AQUILA THREE PEAKS HIGH INCOME FUND GROUP OF FUNDS THE AQUILA SM
Please Note <ul><li>Information contained in this document must be preceded or accompanied by a copy of the Fund’s current...
Please Note <ul><li>Currently, the majority of the Management fees are being voluntarily waived.  Results, where shown, wo...
Introduction <ul><li>Aquila Investment Management, LLC </li></ul><ul><li>and </li></ul><ul><li>Three Peaks Capital Managem...
Aquila Three Peaks High Income  Portfolio Manager:  Sandy Rufenacht <ul><li>Fund Manager since inception, June, 2006 </li>...
Three Peaks Capital Management Team Sandy Rufenacht CEO / CIO / PM Brent Olson Director of Research Assistant PM Kim Colli...
Investment Strategy <ul><li>Produce a high level of current income with a focus on protecting the NAV (Net Asset Value). <...
Agenda <ul><li>The High Yield Market Today </li></ul><ul><li>The Case for High Yield Bonds </li></ul><ul><li>Aquila Three ...
Agenda <ul><li>The High Yield Market Today </li></ul><ul><li>The Case for High Yield Bonds </li></ul><ul><li>Aquila Three ...
The High Yield Market Today  Growth Financed in the High Yield Market Bonds which represent the largest Fund holdings, wil...
The High Yield Market Today  High Yield Bond Investors Investors by segment  2006 45.3% Source :  JPMorgan North American ...
Agenda <ul><li>The High Yield Market Today </li></ul><ul><li>The Case for High Yield Bonds </li></ul><ul><li>Aquila Three ...
The Case for High Yield Bonds Volatility and Return of Fixed Income Securities Use High Yield to Manage Portfolio Risk and...
The Case for High Yield Bonds Volatility and Return of Fixed Income Securities Use High Yield to Manage Portfolio Risk and...
The Case for High Yield Bonds Volatility and Return of Fixed Income Securities Use High Yield to Manage Portfolio Risk and...
The Case for High Yield Bonds Volatility and Return of Various Asset Classes 3 year Volatility (Risk) / Return data JP Mor...
The Case for High Yield Bonds Volatility and Return of Various Asset Classes Incremental Return  9.01% vs. 11.44% Incremen...
The Case for High Yield Bonds Volatility and Return of Various Asset Classes 5 year Volatility (Risk) / Return data JP Mor...
The Case for High Yield Bonds Volatility and Return of Various Asset Classes Incremental Volatility 5.46% vs. 12.78% Incre...
The Case for High Yield Bonds Volatility and Return of Various Asset Classes 10 year Volatility (Risk) / Return data JP Mo...
The Case for High Yield Bonds Volatility of Returns Source:  Lehman Brothers, Yahoo Finance Lehman U.S. Corp. High Yield a...
The Case for High Yield Bonds The Impact of Shifting Interest Rates High Yield Index Return vs. 10-yr U.S. Treasury Yield ...
The Case for High Yield Bonds Performance through Economic Cycles Average Total Return 1987 – 2006:  9.70% “ Golden Age” o...
The Case for High Yield Bonds  Default Rate Near Cyclical Low Long term Average 4.74% Average 1/93 to 6/99 2.36% Jan. ‘98 ...
The Case for High Yield Bonds Yield Spread Near Cyclical Low Long Term Average  548 bps Average 1/93 to 6/99  421 bps Dec ...
The Case for High Yield Bonds  Tying It All Together High Yield Spreads High Yield Default Rates High Yield Average Annual...
The Case for High Yield Bonds Components of High Yield Market Growth Source :  JPMorgan North American High Yield Research...
The Case for High Yield Bonds Growth of the High Yield Market Source :  JP Morgan North American High Yield Research,  200...
Agenda <ul><li>The High Yield Market Today </li></ul><ul><li>The Case for High Yield Bonds </li></ul><ul><li>Aquila Three ...
Aquila Three Peaks High Income Fund Management Focus:  To Minimize Risk <ul><li>Relentless Research and Analysis </li></ul...
Aquila Three Peaks High Income Fund Sell Discipline <ul><li>We may sell a security based on these factors: </li></ul><ul><...
Aquila Three Peaks High Income Fund Buy Discipline <ul><li>We may buy a security based on these factors: </li></ul><ul><li...
Aquila Three Peaks High Income Fund Portfolio Construction Higher Return 0% to 20% Core Portfolio 30% to 75% Lower Risk 20...
Three Peaks Capital Management, LLC Lessons to live by <ul><li>Sell first, ask questions later. </li></ul><ul><li>Excess i...
Aquila Three Peaks High Income Fund A Time-tested Strategy <ul><li>Aquila Three Peaks High Income Fund </li></ul><ul><li>a...
Aquila Three Peaks High Income Fund December 31, 2007
Aquila Three Peaks High Income Fund September 30, 2007 Largest Holdings Las Vegas Sands 6.375%, ‘15 Direct TV Holdings 8.3...
Aquila Three Peaks High Income Fund December 31, 2007 Performance data is based on past performance and does not guarantee...
