios/supplemental data                    
Net assets, end of period (in millions)   $113   $124   $135   $142   $144
Ratio of expenses to average net assets   0.76%   0.75%   0.77%   0.80%   0.79%
Ratio of net investment income to average net assets   2.26%   1.99%   2.14%   2.26%   2.36%
Portfolio turnover rate   10%   7%   7%        6%        6%

 

 

                               

 

(1)   Per share amounts have been calculated using the daily average shares method.

 

 

 

See accompanying notes to financial statements.

 

34  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

FINANCIAL HIGHLIGHTS (continued)

 

For a share outstanding throughout each period

 

    Class C
    Year Ended March 31,
    2023   2022   2021   2020   2019
Net asset value, beginning of period   $10.25   $10.93   $10.78   $10.64   $10.47
Income from investment operations:                    
Net investment income(1)   0.14   0.12   0.14   0.15   0.16
Net gain (loss) on securities (both realized and unrealized)   (0.22)   (0.67)   0.15   0.14   0.19
Total from investment operations   (0.08)   (0.55)   0.29   0.29   0.35
Less distributions (note 9):                    
Dividends from net investment income   (0.15)   (0.12)   (0.14)   (0.15)   (0.16)
Distributions from capital gains     (0.01)       (0.02)
Total distributions   (0.15)   (0.13)   (0.14)   (0.15)   (0.18)
Net asset value, end of period   $10.02   $10.25   $10.93   $10.78   $10.64
Total return (not reflecting CDSC)   (0.80)%   (5.06%)   2.70%   2.75%   3.32%
Ratios/supplemental data                    
Net assets, end of period (in millions)   $2   $4   $5   $6   $7
Ratio of expenses to average net assets   1.61%   1.60%   1.62%   1.65%   1.64%
Ratio of net investment income to average net assets   1.41%   1.13%   1.29%   1.41%   1.50%
Portfolio turnover rate   10%   7%   7%        6%        6%

 

 

                               

 

(1)   Per share amounts have been calculated using the daily average shares method.

 

 

 

See accompanying notes to financial statements.

 

35  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

FINANCIAL HIGHLIGHTS (continued)

 

For a share outstanding throughout each period

 

    Class F
    For the Period
December 21, 2022*
through March 31, 2023
Net asset value, beginning of period   $9.91
Income (loss) from investment operations:    
Net investment income(1)   0.06
Net gain (loss) on securities (both realized and unrealized)   0.13
Total from investment operations   0.19
Less distributions (note 9):    
Dividends from net investment income   (0.09)
Distributions from capital gains  
Total distributions   (0.09)
Net asset value, end of period   $10.01
Total return   1.88%(2)
Ratios/supplemental data    
Net assets, end of period (in millions)   $0.3
Ratio of expenses to average net assets   0.56%(3)
Ratio of net investment income to average net assets   2.30%(3)
Portfolio turnover rate   10%

 

 

                               

 

* Commencement of operations.

(1) Per share amounts have been calculated using the daily average shares method.

(2) Not annualized.

(3) Annualized.

 

 

 

See accompanying notes to financial statements.

 

36  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

FINANCIAL HIGHLIGHTS (continued)

 

For a share outstanding throughout each period

 

    Class I
    Year Ended March 31,
    2023   2022   2021   2020   2019
Net asset value, beginning of period   $10.25   $10.92   $10.78   $10.64   $10.47
Income from investment operations:                    
Net investment income(1)   0.21   0.20   0.22   0.23   0.23
Net gain on securities (both realized and unrealized)   (0.23)   (0.66)   0.14   0.14   0.19
Total from investment operations   (0.02)   (0.46)   0.36   0.37   0.42
Less distributions (note 9):                    
Dividends from net investment income   (0.22)   (0.20)   (0.22)   (0.23)   (0.23)
Distributions from capital gains     (0.01)       (0.02)
Total distributions   (0.22)   (0.21)   (0.22)   (0.23)   (0.25)
Net asset value, end of period   $10.01   $10.25   $10.92   $10.78   $10.64
Total return   (0.20)%   (4.31)%   3.33%   3.48%   4.04%
Ratios/supplemental data                    
Net assets, end of period (in millions)   $6   $6   $7   $7   $7
Ratio of expenses to average net assets   0.91%   0.91%   0.92%   0.93%   0.94%
Ratio of net investment income to average net assets   2.11%   1.84%   1.99%   2.12%   2.20%
Portfolio turnover rate   10%   7%   7%        6%        6%

 

 

                               

 

(1)   Per share amounts have been calculated using the daily average shares method.

 

 

 

See accompanying notes to financial statements.

 

37  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY

FINANCIAL HIGHLIGHTS (continued)

 

For a share outstanding throughout each period

 

    Class Y
    Year Ended March 31,
    2023   2022   2021   2020   2019
Net asset value, beginning of period   $10.26   $10.93   $10.79   $10.65   $10.48
Income from investment operations:                    
Net investment income(1)   0.24   0.23   0.25   0.26   0.26
Net gain (loss) on securities (both realized and unrealized)   (0.24)   (0.66)   0.14   0.14   0.19
Total from investment operations     (0.43)   0.39   0.40   0.45
Less distributions (note 9):                    
Dividends from net investment income   (0.24)   (0.23)   (0.25)   (0.26)   (0.26)
Distributions from capital gains     (0.01)       (0.02)
Total distributions   (0.24)   (0.24)   (0.25)   (0.26)   (0.28)
Net asset value, end of period   $10.02   $10.26   $10.93   $10.79   $10.65
Total return   0.10%   (4.01)%   3.64%   3.78%   4.35%
Ratios/supplemental data                    
Net assets, end of period (in millions)   $46   $45   $40   $27   $30
Ratio of expenses to average net assets   0.61%   0.60%   0.62%   0.65%   0.64%
Ratio of net investment income to average net assets   2.41%   2.14%   2.28%   2.41%   2.50%
Portfolio turnover rate   10%   7%   7%        6%        6%

 

 

                               

 

(1)   Per share amounts have been calculated using the daily average shares method.

 

 

 

See accompanying notes to financial statements.

 

38  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

Additional Information:

Statement Regarding Liquidity Risk Management Program

Rule 22e-4 under the Investment Company Act of 1940, as amended, requires open-end management investment companies to adopt and implement written liquidity risk management programs that are reasonably designed to assess and manage liquidity risk. Liquidity risk is defined in the rule as the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund. In accordance with Rule 22e-4, Aquila Municipal Trust (“AMT”) has adopted a Liquidity Risk Management (“LRM”) program (the “program”). AMT’s Board of Trustees (the “Board”) has designated an LRM Committee consisting of employees of Aquila Investment Management LLC as the administrator of the program (the “Committee”).

The Board met on June 17, 2022 to review the program. At the meeting, the Committee provided the Board with a report that addressed the operation of the program and assessed its adequacy and effectiveness of implementation, and any material changes to the program (the “Report”). The Report covered the period from May 1, 2021 through April 30, 2022 (the “Reporting Period”).

During the Reporting Period, the Committee reviewed whether each Fund’s strategy is appropriate for an open-end fund structure taking into account less liquid and illiquid assets.

The Committee reviewed each Fund’s short-term and long-term cash flow projections during both normal and reasonably foreseeable stressed conditions. In classifying and reviewing each Fund’s investments, the Committee considered whether trading varying portions of a position in a particular portfolio investment or asset class in sizes the Fund would reasonably anticipate trading, would be reasonably expected to significantly affect liquidity. The Committee considered the following information when determining the sizes in which each Fund would reasonably anticipate trading: historical net redemption activity, the Fund’s concentration in an issuer, shareholder concentration, Fund performance, Fund size, and distribution channels.

The Committee considered each Fund’s holdings of cash and cash equivalents, as well as borrowing arrangements. The Committee considered the terms of the credit facility applicable to the Funds, the financial health of the institution providing the facility and the fact that the credit facility is shared among multiple Funds. The Committee also considered other types of borrowing available to the Funds, such as the ability to use interfund lending arrangements.

The Committee also performed an analysis to determine whether a Fund is required to maintain a Highly Liquid Investment Minimum (“HLIM”), and determined that the requirement to maintain an HLIM was inapplicable to the Funds because each Fund primarily holds highly liquid investments.

There were no material changes to the program during the Reporting Period. The Report provided to the Board stated that the Committee concluded that the program is reasonably designed and operated effectively throughout the Review Period.

