The investment fund Narragansett Insured Tax-Free Income Fund held its annual shareholder meeting earlier this month to outline its performance over the past year, a harrowing one for most investor in light of the turmoil in the finance markets.
The Narragansett fund, run by New York-based Aquila Investment Management Corp., pools money from local investors exclusively to buy municipal bonds within the state and pays dividends that are tax-free at both the state and federal levels.
Aquila’s Stephen Caridi, vice president of the Narragansett fund, answered a few questions about the fund and how it’s faring.
PBN: Can you give me a broad idea how the Narragansett Insured Tax-Free Income Fund works, and what is Aquila Management Corp. involvement?
CARIDI: Narragansett Insured Tax-Free Income Fund was launched 17 years ago (September 1992). The fund’s objective is to provide investors with current income that is exempt from Rhode Island and federal income tax, along with preservation of their capital. The fund invests primarily in tax-free municipal obligations that are insured, as to the payment of principal and interest, by nationally recognized insurers of municipal obligations.
Aquila Investment Management is the investment adviser to the fund. Citizens Investment Advisors (a department of RBS Citizens), as the subadviser to the fund, provides investment advisory services, including management of the fund portfolio. Another organization, Aquila Distributors Inc., is responsible for sales and marketing of the fund through communication with fund shareholders and with the financial professionals who recommend the fund to their clients.
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PBN: The last 12 months or so have been a nightmare for many investment managers and investment fund investors? How has the Narragansett fund fared? Explain the performance.
CARIDI: In the last quarter of 2008 and the first quarter of 2009, we saw very dramatic market moves as investors shifted away from assets perceived to be high-risk or were pressed by market circumstances to sell assets (as in the case of Lehman Brothers). It is important to be aware that while that selling was going on, investors were also looking for opportunities to invest where the perceived risk was lower. This is what was referred to in the media as the “flight to quality.”
Along with these trends, investors are looking at the budget issues at the federal and state level, and drawing the conclusion that income taxes are headed higher. If that scenario plays out, exempts from both federal and state income taxes will be very attractive to investors.
With investors searching for lower-risk investments and for income exempt from federal and state taxes, municipal bond funds in general have seen an increase in inflows, and the same has been true for Narragansett Insured Tax-Free Income Fund. At the end of 2008, fund assets were $189 million and at the end of September 2009, fund assets were $209 million.
PBN: Was there a lot of hand-holding over the last year?
CARIDI: We continuously communicate with fund investors and the financial professionals who recommend the fund. Late in 2008 and early in 2009, we actually had good news to share. The flight to quality that I mentioned drove Treasury prices up (and yields down) due to demand. That created a temporary situation in which municipal bonds provided tax-exempt yields higher than the taxable yields available on Treasury bonds of a similar maturity. That anomaly was very attractive to investors.
PBN: It’s been a year since the Narragansett fund absorbed the Ocean Street Tax-Exempt Fund. How has that worked out? Has it allowed the fund to improve its performance? If so, how? If not, why not?
CARIDI: The Narragansett Insured Tax-Free Income Fund absorbed those assets very smoothly. In addition, inflows to the fund over the past 12 months have been on the rise. We are pleased with the investment performance of the fund over the past year relative to the municipal bond market and relative to comparable funds. In fact, the Narragansett Fund had a return of 1.3 percent, based on net asset value in 2008.
Preservation of capital is one of the objectives of the fund. On Dec. 31, 2008, the net asset value of the fund was $10.28 and on Sept. 30, 2009, the net asset value was $10.72. [For more information on the fund’s performance, visit Narragansett Insured Tax-Free Income Fund pages on the Aquila Web site.]
PBN: There’s been a lot of talk of new and more stringent regulations in the financial services industry. How will that affect the Narragansett fund, and Aquila?
CARIDI: The mutual fund industry is (and has been in the past) very highly regulated, in order to protect shareholder interests. Many of the regulatory changes now being considered are focused on, and will more directly impact, the issuers of stock and bonds, investment banks, brokerage firms and the securities rating agencies. Aquila Investment Management and the Narragansett Insured Tax-Free Income sub-adviser, Citizens Investment Advisors, will monitor regulatory changes that affect the municipal securities markets and incorporate that information in the investment strategy of the fund.