Aquila Three Peaks High Income Fund <ul><li>Risk / Return Benefit of Low Correlation </li></ul><ul><li>Extensive Research ...
AQUILA INVESTMENT MANAGEMENT LLC <ul><li>EXPERTISE IN NICHE MARKETS </li></ul><ul><li>DEDICATED TO PROVIDING SUPERIOR SERV...
Conclusion <ul><li>Supporting your Success </li></ul><ul><li>Dedicated Management Team </li></ul><ul><li>Exceptional Marke...
AQUILA THREE PEAKS HIGH INCOME FUND GROUP OF FUNDS THE AQUILA SM
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  • In managing the Aquila Three Peaks High Income fund, we strive to produce a high level of income. Through our research, we attempt to manage the portfolio in a manner that will protect the net asset value from excessive volatility. … turn delivery over to the manager.
  • For the appropriate investor, who can tolerate the risks inherent in high-yield bonds, there are a number of compelling reasons to include this asset class in a well-diversified portfolio. A number of economic variables currently impacting high-yield market cycles merit consideration. Aquila Three Peaks High Income Fund brings intensive fundamental research, active securities management, experience and knowledge to the management of the high-yield bond allocation.
  • We’ll begin by discussing the High Yield market.
  • The high-yield market provides financing for many large, well-known firms. We look for companies in industries that have historically been able to support the use of leverage, and for management teams that, in our view, use leverage prudently. These names represent some of the companies that have issued high-yield bonds, and do not necessarily represent current fund holdings.
  • Together, pension plans and Insurance companies held nearly 45% of the high-yield securities available at the end of 2005. A number of factors account for the appeal of the high yield asset class to this investor segment. Pension funds and insurance companies, both large “institutional” investor categories, apply significant resources and sophisticated analytics to conducting research on the comparative risk and return offered by various investment securities. Both groups have embraced high-yield securities due to: the higher income payments, the lower volatility risk relative to equity investments, and the advantage, within the corporate capital structure, of a position senior to the equity holders. CBO: collateralized bond obligation - An investment-grade bond backed by a pool of junk bonds. Junk bonds are typically not investment grade, but because a CBO pools several types of credit quality bonds together, they offer enough diversification to be deemed &amp;quot;investment grade.&amp;quot;
  • Now we’ll look at the high yield bond asset class.
  • Modern portfolio theory describes a concept known as the “efficient frontier”. According to the theory, portfolios plotted along the “efficient frontier” have the highest expected return possible at a given level of risk. Portfolios below the curve are not “efficient” because, for the same level of risk, you could achieve a greater level of return. High yield bonds have more credit risk than higher quality bonds. However, their higher coupon causes high yield bonds to have less duration risk than higher quality bonds. For that reason, high yield bonds can be added to a fixed income portfolio to manage overall return and risk. Duration: The measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows. Duration is measured in years; however, it should not be confused with a bond&apos;s maturity. For all bonds, duration is shorter than maturity except zero coupon bonds, whose duration is equal to maturity. (Source: Investopedia.com)
  • Modern portfolio theory describes a concept known as the “efficient frontier”. According to the theory, portfolios plotted along the “efficient frontier” have the highest expected return possible at a given level of risk. Portfolios below the curve are not “efficient” because, for the same level of risk, you could achieve a greater level of return. High yield bonds have more credit risk than higher quality bonds. However, their higher coupon causes high yield bonds to have less duration risk than higher quality bonds. For that reason, high yield bonds can be added to a fixed income portfolio to manage overall return and risk. Duration: The measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows. Duration is measured in years; however, it should not be confused with a bond&apos;s maturity. For all bonds, duration is shorter than maturity except zero coupon bonds, whose duration is equal to maturity. (Source: Investopedia.com)
  • Modern portfolio theory describes a concept known as the “efficient frontier”. According to the theory, portfolios plotted along the “efficient frontier” have the highest expected return possible at a given level of risk. Portfolios below the curve are not “efficient” because, for the same level of risk, you could achieve a greater level of return. High yield bonds have more credit risk than higher quality bonds. However, their higher coupon causes high yield bonds to have less duration risk than higher quality bonds. For that reason, high yield bonds can be added to a fixed income portfolio to manage overall return and risk. Duration: The measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows. Duration is measured in years; however, it should not be confused with a bond&apos;s maturity. For all bonds, duration is shorter than maturity except zero coupon bonds, whose duration is equal to maturity. (Source: Investopedia.com)
  • In this illustration, the historical risk and return of a variety of market indices is compared over a 3-year period. Generally, you can see that investments providing higher levels of return also involve higher levels of risk. Compare the risk and associated return of the JPMorgan Global High-Yield index with a broad equity index, in this example, the S&amp;P 500. When you look at the vertical scale, you can see that, during this 3-year period, the S&amp;P 500 provided a lower return than the high-yield index, and, when you look at the horizontal scale, you can also see that investing in the S&amp;P 500 involved more risk, commonly measured in terms of the variability of the returns, or volatility. Over this 3-year period of time, the return on the High Yield Index was 2.51 percentage points greater than the S&amp;P 500 return, while the volatility of the S&amp;P 500 returns was more than 5.40 percentage points higher than those of the High-Yield Index. In addition to risk associated with market volatility, equity holders accept more risk within the corporate capital structure. In the event of a corporate liquidation, bond holders are paid before preferred and common equity holders.