 

39  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

Additional Information (unaudited)

 

Trustees(1)
and Officers
               
                 
Name and
Year of Birth
(2)
  Positions
Held with
Trust and
Length of
Service(3)
  Principal Occupation(s)
During Past 5 Years
  Number of
Portfolios
in Fund
Complex
Overseen
by Trustee
  Other
Directorships
Held by Trustee
During Past
5 Years
                 
Interested
Trustee(4)
               
                 
Diana P. Herrmann
New York, NY
(1958)
  Vice Chair of Aquila Municipal Trust since 2014, Trustee since 1994 and President since 1998   Chair (since 2016 and previously Vice Chair since 2004) and Chief Executive Officer (since 2004) of Aquila Management Corporation, Founder and Sponsor of the Aquila Group of Funds(5) and parent of Aquila Investment Management LLC, Manager, President since 1997, Chief Operating Officer, 1997-2008, a Director since 1984, Secretary, 1986-2016, and previously its Executive Vice President, Senior Vice President or Vice President, 1986-1997; Chief Executive Officer (since 2004) and Chair (since 2016 and previously Vice Chair since 2004), President and Manager  since 2003, and Chief Operating Officer (2003-2008), of the Manager; Chair, Vice Chair, President, Executive Vice President and/or Senior Vice President of funds in the Aquila Group of Funds since 1986; Manager of the Distributor since 1997; Governor, Investment Company Institute (the U.S. mutual fund industry trade organization dedicated to protecting shareholder interests and educating the public about investing) for various periods since 2004, and Chair of its Small Funds Committee, 2004-2009; active in charitable and volunteer organizations.   9  

Director of ICI Mutual Insurance Company, a Risk Retention Group, for various periods since 2006; formerly Vice Chair and Trustee of Pacific Capital Funds of Cash Assets Trust (three money-market funds in the Aquila Group of Funds) 2004-2012

 

Vice Chair Board of Trustees (2003-2020), President (1998-2020) and Trustee (1994-2020) of The Cascades Trust (Predecessor Fund of Aquila Tax-Free Trust of Oregon)

                 
Non-Interested
Trustees
               
                 
Patricia L. Moss
Bend, OR
(1953)
  Chair of the Board of Aquila Municipal Trust effective January 1, 2023; Trustee of Aquila Municipal Trust since 2020   Vice Chairman, Cascade Bancorp and Bank of the Cascades 2012-2017, President and Chief Executive Officer 1997-2012; member, Oregon Investment Council 2018-2021; active in community and educational organizations; Trustee of various funds in the Aquila Group of Funds 2002-2005 and since 2015   8  

First Interstate BancSystem, Inc.; MDU Resources Group, Inc.

 

Trustee of The Cascades Trust (Predecessor Fund of Aquila Tax-Free Trust of Oregon) 2015-2020, 2002-2005; Trustee Emerita 2005-2015

 

 

40  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 
Name and
Year of Birth
(2)
  Positions
Held with
Trust and
Length of
Service(3)
  Principal Occupation(s)
During Past 5 Years
  Number of
Portfolios
in Fund
Complex
Overseen
by Trustee
  Other
Directorships
Held by Trustee
During Past
5 Years
                 
Non-Interested
Trustees (cont’d)
               
                 
Thomas A. Christopher(6)
Danville, KY
(1947)
  Trustee of Aquila Municipal Trust since 2009; Chair of the Board of Aquila Municipal Trust 2017 – December 31, 2022   Principal, Robinson, Hughes & Christopher, C.P.A.s, P.S.C., July 2017-August 2022, previously Senior Partner, since 1977; Chairman of the Board, A Good Place for Fun, Inc., a sports facility, since 1987, President, 1987-2012; Director, Global Outreach International, 2011-2018; member of the Kentucky Primary Care Technical Advisory Committee, 2017-2019; Director, Sunrise Children’s Services Inc., 2010-2013; currently or formerly active with various professional and community organizations; Trustee of various funds in the Aquila Group of Funds since 1985.   6   None
                 
Ernest Calderón
Phoenix, AZ
(1957)
  Trustee of Aquila Municipal Trust since 2004   Attorney (currently, Partner, Calderón Law Offices, PLC); Regent emeritus and President emeritus Arizona Board of Regents; Adjunct Professor, Northern Arizona University; Doctor of Education in Organizational Change and Educational Leadership, University of Southern California; served seven  Arizona governors by appointment; Past President, Grand Canyon Council of Boy Scouts of America; Past President, State Bar of Arizona, 2003-2004; member, American Law Institute; Trustee of various funds in the Aquila Group of Funds since 2004.   6   None
                 
Gary C. Cornia
St. George, UT
(1948)
  Trustee of Aquila Municipal Trust since 2009   Emeritus Dean and Professor, Marriott School of Management, Brigham Young University 2014-present; Professor, Marriott School of Management, Brigham Young University, 1980-2014; Chair, Utah State Securities Commission, 2019-2021, Commissioner, 2013–2021; Dean, Marriott School of Management, 2008-2013; Past President, National Tax Association; Fellow, Lincoln Institute of Land Policy, 2002-present; Trustee of various funds in the Aquila Group of Funds since 1993.   8  

International Center for Land Policies and Training, Taipei, Taiwan, Director and Chair of Executive Committee

 

Trustee of The Cascades Trust (Predecessor Fund of Aquila Tax-Free Trust of Oregon) 2002-2020

 

 

41  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 
Name and
Year of Birth
(2)
  Positions
Held with
Trust and
Length of
Service(3)
  Principal Occupation(s)
During Past 5 Years
  Number of
Portfolios
in Fund
Complex
Overseen
by Trustee
  Other
Directorships
Held by Trustee
During Past
5 Years
                 
Non-Interested
Trustees (cont’d)
               
                 
Grady Gammage, Jr.
Phoenix, AZ
(1951)
  Trustee of Aquila Municipal Trust since 2001   Founding partner, Gammage & Burnham, PLC, a law firm, Phoenix, Arizona, since 1983; director, Central Arizona Water Conservation District, 1992-2004; Senior Fellow, Morrison Institute for Public Policy and Kyl Institute for Water Policy; Adjunct Professor, Sandra Day O’Connor College of Law; W. P. Carey School of Business; active with Urban Land Institute; Author, “The Future of the Suburban City” Island Press, 2016; Trustee of various funds in the Aquila Group of Funds since 2001.   8   None
                 
Glenn P. O’Flaherty
Granby, CO
(1958)
  Trustee of Aquila Municipal Trust since 2013   Chief Financial Officer and Chief Operating Officer of Lizard Investors, LLC, 2008; Co-Founder, Chief Financial Officer and Chief Compliance Officer of Three Peaks Capital Management, LLC, 2003-2005; Vice President – Investment Accounting, Global Trading and Trade Operations, Janus Capital Corporation, and Chief Financial Officer and Treasurer, Janus Funds, 1991-2002; Trustee of various funds in the Aquila Group of Funds since 2006.   9   Granby Ranch Metropolitan District (quasi-municipal corporation); formerly Trustee of Pacific Capital Funds of Cash Assets Trust (three money-market funds in the Aquila Group of Funds) 2009-2012
                 
Heather R. Overby
Prospect, KY
(1971)
  Aquila Municipal Trust: Trustee since September 2022   Vice President, Finance & Accounting/Chief Financial Officer, Kentucky Municipal Energy Agency (wholesale electricity sale – governmental), June 2018 – Present; Chairman, Kentucky School Facilities Construction Commission (state commission), December 2018 – Present; Interim Chief Financial Officer, Kentucky Municipal Energy Agency (wholesale electricity sale – governmental), February 2017 – May 2018; Chief Financial Officer, Kentucky Municipal Power Agency, (wholesale electricity sale – governmental), November 2009 – May 2018.   6   None

 

 

42  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 
Name and
Year of Birth
(2)
  Positions
Held with
Trust and
Length of
Service(3)
  Principal Occupation(s)
During Past 5 Years
  Number of
Portfolios
in Fund
Complex
Overseen
by Trustee
  Other
Directorships
Held by Trustee
During Past
5 Years
                 
Non-Interested
Trustees (cont’d)
               
                 
Laureen L. White
North Kingstown, RI
(1959)
  Trustee of Aquila Municipal Trust since 2013   President, Greater Providence Chamber of Commerce, since 2005, Executive Vice President 2004-2005 and Senior Vice President, 1989-2002; Executive Counselor to the Governor of Rhode Island for Policy and Communications, 2003-2004; Trustee of various funds in the Aquila Group of Funds since 2005.   6   None

 

(1)The Trust’s Statement of Additional Information includes additional information about the Trustees and is available, without charge, upon request by calling 800-437-1020 (toll-free) or by visiting www.aquilafunds.com or the EDGAR Database at the SEC’s internet site at www.sec.gov.
(2)The mailing address of each Trustee is c/o Aquila Municipal Trust, 120 West 45th Street, Suite 3600, New York, NY 10036.
(3)Each Trustee holds office until his or her successor is elected or his or her earlier retirement or removal.
(4)Ms. Herrmann is an “interested person” of the Trust, as that term is defined in the Investment Company Act of 1940, as amended (the “1940 Act”), as an officer of the Trust, as a director, officer and shareholder of the Manager’s corporate parent, as an officer and Manager of the Manager, and as a Manager of the Distributor.
(5)The “Aquila Group of Funds” includes: Aquila Tax-Free Trust of Arizona, Aquila Tax-Free Fund of Colorado, Hawaiian Tax-Free Trust, Aquila Churchill Tax-Free Fund of Kentucky, Aquila Tax-Free Trust of Oregon, Aquila Narragansett Tax-Free Income Fund (Rhode Island) and Aquila Tax-Free Fund For Utah, each of which is a tax-free municipal bond fund and are called the “Aquila Municipal Bond Funds”; Aquila Opportunity Growth Fund, which is an equity fund; and Aquila High Income Fund, which is a high-income corporate bond fund.
(6)Mr. Christopher retired as a Trustee effective March 31, 2023.

