Investment fund Narragansett Insured Tax-Free Income Fund held its annual shareholder meeting earlier this month to outline its performance over the past year. PBN caught up with Stephen Caridi, vice president of the Narragansett fund, to see how the year went.
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. Caridi is employed by Aquila.
PBN: How did the fund do over the past year?
CARIDI: Over the past 12 months, through Aug. 31, the performance of Narragansett Insured Tax-Free Income Fund was aligned with the single-state intermediate municipal bond fund category and reflected the investment strategy of the fund. Based on the investment strategy, fund holdings were of investment-grade quality when acquired, meaning that they are either rated within the four highest credit rating categories assigned by nationally recognized statistical rating organizations, or determined to be of comparable quality by the fund’s sub-adviser, Citizens Investment Advisors. [According to the Narragansett fund prospectus, the one-year cumulative return was 6.34 percent as of Aug. 31, while the annual return since the fund’s inception (Sept. 10, 1992) is 5.26 percent.]
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[In addition], the fund had a weighted average maturity of 9.41 years, which is described as an intermediate maturity relative to the municipal bond market, and there were more than 200 individual municipal bond issues held by the fund. Over the course of the year ending Aug. 31, fund assets grew from $204 million to $249 million.
PBN: How is today’s interest-rate environment affecting the fund?
CARIDI: An environment of declining or relatively consistent interest rates is typically beneficial to bond investors given the inverse relationship between interest rates and bond prices (i.e. bond prices typically rise as interest rates decline and vise versa). Many economists and market observers have expressed opinions indicating that interest rates may remain low during 2011 and possibly some portion of 2012. Recently, a variety of economic and policy issues have also had a significant influence on bond markets.
The expectation that tax rates will be rising has heightened investor interest in tax-exempt municipal bonds. Demand has been putting upward pressure on prices of some municipal bond issues (with corresponding downward pressure on yields). Concerns over the budgetary challenges faced by state and local governments have, in some cases, tempered these influences.
PBN: Does the volatility of the stock markets have any impact on the fund?
CARIDI: Recent volatility in the equity markets has had an indirect influence on bond markets. In both 2009 and 2010, asset flows to bond funds increased as investors sought alternatives to volatile equity markets. Intermediate maturity municipal bonds have a low correlation (or tendency to move in tandem) with equities. That attribute, along with the motivation to protect income from anticipated higher tax rates, resulted in higher relative flows to the municipal bond market and to the fund.
PBN: What types of questions did you face from shareholders this year? How many attended the meeting? More or less than last year?
CARIDI: The number of fund shareholders attending the 2010 annual meeting was higher than the previous year. Narragansett Insured Tax-Free Income Fund is distinctive in that mutual fund shareholders have the ability to attend a local annual shareholder meeting, and address their questions to the investment managers, officers and trustees of their fund. Several shareholder questions raised during the meeting had to do with the investment process in light of fiscal challenges faced by state and local governments. The fund portfolio managers addressed those questions by describing the initial and ongoing research which they conduct on individual issues, and the diversification benefits of holding more than 200 individual bonds in the fund.
PBN: There have been more regulations in the financial services industry in the last year or so. How has that affected the Narragansett fund, and Aquila?
CARIDI: Narragansett Insured Tax-Free Income Fund is one of the mutual funds within the Aquila Group of Funds, which has conducted business in the highly regulated mutual fund industry for more than 25 years. As the mutual fund industry and securities markets have evolved over time, the regulations under which the industry operates have been modified and expanded. When new or revised regulations are implemented, the practices and procedures followed by the Aquila Group of Funds are updated so that the assets of fund shareholders are maintained and monitored in compliance with the highest regulatory standards.