  • In this illustration, the historical risk and return of a variety of market indices is compared over a 3-year period. Generally, you can see that investments providing higher levels of return also involve higher levels of risk. Compare the risk and associated return of the JPMorgan Global High-Yield index with a broad equity index, in this example, the S&amp;P 500. When you look at the vertical scale, you can see that, during this 3-year period, the S&amp;P 500 provided a lower return than the high-yield index, and, when you look at the horizontal scale, you can also see that investing in the S&amp;P 500 involved more risk, commonly measured in terms of the variability of the returns, or volatility. Over this 3-year period of time, the return on the High Yield Index was 2.51 percentage points greater than the S&amp;P 500 return, while the volatility of the S&amp;P 500 returns was more than 5.40 percentage points higher than those of the High-Yield Index. In addition to risk associated with market volatility, equity holders accept more risk within the corporate capital structure. In the event of a corporate liquidation, bond holders are paid before preferred and common equity holders.
  • In this illustration, the historical risk and return of a variety of market indices is compared over a 5-year period. Again, you can see that investments providing higher levels of return also involve higher levels of risk. Again, compare the risk and associated return of the JPMorgan Global High-Yield index with the S&amp;P 500. When you look at the vertical scale, you can see that, during this 5-year period, the S&amp;P 500 delivered a lower return than the high-yield index, and when you look at the horizontal scale, you can also see that an investment in the S&amp;P 500 also involved more risk, as measured in terms of the variability of the returns, or volatility. Over this 5-year period of time, the return on the High Yield Index was 10.49 percentage points higher than the S&amp;P 500 return, while the volatility of the S&amp;P 500 returns was more than 7.24 percentage points greater than those of the High Yield index.
  • In this illustration, the historical risk and return of a variety of market indices is compared over a 5-year period. Again, you can see that investments providing higher levels of return also involve higher levels of risk. Again, compare the risk and associated return of the JPMorgan Global High-Yield index with the S&amp;P 500. When you look at the vertical scale, you can see that, during this 5-year period, the S&amp;P 500 delivered a lower return than the high-yield index, and when you look at the horizontal scale, you can also see that an investment in the S&amp;P 500 also involved more risk, as measured in terms of the variability of the returns, or volatility. Over this 5-year period of time, the return on the High Yield Index was 10.49 percentage points higher than the S&amp;P 500 return, while the volatility of the S&amp;P 500 returns was more than 7.24 percentage points greater than those of the High Yield index.
  • In this illustration, the historical risk and return of a variety of market indices is compared over a 10-year period. Again, you can see that investments providing higher levels of return also involve higher levels of risk. Compare the risk and associated return of the JPMorgan Global High-Yield Index with the S&amp;P 500. When you look at the vertical scale, you can see that, during this 10-year period, the S&amp;P 500 provided a higher return than the high-yield index, but when you look at the horizontal scale, you can also see that an investment in the S&amp;P 500 also involved more risk, again measured in terms of the variability of the returns, or volatility. Over this period of time, the return on the High Yield Index provided 2.25percentage points less in return than the S&amp;P 500 return, while the volatility of these returns were more than 10.26 percentage points lower. The past performance displayed in these three illustrations does not indicate future performance results of any index or investment. The illustrations do demonstrate that returns on the high-yield index over 3, 5 and 10 years have displayed less volatility than those of the equity index.
  • The modern, liquid high-yield bond market dates back to 1987. During the decade from 1987 through 1997, the equity market and the high-yield market displayed a generally similar return trend. For several years following that period, we saw a significant run-up in the equity market, fueled in large part by the technology sector, while valuations in the high yield market fluctuated within a much more narrow band. During the period of market exuberance leading up to the year 2000, investor attention was focused to a far greater degree on equity investments, rather than high yield corporate debt. Within a well diversified investment portfolio, an allocation to high yield corporate debt can serve as a low beta complement to the equity allocation, and serve to dampen overall portfolio volatility. Beta: A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole (commonly represented by the S&amp;P 500). Also known as &amp;quot;beta coefficient&amp;quot;.
  • In this illustration, the red line plots the yield of the 10-year US Treasury bond, and the blue line plots the return on the Bear Stearns High Yield Bond index from 1987 forward. This is the same high yield market return line that we saw in the previous slide. Typically, interest rates begin to rise when the economy is growing at a strong pace – a situation that typically concerns fixed income investors due to the inverse relationship between yield and prices in the bond market. It is also common that equity markets will suffer during periods of rising interest rates. During those periods of economic strength, high yield corporate borrowers are better able to maintain payments on existing debt. As the business cycle progresses, the economy may level off or begin to show signs of weakness. Typically, interest rates will begin to decline during a weak economic period. Fixed income investors, searching for yield, may then favor high yield corporate bonds over lower yielding, higher quality issues. While high yield corporate bonds are subject to the effects of changing market interest rates, characteristics of high yield corporate bonds cause them to respond somewhat differently than investment grade fixed income securities. Here, you can see two periods in recent history during which interest rates were rising, and two periods in which they were declining, along with the corresponding impact on the high yield market.