 

 

43  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 
Name and
Year of Birth(1)
  Positions
Held with
Trust and
Length of
Service(2)
  Principal Occupation(s)
During Past 5 Years
         
Officers(3)        
         
Stephen J. Caridi
New York, NY
(1961)
  Senior Vice President of Aquila Municipal Trust since 2013   Regional Sales Manager (since 2009) and registered representative (since 1986) of the Distributor; Vice President of the Distributor  1995-2009; Vice President, Hawaiian Tax-Free Trust since 1998; Senior Vice President, Aquila Municipal Trust (which includes Aquila Narragansett Tax-Free Income Fund) since 2013; Vice President, Aquila Funds Trust since 2013; Senior Vice President, Aquila Narragansett Tax-Free Income Fund 1998-2013, Vice President 1996-1997; Senior Vice President, Aquila Tax-Free Fund of Colorado 2004-2009; Vice President, Aquila Opportunity Growth Fund 2006-2013.
         
Paul G. O’Brien
New York, NY
(1959)
  Senior Vice President of Aquila Municipal Trust since 2010   President, Aquila Distributors LLC since 2019, Co-President 2010-2019, Managing Director, 2009-2010; Senior Vice President of all funds in the Aquila Group of Funds since 2010; held various positions to Senior Vice President and Chief Administrative Officer of Evergreen Investments Services, Inc., 1997-2008; Mergers and Acquisitions Coordinator for Wachovia Corporation, 1994-1997.
         
Robert C. Arnold
Peoria, AZ
(1973)
  Vice President of Aquila Municipal Trust since 2019   Vice President, Aquila Municipal Trust (which includes Aquila Tax-Free Trust of Arizona) since 2019; Regional Sales Manager, Aquila Distributors LLC (since 2019); Financial Advisor, Prudential Advisors, 2017 – 2019
         
Royden P. Durham
Louisville, KY
(1951)
  Vice President of Aquila Municipal Trust since 2013; Lead Portfolio Manager of Aquila Churchill Tax-Free Fund of Kentucky (since 2011); Portfolio Manager of Aquila Tax-Free Trust of Arizona (since 2017), Aquila Tax-Free Fund of Colorado (since 2023) and and Aquila Tax-Free Fund For Utah (since 2017)   Portfolio Manager of Aquila Churchill Tax-Free Fund of Kentucky (since 2011) and Aquila Tax-Free Fund of Colorado (since 2023); Portfolio Manager of Aquila Tax-Free Trust of Arizona and Aquila Tax-Free Fund For Utah (since 2011); Vice President, Aquila Municipal Trust (since 2013) and Aquila Churchill Tax-Free Fund of Kentucky 2011-2013; President, advEnergy solutions LLC, 2007-2011; Vice President and Trust Advisor, JP Morgan Chase, 2005-2006; Vice President and Trust Officer, Regions Morgan Keegan Trust, 2003-2005; Vice President Fixed Income and Equity Portfolios, The Sachs Company / Louisville Trust Company, 1986-2003.
         
Vasilios Gerasopoulos
Lakewood, CO
(1973)
  Assistant Vice President of Aquila Municipal Trust and Co-Portfolio Manager of Aquila Tax-Free Fund of Colorado since March 2023   Assistant Vice President of Aquila Municipal Trust and Co-Portfolio Manager of Aquila Tax-Free Fund of Colorado and Credit Analyst of Aquila Tax-Free Trust of Oregon since March 2023; Credit Analyst at Davidson Fixed Income Management, Inc., doing business as Kirkpatrick Pettis Capital Management, from 2015 to 2023; Senior Financial Analyst, Bond and Debt, for Jefferson County, Colorado from December 2012 to 2015.

 

 

44  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 
Name and
Year of Birth(1)
  Positions
Held with
Trust and
Length of
Service(2)
  Principal Occupation(s)
During Past 5 Years
         
Officers (cont’d)(3)        
         
Timothy Iltz
Happy Valley, OR
(1975)
  Vice President of Aquila Municipal Trust since March 2023; Portfolio Manager of Aquila Tax-Free Fund of Colorado (since December 2022) and Aquila Tax-Free Trust of Oregon (since 2018)   Vice President of Aquila Municipal Trust since March 2023, Portfolio Manager of Aquila Tax-Free Fund of Colorado since December 2022, and Aquila Tax-Free Trust of Oregon since 2018; Vice President and Municipal Bond Credit Analyst at Davidson Fixed Income Management, Inc., doing business as Kirkpatrick Pettis Capital Management, from 2011 to 2018.  Vice President and Portfolio Manager at Davidson Fixed Income Management, Inc., doing business as Kirkpatrick Pettis Capital Management, from 2018 to 2023.
         
Troy Miller
Louisville, KY
(1971)
  Vice President of Aquila Municipal Trust since March 2022   Vice President, Aquila Municipal Trust (which includes Aquila Churchill Tax-Free Fund of Kentucky) since March 2022; Regional Sales Manager of the Distributor since January 2022; Financial Consultant, Fidelity Investments (wealth management), May 2020 – February 2021; Vice President, Manager-Life Planning Strategies, June 2017 – October 2019, and Vice President, Manager-Retirement Products, April 2010 – June 2017, Baird Trust Company (formerly known as Hilliard Lyons Trust Company) (wealth management).
         
Christine L. Neimeth
Portland, OR
(1964)
  Vice President of Aquila Municipal Trust since 2020   Vice President of Aquila Funds Trust since 2013 and Aquila Municipal Trust (which includes Aquila Tax-Free Trust of Oregon) since 2020; formerly Vice President, Aquila Opportunity Growth Fund 1999 – 2013 and Aquila Tax-Free Trust of Oregon 1998 – 2020; Regional Sales Manager and/or registered representative of the Distributor since 1999.
         
Anthony A. Tanner
Phoenix, AZ
(1960)
  Vice President of Aquila Municipal Trust, Lead Portfolio Manager of Aquila Tax-Free Trust of Arizona, and Portfolio Manager of Aquila Churchill Tax-Free Fund of Kentucky (since 2018), Aquila Tax-Free Trust of Oregon (since 2023) and Aquila Tax-Free Fund For Utah since 2018   Vice President of Aquila Municipal Trust (since 2018); Portfolio Manager of Aquila Tax-Free Trust of Arizona, Aquila Churchill Tax-Free Fund of Kentucky and Aquila Tax-Free Fund For Utah (since 2018) and Aquila Tax-Free Trust of Oregon (since 2023); Senior Portfolio Manager at BNY Mellon Wealth Management from 2016 to 2018; a Senior Client Advisor at BMO Private Bank from 2014 to 2015; and Senior Fixed Income Manager at Wells Fargo Private Bank from 2010 to 2014.
           

 

 

45  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 
Name and
Year of Birth(1)
  Positions
Held with
Trust and
Length of
Service(2)
  Principal Occupation(s)
During Past 5 Years
         
Officers (cont’d)(3)        
         
James T. Thompson
Bountiful, Utah
(1955)
  Vice President of Aquila Municipal Trust and Lead Portfolio Manager of Aquila Tax-Free Fund For Utah since 2009; Portfolio Manager, Aquila Tax-Free Trust of Arizona and Aquila Churchill Tax-Free Fund of Kentucky since 2017 and Aquila Tax-Free Trust of Oregon (since 2023)   Portfolio Manager of Aquila Tax-Free Fund For Utah, Aquila Churchill Tax-Free Fund of Kentucky and Aquila Tax-Free Trust of Arizona (since 2009) and Aquila Tax-Free Trust of Oregon (since 2023); Vice President Aquila Municipal Trust (since 2013) and Aquila Tax-Free Fund For Utah (2009 – 2013); Senior Vice President, First Security Bank/Wells Fargo Brokerage Services LLC, Salt Lake City, Utah 1991-2009.
         
M. Kayleen Willis
South Jordan, UT
(1963)
  Vice President of Aquila Municipal Trust since 2013     Vice President, Aquila Municipal Trust (which includes Aquila Tax-Free Fund For Utah) since 2013; Vice President, Aquila Tax-Free Fund For Utah 2003-2013, Assistant Vice President, 2002-2003; Vice President, Aquila Opportunity Growth Fund, 2004-2013 and Aquila Funds Trust since 2013.
         
Eric D. Okerlund
Highland, UT
(1961)
  Assistant Vice President of Aquila Municipal Trust since March 2021   Assistant Vice President, Aquila Municipal Trust (which includes Aquila Tax-Free Fund For Utah) since March 2021; Credit Analyst (for Aquila Tax-Free Fund For Utah and Aquila Tax-Free Fund of Colorado), Aquila Investment Management LLC, since January 2021; Budget Officer, City of West Jordan, Utah, 2000-2020; Senior Accountant, Provo City Corporation, Provo, Utah, 1989-2000; Auditor, Defense Contract Audit Agency, Anaheim, California, 1989; Revenue Agent, Internal Revenue Service, Los Angeles, California, 1987-1989.
         