  • Market sectors and asset classes commonly experience cyclical returns as variations in the economic cycle impact security markets. The high-yield bond market recorded double digit returns in 6 of the 7 years from 1991 to 1998. Several factors contributed to the strength of the high-yield market during that period, including relatively low default rates and low yield spreads between investment-grade bonds and high-yield bonds. The low yield spreads and the low default rates coincide with a generally favorable economic environment, and the resulting ability of many corporate borrowers to maintain debt payments. During 2003 and 2004, default rates and yield spreads again declined, and returns in the high-yield market displayed a similar positive response. Spread: The difference between yields on differing debt instruments, calculated by deducting the yield of one instrument from another. The higher the yield spread, the greater the difference between the yields offered by each instrument. The spread can be measured between debt instruments of differing maturities, credit ratings and risk.
  • During difficult economic cycles, some businesses are not able to continue making payments on corporate debt, and some firms may default on loans, as in the periods illustrated here by spikes in the default rate. In 1998, debt issuance, particularly in the telecommunication sector, was very high, and much of that debt subsequently went into default. Conversely, when the economy is healthy, defaults are less common as corporate revenues are applied to debt payments.
  • The “yield spread” depicted in this graph is the difference between the yield of the 10-year US Treasury bond and the yield of the JP Morgan High Yield Index. During periods of weak economic conditions, investors typically require more yield to compensate for the credit (or default) risk they assume when investing in lower rated corporate debt. In a more healthy economic environment, companies, including those that have issued high-yield debt, are generally stronger financially and more capable of maintaining debt payments. During these periods, the yield differential between high quality and lower quality bonds may decrease significantly. Spread: The difference between yields on differing debt instruments, calculated by deducting the yield of one instrument from another. The higher the yield spread, the greater the difference between the yields offered by each instrument. The spread can be measured between debt instruments of differing maturities, credit ratings and risk. (Source: Investopedia.com)
  • When we put the last 3 graphs together – high-yield market returns, yield spreads, and default rates – you can see that yield spreads and default rates tend to follow similar trends, and that the economic and market conditions affecting yield spreads and default rates also affect high yield market returns.
  • At the top of this chart, you see the dollar value, in 2005, of new high-yield bond supply available in the market. In the lower portion of the chart, you see the dollar value, again in 2005, of demand for available high yield bonds. One source of demand in the high yield market is the income generated by outstanding high yield bonds. Investors who do not have a current need for the income generated by their high yield bond investments often seek to reinvest that income in the high yield market.
  • While the volume of new issuance in the high yield market displays significant variability from year to year, the size of the high yield market overall has continued to trend higher.
  • Now, let’s look at Aquila Three Peaks High Income Fund.
  • Our research process is extensive and on-going. In addition to hundreds of annual face-to-face visits with corporate management, we also talk to retailers, distributors, competitors, and consumers. The data we gather is compiled in detailed financial models and subjected to extensive qualitative analysis, in addition to best-to-worst case scenario analysis. While it is common for competent investment analysts to apply financial theory and strategy to their research process, we consistently attempt to validate the assumptions, estimates and inputs used in our models, through extensive on-going research. We maintain diversification within the portfolio by sector, position size and risk profile.
  • Because we are interested in reducing risk through our investment process, we typically discuss our Sell Discipline before we describe our Buy Discipline. Our intensive research is on-going and facilitates our efforts to minimize portfolio volatility. We have developed a number of tests that guide us in our effort to monitor actual financial outcomes against potential opportunity within our analysis of a security.
  • Our criteria for investing in a bond are indicative of the intensive fundamental research we conduct on each holding.
  • As bonds are selected for the portfolio, the focus is on companies that we deem to be moderate-risk issuers, which will represent approximately 60% of the portfolio. Balancing out that moderate-risk core, are an approximate 20% weighting in more conservative holdings offering steady coupon income, and an approximate 20% weighting in aggressive issues poised for credit upgrades. These weightings are approximate, and will vary over time with changes in the economic environment, the high yield market and the financial circumstances of individual high yield issuers.
  • Over the years, while conducting corporate research, and investing in the high yield market, the Three Peaks Capital Management team has compiled a list of significant lessons learned.
  • … pick up delivery from manager
  • The investment process just described has been applied by Three Peaks Capital Management and Sandy Rufenacht in managing Aquila Three Peaks High Income Fund. Here you see the fund characteristics and composition as of the most recent quarter-end.
  • At the most recent quarter-end, these were the 10 largest holdings of the Fund, illustrating in part, the implementation of the investment process just described.
  • Here you see the returns and expenses of the Fund as of the most recent quarter-end.
  • GROUP OF FUNDS THE AQUILA

    1. 1. AQUILA THREE PEAKS HIGH INCOME FUND GROUP OF FUNDS THE AQUILA SM
    2. 2. Please Note <ul><li>Information contained in this document must be preceded or accompanied by a copy of the Fund’s current prospectus. </li></ul><ul><li>The Fund is not a financial institution, deposit or other obligation, is not backed by any financial institution guarantee, is not backed by FDIC or other deposit insurance, and is subject to investment risks, including the possible loss of the principal amount invested. </li></ul><ul><li>Past Performance is not predictive of future investment results. Performance data quoted represents past performance; investment return and principal value of an investment will fluctuate with market conditions so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Fund performance as of the most recent month end is available from Aquila Distributors Inc., 800-437-1020 or www.aquilafunds.com. </li></ul><ul><li>The Fund invests in a variety of fixed-income securities. A basic risk of these securities is that their value will fall if interest rates rise. Since the value of a fixed-income portfolio will generally decrease when interest rates rise, the Fund's net asset value (NAV) will likewise decrease. Another basic risk associated with the Fund is credit or default risk, which is the risk that an issuer will be unable to make principal and interest payments when due. </li></ul><ul><li>It is anticipated that the Fund’s portfolio will typically include a high proportion, perhaps even 100%, of high-yield/high-risk securities rated below investment grade. High-yield bonds generally have a greater credit risk than other types of fixed-income securities and may be especially sensitive to economic changes, political changes, or adverse developments specific to the company that issued the bond. Because of these factors, the performance and NAV of the Fund may vary significantly, depending upon its holdings of high-yield/high risk bonds. </li></ul>
    3. 3. Please Note <ul><li>Currently, the majority of the Management fees are being voluntarily waived. Results, where shown, would have been lower if the full fees or expenses were applied. The maximum sales charge for the Class A shares of the Fund is 4.00%. The Class C share have no sales charge, but do have a Contingent Deferred Sales Charge of 1.00% on redemptions within 12 months of purchase. </li></ul><ul><li>Portfolio holdings information is not necessarily representative of the entire portfolio. Holdings and composition of holdings are subject to change. </li></ul>
    4. 4. Introduction <ul><li>Aquila Investment Management, LLC </li></ul><ul><li>and </li></ul><ul><li>Three Peaks Capital Management, LLC </li></ul><ul><li>create </li></ul><ul><li>Aquila Three Peaks High Income Fund </li></ul>
    5. 5. Aquila Three Peaks High Income Portfolio Manager: Sandy Rufenacht <ul><li>Fund Manager since inception, June, 2006 </li></ul><ul><li>Founded Three Peaks Capital Management, LLC in July 2003 </li></ul><ul><li>Dedicated focus on specialty fixed-income disciplines </li></ul><ul><li>Highly disciplined approach with emphasis on maintaining a stable NAV </li></ul><ul><li>Managed Janus High-Yield Bond Fund, Janus Short-Term Bond Fund, separate accounts and sub-advised portfolios for Janus Capital Group Inc. from January 1996 through July 2003 </li></ul><ul><li>18 years professional investment experience </li></ul><ul><li>University of Northern Colorado, B.A., Business </li></ul>
    6. 6. Three Peaks Capital Management Team Sandy Rufenacht CEO / CIO / PM Brent Olson Director of Research Assistant PM Kim Collins Chief Compliance Officer David Battilega Research Analyst Andrew Bauman Research Analyst Todd Telesz Research Analyst Nora Seibert-Dispense Trader / Desk Analyst Ashley Gapuzan Client Services
    7. 7. Investment Strategy <ul><li>Produce a high level of current income with a focus on protecting the NAV (Net Asset Value). </li></ul>
    8. 8. Agenda <ul><li>The High Yield Market Today </li></ul><ul><li>The Case for High Yield Bonds </li></ul><ul><li>Aquila Three Peaks High Income Fund </li></ul>
    9. 9. Agenda <ul><li>The High Yield Market Today </li></ul><ul><li>The Case for High Yield Bonds </li></ul><ul><li>Aquila Three Peaks High Income Fund </li></ul>
    10. 10. The High Yield Market Today Growth Financed in the High Yield Market Bonds which represent the largest Fund holdings, will be presented in an upcoming slide.
    11. 11. The High Yield Market Today High Yield Bond Investors Investors by segment 2006 45.3% Source : JPMorgan North American High Yield Research, 2006 High-Yield Annual Review , 12/06
    12. 12. Agenda <ul><li>The High Yield Market Today </li></ul><ul><li>The Case for High Yield Bonds </li></ul><ul><li>Aquila Three Peaks High Income Fund </li></ul>
    13. 13. The Case for High Yield Bonds Volatility and Return of Fixed Income Securities Use High Yield to Manage Portfolio Risk and Return JP Morgan data for 5 years ending 10-31-05 Source : JPMorgan North American High Yield Research, 2005 High-Yield Annual Review , 12/05 Investment-grade bond data from 1991 through 2004 is measured by the Merrill Lynch Corporate Master Index; in 2005 it is measured by the JPMorgan JULI Investment-Grade Index. High Yield bond data is measured by the JPMorgan Global High Yield Index. It is not possible to invest directly in an index. Index performance is not illustrative of the performance of the Fund. The Fund commenced operations on June 1, 2006, and does not have performance or volatility history during the period illustrated.