Randall S. Fillmore
New York, NY
(1960)
  Chief Compliance Officer of Aquila Municipal Trust since 2012   Chief Compliance Officer of all funds in the Aquila Group of Funds, the Manager and the Distributor since 2012; Managing Director, Fillmore & Associates, 2009-2012; Fund and Adviser Chief Compliance Officer (2002-2009), Senior Vice President - Broker Dealer Compliance (2004-2009), Schwab Funds Anti Money Laundering Officer and Identity Theft Prevention Officer (2004-2009), Vice President - Internal Audit (2000-2002), Charles Schwab Corporation; National Director, Information Systems Risk Management - Consulting Services (1999-2000), National Director, Investment Management Audit and Business Advisory Services (1992-1999), Senior Manager, Manager, Senior and Staff Roles (1983-1992), PricewaterhouseCoopers LLP.
         
Joseph P. DiMaggio
New York, NY
(1956)
  Chief Financial Officer of Aquila Municipal Trust since 2003 and Treasurer since 2000   Chief Financial Officer of all funds in the Aquila Group of Funds since 2003 and Treasurer since 2000.

 

 

46  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 
Name and
Year of Birth(1)
  Positions
Held with
Trust and
Length of
Service(2)
  Principal Occupation(s)
During Past 5 Years
         
Officers (cont’d)(3)        
         
Anita Albano, CPA
New York, NY
(1973)
  Secretary of Aquila Municipal Trust since 2020, Assistant Secretary 2018-2019   Secretary of all funds in the Aquila Group of Funds since 2020, Assistant Secretary 2018 – 2019; Senior Vice President and Chief Financial Officer of Aquila Investment Management LLC and Aquila Management Corporation since 2018; Treasurer of Aquila Investment Management LLC and Aquila Management Corporation since 2005.
         
Yolonda S. Reynolds
New York, NY
(1960)
  Assistant Treasurer of Aquila Municipal Trust since 2010   Assistant Treasurer of all funds in the Aquila Group of Funds since 2010; Director of Fund Accounting for the Aquila Group of Funds since 2007.
         
Lori A. Vindigni
New York, NY
(1966)
  Assistant Treasurer of Aquila Municipal since 2000   Assistant Treasurer of all funds in the Aquila Group of Funds since 2000; Assistant Vice President of the Manager or its predecessor and current parent since 1998; Fund Accountant for the Aquila Group of Funds, 1995-1998.

 

(1)The mailing address of each officer is c/o Aquila Municipal Trust, 120 West 45th Street, Suite 3600, New York, NY 10036.
(2)The term of office of each officer is one year.
(3)The Trust’s Statement of Additional Information includes additional information about the officers and is available, without charge, upon request by calling 800-437-1020 (toll-free) or by visiting www.aquilafunds.com or the EDGAR Database at the SEC’s internet site at www.sec.gov.

 

 

47  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

 

 

Your Fund’s Expenses (unaudited)

As a Fund shareholder, you may incur two types of costs: (1) transaction costs, including front-end sales charges with respect to Class A shares or contingent deferred sales charges (“CDSC”) with respect to Class C shares; and (2) ongoing costs including management fees; distribution “12b-1” and/or service fees; and other Fund expenses. The table below is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The table below assumes a $1,000 investment held for the six months indicated.

Actual Fund Expenses

The table provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses that you paid on your account, divide your ending account value by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6), then multiply the result by the number under the heading “Expenses Paid During the Period”.

Hypothetical Example for Comparison with Other Funds

Under the heading, “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.

Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.

 

  Actual   Hypothetical
  (actual return after expenses)   (5% annual return before expenses)
Share
Class
Beginning Account
Value
10/1/22

Ending(1)

Account
Value
3/31/23

Expenses(2)
Paid During Period
10/1/22 –
3/31/23
  Ending
Account
Value
3/31/23
Expenses(2)
Paid During
Period
10/1/22 –
3/31/23
Net
Annualized
Expense
Ratio
A $1,000 $1,054.20 $3.99   $1,021.04 $3.93 0.78%
C $1,000 $1,049.80 $8.33   $1,016.80 $8.20 1.63%
F* $1,000 $1,019.40 $2.82   $1,022.14 $2.82 0.56%
I $1,000 $1,052.40 $4.76   $1,020.29 $4.68 0.93%
Y $1,000 $1,055.00 $3.23   $1,021.79 $3.18 0.63%

 

(1) Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value and does not reflect the deduction of the applicable sales charges with respect to Class A or the applicable CDSC with respect to Class C shares. Total return is not annualized and as such, it may not be representative of the total return for the year.
   
(2) Expenses are equal to the annualized expense ratio for the six-month period as indicated above - in the far right column - multiplied by the simple average account value over the period indicated, and then multiplied by 182/365 to reflect the one-half year period.
   
* Commencement of operations 12/21/22.

 

 

48  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

Information Available (unaudited)

Annual and Semi-Annual Reports and Complete Portfolio Holding Schedules

Your Fund’s Annual and Semi-Annual Reports are filed with the SEC twice a year. Each Report contains a complete Schedule of Portfolio Holdings, along with full financial statements and other important financial statement disclosures. Additionally, your Fund files a complete Schedule of Portfolio Holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its Reports on Form N-PORT. Your Fund’s Annual and Semi-Annual Reports and N-PORT reports are available free of charge on the SEC website at www.sec.gov. You may also review or, for a fee, copy the forms at the SEC’s Public Reference Room in Washington, D.C. or by calling 1-800-SEC-0330.

In addition, your Fund’s Annual and Semi-Annual Reports and complete Portfolio Holdings Schedules for each fiscal quarter end are also available, free of charge, on your Fund’s website, www.aquilafunds.com (under the prospectuses & reports tab) or by calling us at 1-800-437-1000.

Portfolio Holdings Reports

In accordance with your Fund’s Portfolio Holdings Disclosure Policy, the Manager also prepares a Portfolio Holdings Report as of each quarter end, which is typically posted to your Fund’s individual page at www.aquilafunds.com by the 15th day after the end of each calendar quarter. Such information will remain accessible until the next Portfolio Holdings Report is made publicly available by being posted to www.aquilafunds.com. The quarterly Portfolio Holdings Report may be accessed, free of charge, by visiting www.aquilafunds.com or calling us at 1-800-437-1000.

 

 

Proxy Voting Record (unaudited)

During the 12 month period ended June 30, 2022, there were no proxies related to any portfolio instruments held by the Fund. As such, the Fund did not vote any proxies. Applicable regulations require us to inform you that the Fund’s proxy voting information is available on the SEC website at www.sec.gov.

 

 

Federal Tax Status of Distributions (unaudited)

This information is presented in order to comply with a requirement of the Internal Revenue Code. No action on the part of shareholders is required.

For the fiscal year ended March 31, 2023, $3,940,947 of dividends paid by Aquila Churchill Tax-Free Fund of Kentucky, constituting 98.2% of total dividends paid, were exempt-interest dividends; and the balance was ordinary income.

Prior to February 15, 2024, shareholders will be mailed the appropriate tax form(s) which will contain information on the status of distributions paid for the 2023 calendar year.

 

 

49  |  Aquila Churchill Tax-Free Fund of Kentucky

 

 
 
 

Founders

Lacy B. Herrmann (1929-2012)

Aquila Management Corporation, Sponsor

 

Manager

AQUILA INVESTMENT MANAGEMENT LLC

120 West 45th Street, Suite 3600

New York, New York 10036

 

Board of Trustees

Patricia L. Moss, Chair

Diana P. Herrmann, Vice Chair

Ernest Calderón

Thomas A. Christopher

Gary C. Cornia

Grady Gammage, Jr.

Glenn P. O’Flaherty

Heather R. Overby

Laureen L. White

 

Officers

Diana P. Herrmann, President

Paul G. O’Brien, Senior Vice President

Royden P. Durham, Vice President
and Lead Portfolio Manager

Anthony A. Tanner, Vice President
and Portfolio Manager

James T. Thompson, Vice President and
Portfolio Manager

Troy Miller, Vice President

Randall S. Fillmore, Chief Compliance Officer

Joseph P. DiMaggio, Chief Financial Officer and Treasurer

Anita Albano, Secretary

 

Distributor

AQUILA DISTRIBUTORS LLC

120 West 45th Street, Suite 3600

New York, New York 10036

 

Transfer and Shareholder Servicing Agent

BNY MELLON INVESTMENT SERVICING (US) INC.

118 Flanders Road

Westborough, Massachusetts 01581

 

Custodian

The Bank of New York Mellon

240 Greenwich Street

New York, New York 10286

 

Independent Registered Public Accounting Firm

TAIT, WELLER & BAKER LLP

Two Liberty Place

50 South 16th Street, Suite 2900

Philadelphia, Pennsylvania 19102

 

Further information is contained in the Prospectus,
which must precede or accompany this report.

 

AQL-KYAR-0523

 

 

 

 
 
 

 

                                                   

 

 

 

 

 

 

 

 

 

 

 

 

Annual Report

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 
 

 

 

 
 
 

Aquila Narragansett

Tax-Free Income Fund

Navigating Changing
Market Conditions

 

Serving Rhode Island investors since 1992

     

 

May, 2023

Dear Fellow Shareholder:

The financial markets have a way of reminding us that it isn’t always smooth sailing. As history has demonstrated, investments can be influenced to varying degrees by changing market conditions. That’s why charting a course for your financial future, and being prepared for inevitable twists and turns, may be important to help one navigate times of volatility and uncertainty. And while the municipal bond market has shown some signs of improvement following a particularly challenging period in 2022, some investors remain leery, wondering what lies ahead. What is the future direction of interest rates? Will inflation continue, or might the economy be headed for a recession? These and other market drivers remain to be seen, which is why we believe it’s important to maintain perspective, as well as a long-term focus.

What’s Driving Fixed Income Markets

The Federal Reserve (the “Fed”) remains front and center when to comes to factors that influence fixed income markets, including the municipal bonds in which your Fund invests. The Fed has continued with a “tight” monetary policy in its quest to manage the U.S. economy. The primary tool employed by the Fed has been to increase interest rates, specifically the Federal Funds rate (the rate that banks charge one another to borrow or lend excess reserves overnight). To date, the Federal Reserve has implemented 10 rate hikes since March of 2022, bringing the Fed Funds rate to a 16-year high, and representing the first time that the Fed’s target rate has been above 5% since 2007. This has had a significant impact on fixed income securities, including municipal bonds, and continues to work its way through the economy.

As a result, interest rates rose fairly dramatically over the past year. And as interest rates rise (along with the resulting yields on fixed income securities), prices of bonds generally fall commensurately. When rising rates and declining prices occur at a relatively rapid pace, this normally creates a shift in market dynamics, and in the overall tenor among investors.

The Federal Reserve has also engaged in efforts to reduce its balance sheet, as it attempts to combat inflation, while also trying to avoid the possibility of an economic recession. The state of the U.S. economy continues to be another key driver of fixed income markets. Although certain economic indicators suggest a resilient economy, the future direction of the economy remains a question mark. As the Fed attempts to perform

 

 

NOT A PART OF THE ANNUAL REPORT

 

 
 
 

a delicate balancing act, market participants are left wondering if the Fed can successfully achieve a so-called “soft landing,” or if the economy may slip into a recession.

Additional factors also contribute to market movements. One such example is recent turmoil in the banking industry which resulted in several high-profile bank failures and subsequent takeovers beginning in March. While the bank failures triggered some concern and uncertainty, they did not necessarily appear to have changed the Fed’s outlook on the economy. With continued elevated inflation data, the Fed went ahead with yet another rate increase on May 3, 2023. Comments by Fed Chair Jerome Powell at a subsequent news conference did, however, indicate to many market observers that the Fed may push pause on further rate hikes. The markets, of course, will be paying close attention as we approach the Fed’s June meeting date, and beyond.

The Effect on Municipal Bonds

The municipal bond market is currently being supported by strong credit fundamentals. Generally speaking, municipalities around the country have recorded high levels of tax receipts and added liquidity. Credit conditions appear to be solid even in the face of interest rate volatility. Moreover, credit rating upgrades continued to significantly outpace downgrades through year-end 2022, based on data from Standard & Poor’s.

Bond issuance has remained relatively low on a year-over-year basis. The combination of robust tax receipts and federal aid programs have left many municipalities with excess budgets. Additionally, bond issuers remain wary given interest rate changes and overall volatility swings. Issuance is generally expected to pick up as the year progresses, although many believe it is likely to remain rather muted.

Maintain a Long-Term Focus

At Aquila Group of Funds, we remain optimistic in the long term for the municipal bond market. Municipal bonds are vital to financing the infrastructure of our local communities and states. Moreover, they may play an important role for investors’ asset allocation. We, therefore, believe it’s important to keep in mind the key benefits that municipal bond funds offer, particularly during periods of market change and uncertainty.

Your Fund has been specifically designed bearing in mind the fact that most people are more sensitive to potential investment losses than they are eager for outsized gains. Important characteristics of your Fund therefore include:

·High-quality municipal bonds – Invests in investment-grade bonds; those in the four highest rating categories, or determined to be of comparable credit quality
·Intermediate bond portfolio – Seeks to minimize share price volatility or interest rate risk
·Broad portfolio diversification – Supports a wide range of projects in communities of all sizes throughout your state, not only reducing risk but also improving the quality of life throughout the state
·Local portfolio management – Provides an up-close perspective and valuable insights on the issuers and economy in the state

 

 

NOT A PART OF THE ANNUAL REPORT

 

 
 
 

Rest assured that your dedicated team of investment professionals continually draws upon their many years of experience in analyzing securities, observing market and economic cycles, and recognizing risks and opportunities. Our goal is to achieve your Fund’s investment objective of delivering the highest level of income exempt from regular federal and state income taxes, as is consistent with preservation of capital.

As always, we encourage you to consult with a trusted financial professional who can help ensure that your investment portfolio remains aligned with your individual needs to meet your long-term financial goals. It’s prudent to focus on your goals, your time frame for achieving them, and your tolerance for risk.

Thank you for your investment and continued confidence in Aquila Group of Funds.

 

  Sincerely,  
   
   
  Diana P. Herrmann, Vice Chair and President  

 

 

 

                                                                                  

 

Any information in this Shareholder Letter regarding market or economic trends or the factors influencing the Fund’s historical or future performance are statements of opinion as of the date of this report. These statements should not be relied upon for any other purposes. Past performance is no guarantee of future results, and there is no guarantee that any market forecasts discussed will be realized.

 

 

NOT A PART OF THE ANNUAL REPORT

 

 
 
 

Aquila Narragansett
Tax-Free Income Fund

ANNUAL REPORT
Management Discussion

 

Serving Rhode Island investors since 1992

     

 

Aquila Narragansett Tax-Free Income Fund (the “Fund”) seeks to provide as high a level of double tax-free income possible as is consistent with preservation of capital, while staying within self-imposed quality constraints. We strive to accomplish this by constructing a diversified investment portfolio of investment grade Rhode Island municipal securities. As an extra measure of credit protection for Fund shareholders, some of your Fund’s securities have been insured by the issuers, with the intent to provide for the timely payment of principal and interest when due. A maturity range of between 5 and 15 years has been maintained for the Fund’s portfolio with the goal to produce a reasonable level of income return with relatively high stability for the Fund’s share price. The intention is to maintain a similar profile going forward. As of March 31, 2023, the Fund’s portfolio of investments had an average maturity of 8.72 years.

U.S. Economy

While the U.S. economy showed considerable resiliency during 2022, it has begun to show some cracks during the first quarter of 2023. As a result of unprecedented tightening by the Federal Reserve (the “Fed”) beginning just over a year ago, we see the beginnings of a possible slowdown in economic activity seeping into the psyche of investors. While some may believe the Fed was a bit too patient in containing inflation in 2021 and the first quarter of 2022, it made up for any lost time during the last twelve months. This caused both the equity and fixed income markets to reprice and left historical correlations between these markets to deviate from their norms. We believe the Federal Reserve has clearly leaned heavily on its mandate for stable prices by its tightening of monetary policy. The resulting shifts in interest rates have caused bond prices to fall precipitously throughout the year, resulting in challenges for bond managers and investors alike. Monetary policy impacts have historically acted with a lag (of 1 – 2 years) and this time does not appear to be much different. While we have begun to see inflation softening as of late, we have also seen the first casualties in the form of some bank failures, a result of larger than normal asset and liability mismatches that have received additional scrutiny by regulators and investors. While these failures appear to be isolated, concerns about subsequent impacts are generally weighing heavily on consumers’ minds. More recent economic data are showing labor markets moderating on both job growth and labor costs, with inflation data stabilizing, but still above the Fed’s established targets. This still allows the Fed to continue its pursuit of lowering inflation at the expense of higher unemployment levels. Normally, this scenario would bode well for fixed income markets, particularly given concerns about a recession. As long as inflation can be contained, we believe fixed income markets should be able to rebound and potentially provide positive returns.