    14. 14. The Case for High Yield Bonds Volatility and Return of Fixed Income Securities Use High Yield to Manage Portfolio Risk and Return JP Morgan data for 5 years ending 10-31-06 Source : JPMorgan North American High Yield Research, 2006 High-Yield Annual Review , 12/06 Investment-grade bond data from 1991 through 2004 is measured by the Merrill Lynch Corporate Master Index; in 2005 it is measured by the JPMorgan JULI Investment-Grade Index. High Yield bond data is measured by the JPMorgan Global High Yield Index. It is not possible to invest directly in an index. Index performance is not illustrative of the performance of the Fund. The Fund commenced operations on June 1, 2006, and does not have performance or volatility history during the period illustrated.
    15. 15. The Case for High Yield Bonds Volatility and Return of Fixed Income Securities Use High Yield to Manage Portfolio Risk and Return 10-31-05 vs. 10-31-06 Source : JPMorgan North American High Yield Research, 2006 High-Yield Annual Review , 12/06 Investment-grade bond data from 1991 through 2004 is measured by the Merrill Lynch Corporate Master Index; in 2005 it is measured by the JPMorgan JULI Investment-Grade Index. High Yield bond data is measured by the JPMorgan Global High Yield Index. It is not possible to invest directly in an index. Index performance is not illustrative of the performance of the Fund. The Fund commenced operations on June 1, 2006, and does not have performance or volatility history during the period illustrated.
    16. 16. The Case for High Yield Bonds Volatility and Return of Various Asset Classes 3 year Volatility (Risk) / Return data JP Morgan data for 3 years ending 10-31-05 Source : JPMorgan North American High Yield Research, 2005 High-Yield Annual Review , 12/05 Index performance is not illustrative of the performance of the Fund. The Fund commenced operations on June 1, 2006, and does not have performance or volatility history during the period illustrated. Incremental Return 15.36% vs. 12.85% Incremental Volatility 6.17% vs. 11.57%
    17. 17. The Case for High Yield Bonds Volatility and Return of Various Asset Classes Incremental Return 9.01% vs. 11.44% Incremental Volatility 3.69% vs. 7.34% 3 year Volatility (Risk) / Return data JP Morgan data for 3 years ending 10-31-06 Source : JPMorgan North American High Yield Research, 2006 High-Yield Annual Review , 12/06 Index performance is not illustrative of the performance of the Fund. The Fund commenced operations on June 1, 2006, and does not have performance or volatility history during the period illustrated.
    18. 18. The Case for High Yield Bonds Volatility and Return of Various Asset Classes 5 year Volatility (Risk) / Return data JP Morgan data for 5 years ending 10-31-05 Source : JPMorgan North American High Yield Research, 2005 High-Yield Annual Review , 12/05 Index performance is not illustrative of the performance of the Fund. The Fund commenced operations on June 1, 2006, and does not have performance or volatility history during the period illustrated. Incremental Volatility 8.03% vs. 15.27% Incremental Return 8.75% vs. -1.74%
    19. 19. The Case for High Yield Bonds Volatility and Return of Various Asset Classes Incremental Volatility 5.46% vs. 12.78% Incremental Return 10.87% vs. 7.26% 5 year Volatility (Risk) / Return data JP Morgan data for 5 years ending 10-31-06 Source : JPMorgan North American High Yield Research, 2006 High-Yield Annual Review , 12/06 Index performance is not illustrative of the performance of the Fund. The Fund commenced operations on June 1, 2006, and does not have performance or volatility history during the period illustrated.
    20. 20. The Case for High Yield Bonds Volatility and Return of Various Asset Classes 10 year Volatility (Risk) / Return data JP Morgan data for 10 years ending 10-31-06 Incremental Return 6.89% vs. 8.64% Incremental Volatility 6.54% vs. 15.52% Source : JPMorgan North American High Yield Research, 2006 High-Yield Annual Review , 12/06 Index performance is not illustrative of the performance of the Fund. The Fund commenced operations on June 1, 2006, and does not have performance or volatility history during the period illustrated.