 

 

1  |  Aquila Narragansett Tax-Free Income Fund

 

 
 
 

MANAGEMENT DISCUSSION (continued)

 

Municipal Market

The municipal bond market had a good year relative to the taxable market in 2022. Even though returns were negative, overall municipal returns (as gauged by the Bloomberg Municipal Index return of - 8.53%) were considerably better than the -13.01% for the Bloomberg Aggregate Bond Index. Despite rising interest rates, investors remained interested in tax-free bonds even as supply continued to drop. The municipal bond market had a volatile year as spreads widened and tightened based on perceived moves within the Fed’s tightening cycle. As a percentage of U.S. Treasury yields, municipal bonds retested their historic lows (mid-50%), particularly within maturities of less than 10 years. Longer dated municipal bonds remained closer to their longer-term averages (mid-80% to mid-90%) as inflationary fears kept those yields in check. The start of 2023 saw yield spreads remaining tight as supply was considerably off from the same period in 2022. Part of this was driven by the belief that the Fed was close to reversing its policy of the last year as recession fears were once again brought into the headlines. While most states and communities were bolstered by federal stimulus funds, 2022 saw this come to an end. Even though states and communities appear to be in decent fiscal shape, the next few years could be challenging as we believe the social impacts will more than likely stress budgets. Tax receipts appear to have peaked and new sources of revenues may be needed to fill the gap. Add to this a potential recession and we could see some credit strain across many communities as challenges arise.

Rhode Island Economy

Rhode Island has continued to add jobs over the past year; however, its labor force has shrunk by close to 4,000 jobs as of February 2023. The number of unemployed has also fallen and the unemployment rate has dropped to 3.1% as of February 2023 as the labor force participation rate hovered at 62.9%, slightly above that of the national average. Employment figures are being closely watched as the Federal Reserve continues its fight against inflation. The number of jobs available has declined nationally and is expected to be felt locally. Rhode Island, again this year, projects a budget surplus for the current fiscal year ending June 30, 2023 similar to the prior fiscal year of close to $600 million. Calls from legislators to provide some relief to taxpayers have been voiced, but nothing definitive has been determined at this point. Sales tax relief seems to be fairly popular and multiple proposals have been submitted. Something may be solidified after the semi-annual Revenue Estimating Conference in May and prior to the General Assembly adjournment for the summer. Higher interest rates are having an impact on a number of local projects as funding costs cause reconsideration in light of higher construction and bonding costs. Some notable projects such as Tidewater Landing – RI FC soccer stadium, the “Superman Building” and various public schools have indicated that they may be put on hold or scrapped altogether. According to one major RI developer, construction costs are up over 30% since a year ago.

Fund Performance

Returns for Aquila Narragansett Tax-Free Income Fund Class Y shares were -7.16% as compared with -5.16% for the Bloomberg Quality Intermediate Municipal Bond Index

 

 

2  |  Aquila Narragansett Tax-Free Income Fund

 

 
 
 

MANAGEMENT DISCUSSION (continued)

 

(the “Index”) for calendar year 2022. For the Fund’s fiscal year ending March 31, 2023, performance for the Fund’s Y Share class was 0.10% which was below that of 2.04% the Index for the same period. The Fund underperformed the Index mainly due to two factors. First, the Fund’s duration was longer than that of the Index so the Fund’s portfolio was impacted to a greater degree by interest rate movements. The longer duration allowed for a bit more variance in returns relative to the Index causing lower returns. This positioning detracted from performance for most of the year; however, the most recent quarter saw stabilizing rates and a gain of underlying bond values. Having a number of longer bonds in the portfolio at times moved bond values between their call and maturity dates. This volatility led to portfolio price swings and caused returns to lag the Index; however, portfolio yield remains considerably above that of the Index. The second factor was the difference in credit and sector distribution within the Fund’s portfolio. The Fund has a higher percentage of AA quality bonds, lower percentage of A bonds and some BBB bonds in the portfolio compared with the Index. There were some considerable variations in performance based on credit quality and sectors.

While Rhode Island issuance has been low, secondary market offerings have continued to be available. Unfortunately, we have not found offering levels to be attractive nor have we found the environment for bond swaps to be compelling at the present time. Should value re-appear to us in the Rhode Island municipal market, we would entertain the opportunity to extend duration slightly if it meant picking up sufficient yield.

Outlook and Strategy

We have now witnessed how quickly a determined Federal Reserve can impact markets and economic outlook. After an unprecedented number of hikes and shrinking of its balance sheet, the impacts appear to be starting to work their way through the financial system. Such impacts are showing signs of cracks in the financial system through the Silicon Valley Bank and Signature Bank failures and a number of layoff announcements by many S&P 500 companies. While this is normally a good sign for bonds, given the large move in interest rates, it has been a challenge as the U.S. Treasury yield curve remains inverted. While bond yields still look attractive, municipal bond issuance remains down from the prior year and current issuance in Rhode Island is sparse. One challenge would be if rates were to begin to moderate, new issuance may pick up, while yields may not be so attractive. This would also likely be a result of the bond market not fully pricing in the fact that inflation is here to stay and that the economy may indeed falter given such aggressive Fed tightening. As it stands now, we believe the municipal yield curve offers some attractive yields for longer dated bonds. Given current portfolio positioning, the Fund should be able to take advantage of any expected slower growth and a potentially shifting yield curve. As an intermediate bond fund, a major challenge is to balance the additional yield with interest rate sensitivity of the Fund’s portfolio. Similar to the Fed’s dual mandate, the tradeoff for the portfolio manager is to ensure this balance remains top of mind throughout interest rate cycles to ensure a relatively stable net asset value (“NAV”). Despite the potential for more volatile interest rates, we remain steadfast in our commitment to our shareholders in an attempt to provide value regardless of market environment as we have since 1992.

 

 

3  |  Aquila Narragansett Tax-Free Income Fund

 

 
 
 

MANAGEMENT DISCUSSION (continued)

 

 

                                                                                  

 

*Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg does not approve or endorse this material or guarantee the accuracy or completeness of any information therein, nor does Bloomberg make any warranty, express or implied, as to results to be obtained therefrom, and, to the maximum extent allowed by the law, Bloomberg shall not have any liability or responsibility for any injury or damages arising in connection therewith.

 

                                                                                  

 

Mutual fund investing involves risk and loss of principal is possible.

The market prices of the Fund’s securities may rise or decline in value due to general market conditions, such as real or perceived adverse economic, political or regulatory conditions, recessions, inflation, changes in interest rates, lack of liquidity in the bond markets, the spread of infectious illness or other public health issues, armed conflict including Russia’s military invasion of Ukraine, sanctions against Russia, other nations or individuals or companies and possible countermeasures, market disruptions caused by tariffs, trade disputes or other factors, or adverse investor sentiment. When market prices fall, the value of your investment may go down. In the past several years, financial markets have experienced increased volatility, depressed valuations, decreased liquidity and heightened uncertainty. These conditions may continue, recur, worsen or spread. Recently, inflation and interest rates have increased and may rise further. These circumstances could adversely affect the value and liquidity of the Fund’s investments, impair the Fund’s ability to satisfy redemption requests, and negatively impact the Fund’s performance. Raising the ceiling on U.S. government debt has become increasingly politicized. Any failure to increase the ceiling on U.S. government debt could lead to a default on U.S. government obligations, with unpredictable consequences for economies and markets.

The global pandemic of the novel coronavirus respiratory disease designated COVID-19 has resulted in major disruption to economies and markets around the world, including the United States. Global financial markets have experienced extreme volatility and severe losses, and trading in many instruments has been disrupted. Liquidity for many instruments has been greatly reduced for periods of time. Some sectors of the economy and individual issuers have experienced particularly large losses. These circumstances may continue to affect adversely the value and liquidity of the Fund’s investments. Following Russia’s invasion of Ukraine, Russian securities have lost all, or nearly all, their market value. Other securities or markets could be similarly affected by past or future geopolitical or other events or conditions.

Governments and central banks, including the U.S. Federal Reserve, have taken extraordinary and unprecedented actions to support local and global economies and the financial markets. These actions have resulted in significant expansion of public debt, including in the U.S. The consequences of high public debt, including its future impact on the economy and securities markets, may not be known for some time.

The U.S. and other countries are periodically involved in disputes over trade and other matters, which may result in tariffs, investment restrictions and adverse impacts on affected companies and securities. For example, the U.S. has imposed tariffs and other trade barriers on Chinese exports, has restricted sales of certain categories of goods to China, and has established barriers to investments in China. Trade disputes may adversely affect the economies of the U.S. and its trading partners, as well as companies directly or indirectly affected and financial markets generally. If the political climate between the U.S. and China does not improve or continues to deteriorate, if China were to attempt unification of Taiwan by force, or if other geopolitical conflicts develop or get worse, economies, markets and individual securities may be severely affected both regionally and globally, and the value of the Fund’s assets may go down.

The value of your investment will generally go down when interest rates rise. A rise in interest rates tends to have a greater impact on the prices of longer term or longer duration securities. In recent years, interest rates and credit spreads in the U.S. have been at historic lows. The U.S. Federal Reserve has raised certain interest rates, and interest rates may continue to go up. A general rise in interest rates may cause investors to move out of fixed income securities on a large scale and could also result in increased redemptions from the Fund.

Investments in the Fund are subject to possible loss due to the financial failure of the issuers of underlying securities and their inability to meet their debt obligations.