    21. 21. The Case for High Yield Bonds Volatility of Returns Source: Lehman Brothers, Yahoo Finance Lehman U.S. Corp. High Yield and S&P 500 Growth of $100 Jan. 1987 to Dec. 2006 This chart illustrates a hypothetical investment of $100 in the Lehman U.S. Corporate High Yield Index and the S&P 500 Index. It is not possible to invest directly in an index. The hypothetical illustration does not include the fees and expenses associated with an actual investment; if such fees and expenses were included, the returns would be lower. Index performance is not illustrative of the performance of the Fund. The Fund commenced operations on June 1, 2006, and does not have performance or volatility history during the period illustrated. $ Value
    22. 22. The Case for High Yield Bonds The Impact of Shifting Interest Rates High Yield Index Return vs. 10-yr U.S. Treasury Yield Index performance is not illustrative of the performance of the Fund. The Fund commenced operations on June 1, 2006, and does not have performance or volatility history during the period illustrated. Source: Lehman Brothers, Yahoo Finance Lehman U.S Corp. High Yield Bond Index Growth of $100 Yield on 10-yr. U.S. Treasury
    23. 23. The Case for High Yield Bonds Performance through Economic Cycles Average Total Return 1987 – 2006: 9.70% “ Golden Age” of High Yield 1991 – 1998: 15.46% Average Return Source : JPMorgan North American High Yield Research, 2006 High-Yield Annual Review , 12/06
    24. 24. The Case for High Yield Bonds Default Rate Near Cyclical Low Long term Average 4.74% Average 1/93 to 6/99 2.36% Jan. ‘98 1.20% Dec. ‘06 0.84% Source : JPMorgan North American High Yield Research, 2006 High-Yield Annual Review , 12/06
    25. 25. The Case for High Yield Bonds Yield Spread Near Cyclical Low Long Term Average 548 bps Average 1/93 to 6/99 421 bps Dec ‘06 317 bps Feb ‘97 304 bps Source : JPMorgan North American High Yield Research, 2006 High-Yield Annual Review , 12/06
    26. 26. The Case for High Yield Bonds Tying It All Together High Yield Spreads High Yield Default Rates High Yield Average Annual Returns Source : JPMorgan North American High Yield Research, 2006 High-Yield Annual Review , 12/06
    27. 27. The Case for High Yield Bonds Components of High Yield Market Growth Source : JPMorgan North American High Yield Research, 2006 High-Yield Annual Review , 12/06 58.8 Coupon interest 4.4 Mutual fund inflows 226.3 Total Demand 2006 30.4 New public issues 117.0 144A 147.4 Total new issues 29.3 Fallen angels 176.7 Total Supply 0.0 Forward calendar – Public 0.8 Forward calendar – 144A 0.8 Potential supply 83.3 Redemptions & maturities 45.4 Tenders 955.1 Estimated size of high-yield market 163.2 Demand 8.3 Other 26.1 Rising stars Coupon interest represented 26% of the 2006 Total Demand for High Yield Bonds
    28. 28. The Case for High Yield Bonds Growth of the High Yield Market Source : JP Morgan North American High Yield Research, 2006 High-Yield Annual Review, 12/06. Note: 2006 data as of December 14 th Global US Dollar-Denominated Issues The information in this graph has been obtained from, and is based on, sources that Aquila Distributors, Inc. believes to be reliable. Aquila Distributors, Inc. does not guarantee its accuracy. This analysis is for informational purposes only and is not intended as investment advice. The high yield securities represented in this graph will not match and are not intended to be representative of securities held or to be held in Aquila Three Peaks High Income Fund.
    29. 29. Agenda <ul><li>The High Yield Market Today </li></ul><ul><li>The Case for High Yield Bonds </li></ul><ul><li>Aquila Three Peaks High Income Fund </li></ul>
    30. 30. Aquila Three Peaks High Income Fund Management Focus: To Minimize Risk <ul><li>Relentless Research and Analysis </li></ul><ul><ul><li>Typically visit every company in the portfolio </li></ul></ul><ul><ul><li>Internal financial model developed on all credits </li></ul></ul><ul><ul><ul><li>Income Statement </li></ul></ul></ul><ul><ul><ul><li>Balance Sheet </li></ul></ul></ul><ul><ul><ul><li>Cash Flow Analysis </li></ul></ul></ul><ul><li>Diversified – 25 different industries </li></ul><ul><li>Generally, no more than a 5% position in any one name; typically 1.5% or less </li></ul><ul><li>Minimize duration risk </li></ul>
    31. 31. Aquila Three Peaks High Income Fund Sell Discipline <ul><li>We may sell a security based on these factors: </li></ul><ul><li>Fundamental analysis proves incorrect </li></ul><ul><li>Bond price is higher than justified </li></ul><ul><ul><li>Spread too tight relative to the risk </li></ul></ul><ul><li>More downside risk vs. upside, given price/yield of bond </li></ul><ul><li>Deterioration of communication with management </li></ul><ul><li>Company visit is not allowed </li></ul>
    32. 32. Aquila Three Peaks High Income Fund Buy Discipline <ul><li>We may buy a security based on these factors: </li></ul><ul><li>Our understanding of industry fundamentals </li></ul><ul><li>Our belief that the company is a leader within the industry </li></ul><ul><li>Our belief that the management team is exceptional </li></ul><ul><li>Management team owns stock; preferably 10% or more </li></ul><ul><li>Earnings are reasonably predictable </li></ul><ul><li>Company is aggressively seeking deleveraging opportunities </li></ul><ul><li>Free cash flow exceeds amortization schedule </li></ul><ul><ul><li>Financial model is critical </li></ul></ul><ul><li>Bond represents reasonable value on a relative basis </li></ul><ul><li>Positive events: ratings upgrade, buyout, tender offer </li></ul>