 

 

4  |  Aquila Narragansett Tax-Free Income Fund

 

 
 
 

MANAGEMENT DISCUSSION (continued)

 

The value of municipal securities can be adversely affected by changes in the financial condition of one or more individual municipal issuers or insurers of municipal issuers, regulatory developments, legislative actions, and by uncertainties and public perceptions concerning these and other factors. The Fund may be affected significantly by adverse economic, political or other events affecting state and other municipal issuers in which it invests, and may be more volatile than a more geographically diverse fund. The municipal bond market can be susceptible to unusual volatility, particularly for lower-rated and unrated securities. Liquidity can be reduced unpredictably in response to overall economic conditions or credit tightening. Municipal issuers may be adversely affected by rising health care costs, increasing unfunded pension liabilities, and by the phasing out of federal programs providing financial support. Unfavorable conditions and developments relating to projects financed with municipal securities can result in lower revenues to issuers of municipal securities, potentially resulting in defaults. Municipal securities may be more susceptible to downgrades or defaults during a recession or similar periods of economic stress. Financial difficulties of municipal issuers may continue or get worse, particularly in the event of political, economic or market turmoil or a recession.

A portion of income may be subject to local, state, Federal and/or alternative minimum tax. Capital gains, if any, are subject to capital gains tax.

These risks may result in share price volatility.

Any information in this Annual Report regarding market or economic trends or the factors influencing the Fund’s historical or future performance are statements of opinion as of the date of this report. These statements should not be relied upon for any other purposes. Past performance is no guarantee of future results, and there is no guarantee that any market forecasts discussed will be realized.

 

 

5  |  Aquila Narragansett Tax-Free Income Fund

 

 
 
 

PERFORMANCE REPORT

 

The following graph illustrates the value of $10,000 invested in the Class Y shares of Aquila Narragansett Tax-Free Income Fund (the “Fund”) for the 10-year period ended March 31, 2023 as compared with the Bloomberg Municipal Bond: Quality Intermediate TR Unhedged Index** (the “Bloomberg Intermediate Index”) and the Consumer Price Index (a cost of living index). The performance of each of the other classes is not shown in the graph but is included in the table below. It should be noted that the Bloomberg Intermediate Index does not include any operating expenses nor sales charges, and being nationally oriented, does not reflect state-specific bond market performance.

 

 

   

Average Annual Total Return

for periods ended March 31, 2023

 
Class and Inception Date   1 Year   5 Years   10 Years   Since
Inception
 
Class A since 9/10/92                  
With Maximum Sales Charge   (3.04)%   0.50%   1.48%   3.85%  
Without Sales Charge   (0.05)   1.32   1.89   3.99  
Class C since 5/01/96                  
With CDSC*   (1.88)   0.46   1.03   2.77  
Without CDSC   (0.90)   0.46   1.03   2.77  
Class F since 11/30/18                  
No Sales Charge   0.14   N/A   N/A   1.47  
Class I since 11/04/98                  
No Sales Charge   (0.18)   1.23   1.77   3.15  
Class Y since 5/01/96                  
No Sales Charge   0.10   1.47   2.05   3.84  
Bloomberg Intermediate Index   2.04   1.96   1.93   4.18 (Class A)
                3.94 (Class C & Y)
                1.98 (Class F)
                3.63 (Class I)

 

Total return figures shown for the Fund reflect any change in price and assume all distributions, including capital gains, within the period were invested in additional shares. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund Shares. The rates of return will vary and the principal value of an investment will fluctuate with market conditions. Shares, if redeemed, may be worth more or less than their original cost. A portion of each class’s income may be subject to Federal and state income taxes. Past performance is not predictive of future investment results.

 

*     CDSC = 1% contingent deferred sales charge imposed on redemptions made within the first 12 months after purchase.

 

6  |  Aquila Narragansett Tax-Free Income Fund

 

 
 
 

PERFORMANCE REPORT (continued)

 

 

                                                                                  

 

**Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg does not approve or endorse this material or guarantee the accuracy or completeness of any information therein, nor does Bloomberg make any warranty, express or implied, as to results to be obtained therefrom, and, to the maximum extent allowed by the law, Bloomberg shall not have any liability or responsibility for any injury or damages arising in connection therewith.

 

 

 

 

 

 

 

 

 

 

 

 

7  |  Aquila Narragansett Tax-Free Income Fund

 

 
 
 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Trustees of Aquila Municipal Trust and the
Shareholders of Aquila Narragansett Tax-Free Income Fund:

 

Opinion on the Financial Statements

We have audited the accompanying statement of assets and liabilities of Aquila Narragansett Tax-Free Income Fund (the “Fund”), including the schedule of investments, as of March 31, 2023, the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and financial highlights for each of the five years in the period then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of March 31, 2023, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We have served as the auditor for the Trust since 2005.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of March 31, 2023 by correspondence with the custodian. We believe that our audit provides a reasonable basis for our opinion.

 

TAIT, WELLER & BAKER LLP

Philadelphia, Pennsylvania

May 30, 2023

 

 

8  |  Aquila Narragansett Tax-Free Income Fund

 

 
 
 

AQUILA NARRAGANSETT TAX-FREE INCOME FUND

SCHEDULE OF INVESTMENTS

MARCH 31, 2023

 

Principal
Amount
  General Obligation Bonds (26.8%)   Ratings
Moody’s, S&P
and Fitch
(unaudited)
  Value
    Barrington, Rhode Island        
$ 840,000   2.500%, 08/01/25   Aa1/NR/NR   $ 831,230
    Bristol, Rhode Island        
865,000   3.500%, 08/01/31   NR/AA+/NR   887,300
1,900,000   3.000%, 08/01/38 Series 2021A   NR/AA+/NR   1,709,867
    Coventry, Rhode Island        
1,605,000   3.625%, 03/15/27 AGMC Insured   A1/AA/NR   1,634,917
    Cranston, Rhode Island        
1,325,000   4.000%, 07/01/28   A1/AA-/AA+   1,382,929
1,170,000   5.000%, 08/01/32 Series 2018 A   A1/AA-/AA+   1,326,218
1,000,000   4.000%, 08/01/33 Series 2019 A BAMI Insured   A1/AA/AA+   1,069,440
615,000   4.000%, 08/01/35 Series 2019 A BAMI Insured   A1/AA/AA+   649,815
860,000   4.000%, 08/15/34 Series 2021 A   NR/AA-/AA+   916,992
455,000   4.000%, 08/15/35 Series 2021 A   NR/AA-/AA+   479,852
475,000   4.000%, 08/15/36 Series 2021 A   NR/AA-/AA+   496,327
1,515,000   4.250%, 07/15/24 Series B BAMI Insured   A1/AA/AA+   1,546,815
1,000,000   4.250%, 07/15/25 Series B BAMI Insured   A1/AA/AA+   1,038,950
    Cumberland, Rhode Island          
500,000   4.250%, 11/01/27 Series 2011 A   NR/AA+/NR   500,640
500,000   4.625%, 11/01/31 Series 2011 A   NR/AA+/NR   500,690
700,000   4.500%, 03/15/32 Series 2018 A   NR/AA+/NR   767,942
    Hopkinton, Rhode Island        
450,000   4.375%, 08/15/31   Aa3/NR/NR   450,558
    Johnston, Rhode Island        
1,020,000   3.450%, 06/01/29 Series A   A1/AA/NR   1,020,683
1,020,000   3.700%, 06/01/33 Series A   A1/AA/NR   1,020,602
    Lincoln, Rhode Island          
1,500,000   3.500%, 08/01/24 Series A   Aa2/NR/AAA   1,515,615
2,225,000   3.500%, 08/01/25 Series A   Aa2/NR/AAA   2,269,967
    Middleton, Rhode Island        
435,000   4.000%, 02/01/31 Series 2021A   Aa1/NR/NR   475,816
    Narragansett, Rhode Island        
1,025,000   3.500%, 07/15/28   Aa2/AA+/NR   1,031,478
             

 

 

9  |  Aquila Narragansett Tax-Free Income Fund

 

 
 
 

AQUILA NARRAGANSETT TAX-FREE INCOME FUND

SCHEDULE OF INVESTMENTS (continued)

MARCH 31, 2023

 

Principal
Amount
  General Obligation Bonds (continued)   Ratings
Moody’s, S&P
and Fitch
(unaudited)
  Value
    North Kingstown, Rhode Island        
$ 190,000   3.000%, 04/15/24 Series A   Aa2/AA+/NR   $ 190,334
1,500,000   3.500%, 04/01/37 Series 2021 A   NR/AA+/NR   1,488,450
    North Smithfield, Rhode Island        
825,000   3.000%, 06/15/26 Series A   Aa2/NR/NR   833,935
1,075,000   3.500%, 05/15/34   Aa2/NR/NR   1,097,005
    Pawtucket, Rhode Island        
770,000   4.000%, 11/01/25 AGMC Insured   A1/AA/A+   788,018
890,000   4.500%, 07/15/33 Series C AGMC Insured   A1/AA/NR   988,532
935,000   4.500%, 07/15/34 Series C AGMC Insured   A1/AA/NR   1,034,316
975,000   4.500%, 07/15/35 Series C AGMC Insured   A1/AA/NR   1,065,675
    Portsmouth, Rhode Island        
1,140,000   3.750%, 02/01/31 Series A   Aa2/AAA/NR   1,173,790
    Providence, Rhode Island          
975,000   3.625%, 01/15/29 Series A AGMC Insured   A1/AA/A   975,702
2,010,000   3.750%, 01/15/30 Series A AGMC Insured   A1/AA/A   2,011,528
1,000,000   3.750%, 01/15/32 Series A AGMC Insured   A1/AA/A   1,000,760
    Richmond, Rhode Island        
525,000   3.000%, 08/01/24   Aa3/NR/NR   527,200
    State of Rhode Island        
2,000,000   3.000%, 05/01/31 Series A   Aa2/AA/AA   2,010,060
2,500,000   4.000%, 04/01/32 Series A   Aa2/AA/AA   2,643,200
2,000,000   3.000%, 05/01/32 Series A   Aa2/AA/AA   2,010,140
1,500,000   3.000%, 05/01/36 Series A   Aa2/AA/AA   1,415,520
2,000,000   5.000%, 08/01/23 Series D   Aa2/AA/AA   2,015,520
2,000,000   5.000%, 08/01/24 Series D   Aa2/AA/AA   2,063,500
1,500,000   4.000%, 08/01/30 Series 2021C   Aa2/AA/AA   1,664,520
1,000,000   4.000%, 08/01/33 Series 2021E   Aa2/AA/AA   1,076,420
    Warren, Rhode Island          
1,170,000   4.000%, 02/15/33 Series 2018 A   Aa3/NR/NR   1,231,320

 

 

10  |  Aquila Narragansett Tax-Free Income Fund

 

 
 
 

AQUILA NARRAGANSETT TAX-FREE INCOME FUND

SCHEDULE OF INVESTMENTS (continued)

MARCH 31, 2023

 

Principal
Amount
  General Obligation Bonds (continued)   Ratings
Moody’s, S&P
and Fitch
(unaudited)
  Value
    West Greenwich, Rhode Island        
$ 1,175,000   3.000%, 08/15/26   NR/AA+/NR   $ 1,180,605
    West Warwick, Rhode Island        
795,000   5.000%, 10/01/32 Series A BAMI Insured   A3/AA/NR   838,852
    Westerly, Rhode Island          
345,000   5.000%, 11/15/31 Series 2021 A   NR/AA/NR   410,895
    Total General Obligation Bonds        55,260,440
             
    Revenue Bonds (69.1%)        
    Development (6.9%)        
    Providence, Rhode Island Public Building Authority
(Capital Improvement Program Projects)
       
3,000,000   4.000%, 09/15/34 Series A AGMC Insured   A1/AA/NR   3,163,080
3,500,000   4.000%, 09/15/35 Series A AGMC Insured   A1/AA/NR   3,668,770
    Providence, Rhode Island Redevelopment Agency Refunding Public Safety Building Project        
1,680,000   5.000%, 04/01/26 Series A AGMC Insured   A1/AA/NR   1,757,213
    Rhode Island Infrastructure Bank Municipal Road and Bridge Revolving Fund        
 935,000   4.000%, 10/01/33 Series 2019 A   NR/AA/NR   992,989
 845,000   4.000%, 10/01/34 Series 2019 A   NR/AA/NR   890,461
 1,010,000   4.000%, 10/01/35 Series 2019 A   NR/AA/NR   1,052,157
    Rhode Island Infrastructure Bank Efficient Buildings Fund, Green Bonds        
 1,110,000   4.000%, 10/01/29 Series 2018 A   NR/AA/NR   1,198,722
 1,555,000   3.000%, 10/01/37 Series 2020 A   NR/AA/NR   1,435,794
    Total Development        14,159,186
             

 

 

11  |  Aquila Narragansett Tax-Free Income Fund

 

 
 
 

AQUILA NARRAGANSETT TAX-FREE INCOME FUND

SCHEDULE OF INVESTMENTS (continued)

MARCH 31, 2023

 

Principal
Amount
  Revenue Bonds (continued)   Ratings
Moody’s, S&P
and Fitch
(unaudited)
  Value
    Healthcare (3.4%)        
    Rhode Island Health & Education Building Corp., Hospital Financing, Lifespan Obligated Group        
$ 875,000   5.000%, 05/15/28 Series 2016   NR/BBB+/BBB+   $ 904,680
1,000,000   5.000%, 05/15/31 Series 2016   NR/BBB+/BBB+   1,031,400
1,000,000   5.000%, 05/15/33 Series 2016   NR/BBB+/BBB+   1,028,370
1,250,000   5.000%, 05/15/34 Series 2016   NR/BBB+/BBB+   1,282,187
1,750,000   5.000%, 05/15/39 Series 2016   NR/BBB+/BBB+   1,766,677
    Rhode Island State & Providence Plantations Lease COP (Eleanor Slater Hospital Project)        
1,000,000   4.000%, 11/01/32 Series B   Aa3/AA-/AA-   1,079,590
    Total Healthcare        7,092,904
             
    Higher Education (5.9%)        
    Rhode Island Health and Education Building Corp., Higher Educational Facility        
2,500,000   5.000%, 09/15/30 Series 2010 A AGMC Insured   Aa3/NR/NR   2,504,500
    Rhode Island Health and Educational Building Corp., Higher Education Facility, Brown University        
2,000,000   4.000%, 09/01/37 Series 2017   Aa1/AA+/NR   2,058,400
    Rhode Island Health and Educational Building Corp., Higher Education Facility, Providence College        
2,490,000   4.000%, 11/01/24 Series 2015   A2/A/NR   2,539,177
250,000   4.000%, 11/01/37 Series 2021B   A2/A/NR   254,077
250,000   4.000%, 11/01/38 Series 2021B   A2/A/NR   252,590
    Rhode Island Health and Educational Building Corp., Higher Education Facility, University of Rhode Island        
1,000,000   4.250%, 09/15/31 Series A   Aa3/A+/NR   1,070,290

 

 

12  |  Aquila Narragansett Tax-Free Income Fund

 

 
 
 

AQUILA NARRAGANSETT TAX-FREE INCOME FUND

SCHEDULE OF INVESTMENTS (continued)

MARCH 31, 2023

 

Principal
Amount
  Revenue Bonds (continued)   Ratings
Moody’s, S&P
and Fitch
(unaudited)
  Value
    Higher Education (continued)        
    Rhode Island Health and Educational Building Corp., Higher Education Facility, University of Rhode Island Auxiliary Enterprise        
$ 500,000   4.000%, 09/15/31 Series 2016 B   A1/A+/NR   $ 515,220
2,000,000   4.000%, 09/15/42 Series 2017 A   A1/A+/NR   1,952,580
1,000,000   4.000%, 09/15/32 Series 2017 B   A1/A+/NR   1,035,800
    Total Higher Education        12,182,634
             
    Housing (5.9%)        
     Rhode Island Housing & Mortgage Finance Corp. Homeownership Opportunity        
155,000   3.000%, 10/01/39 Series 71   Aa1/AA+/NR   137,660
2,000,000   2.100%, 10/01/35 Series 73 A   Aa1/AA+/NR   1,659,880
2,000,000   2.300%, 10/01/40 Series 73 A   Aa1/AA+/NR   1,508,320
2,000,000   2.050%, 10/01/36 Series 75 A   Aa1/AA+/NR   1,576,940
750,000   2.350%, 10/01/36 Series 76 A   Aa1/AA+/NR   614,475
1,500,000   4.400%, 10/01/38 Series 79 A   Aa1/AA+/NR   1,539,630
    Rhode Island Housing & Mortgage Finance Corp. Multi-Family Development Sustainability          
770,000   2.750%, 10/01/34 Series 1-B   Aa2/NR/NR   702,379
1,000,000   3.100%, 10/01/44 Series 1-B   Aa2/NR/NR   809,130
    Rhode Island Housing & Mortgage Finance Corp. Multi-Family Housing        
175,000   4.625%, 10/01/25 Series 2010 A   Aaa/NR/NR   175,227
215,000   5.000%, 10/01/30 Series 2010 A   Aaa/NR/NR   215,546
1,255,000   3.450%, 10/01/36 Series 2016 1B   Aa2/NR/NR   1,201,537
1,000,000   3.250%, 10/01/27 Series 1B   Aa2/NR/NR   1,000,120
1,000,000   3.400%, 10/01/29 Series 3B   Aa2/NR/NR   1,001,710
    Total Housing        12,142,554
             

 

 

13  |  Aquila Narragansett Tax-Free Income Fund

 

 
 
 

AQUILA NARRAGANSETT TAX-FREE INCOME FUND

SCHEDULE OF INVESTMENTS (continued)

MARCH 31, 2023

 

Principal
Amount
  Revenue Bonds (continued)   Ratings
Moody’s, S&P
and Fitch
(unaudited)
  Value
    Public School (32.0%)        
    Rhode Island Health and Education Building Corp., Public Schools Financing Program        
$ 795,000   5.000%, 05/15/27 Series 2015 C   Aa2/NR/NR   $ 834,027