    33. 33. Aquila Three Peaks High Income Fund Portfolio Construction Higher Return 0% to 20% Core Portfolio 30% to 75% Lower Risk 20% to 50% Moderate <ul><li>Better Known </li></ul><ul><li>Seasoned Issuer </li></ul>Conservative <ul><li>Yield to Call </li></ul>Aggressive <ul><li>Start up </li></ul><ul><li>Construction </li></ul>
    34. 34. Three Peaks Capital Management, LLC Lessons to live by <ul><li>Sell first, ask questions later. </li></ul><ul><li>Excess issuance relative to size is a problem, unless the issuer finances hard assets, consolidates debt, or buys back commercial paper or bank loans. </li></ul><ul><li>Growth companies are often not bondholder friendly. </li></ul><ul><li>Covenants count. </li></ul><ul><li>Transparency remains a very critical part of assessing credit value. Regular detailed filings help, but an open door policy with credit analysts goes a long way to establish confidence. </li></ul><ul><li>Liquidity first. </li></ul><ul><li>Boring is good for bond holders. “Rich or tight bonds can outperform as long as blowups are avoided.” </li></ul><ul><li>Dig deep to uncover future blowup candidates. Avoiding the blowups is more important than hitting the home runs. </li></ul><ul><li>Caveat emptor – if you cannot understand the credit, don’t own it. </li></ul><ul><li>Be suspicious of all companies who have done large mergers, particularly those where one company uses the cash flow from an established company to fund growth. Be leery of spin-offs. </li></ul><ul><li>Avoid dividend paying debt deals. </li></ul><ul><li>Assets count. </li></ul><ul><li>Invest only in those sectors that have traditionally been able to support leverage. </li></ul><ul><li>Understand who is borrowing, why they are borrowing, when they will pay off the loan and what bondholders will get in the event of an unforeseen default. </li></ul><ul><li>Dot all I’s and cross all T’s. Don’t get scooped, get the scoop!!! </li></ul>
    35. 35. Aquila Three Peaks High Income Fund A Time-tested Strategy <ul><li>Aquila Three Peaks High Income Fund </li></ul><ul><li>and your investment strategy </li></ul>
    36. 36. Aquila Three Peaks High Income Fund December 31, 2007
    37. 37. Aquila Three Peaks High Income Fund September 30, 2007 Largest Holdings Las Vegas Sands 6.375%, ‘15 Direct TV Holdings 8.375%, ‘13 CSC Holdings Inc 7.25%, ‘08 Felcor Lodging LP 7.25%, ‘11 HCA Inc 6.75%, ‘13 Mandalay Resort 7.625%, ‘13 Aramark Corp 8.50%, ‘15 Corrections Corp 7.50%, ‘11 Ball Corp 6.875%, ‘12 GSC Holding Corp 8.00%, ‘12 5.77% 5.38% 3.13% 3.10% 2.90% 2.21% 1.99% 1.93% 1.92% 1.79%
    38. 38. Aquila Three Peaks High Income Fund December 31, 2007 Performance data is based on past performance and does not guarantee future results. Current performance may be higher or lower. Data current to the most recent month end is available: 800-437-1020 or www.aquilafunds.com. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Total return calculations include changes in share price and reinvestment of dividends and capital gain distributions in a hypothetical investment for the period shown. Class A shares have a maximum sales charge of 4.00%; Class C shares have no initial sales charge, but a 1.00% contingent deferred sales charge applies to Class C shares redeemed within 12 months of purchase. Class Y shares have no initial and no contingent deferred sales charge and are available only through certain financial institutions. Other classes of shares are offered and their performance will vary due to differences in sales charges and fees. Management has contractually undertaken to waive fees and/or reimburse Fund Expenses through December 31, 2007. Returns would have been less if full management fees and expenses were applied.
    39. 39. Aquila Three Peaks High Income Fund <ul><li>Risk / Return Benefit of Low Correlation </li></ul><ul><li>Extensive Research & Risk Management </li></ul><ul><li>Sell Discipline </li></ul><ul><li>18 Years of Investment Industry Experience </li></ul><ul><li>____________________________________ </li></ul><ul><li>Class A Shares ATPAX </li></ul><ul><li>Class C Shares ATPCX </li></ul><ul><li>Class Y Shares ATPYX </li></ul><ul><li>Class I Shares ATIPX </li></ul><ul><li>www.aquilafunds.com </li></ul><ul><li>800-437-1020 </li></ul>
    40. 40. AQUILA INVESTMENT MANAGEMENT LLC <ul><li>EXPERTISE IN NICHE MARKETS </li></ul><ul><li>DEDICATED TO PROVIDING SUPERIOR SERVICE </li></ul><ul><li>High Yield Corporate Bond Fund </li></ul><ul><li>AQUILA THREE PEAKS HIGH INCOME FUND </li></ul><ul><li>Single-State Municipal Bond Funds </li></ul><ul><li>ARIZONA, COLORADO, HAWAII, KENTUCKY, OREGON, RHODE ISLAND, UTAH </li></ul><ul><li>Equity Fund </li></ul><ul><li>AQUILA ROCKY MOUNTAIN EQUITY FUND </li></ul><ul><li>CLASS A, C, Y and I SHARES </li></ul>Before investing in any of the Aquila Group of Funds SM , carefully read about and consider the investment objectives, risks, charges, expenses and other information found in the Fund prospectus. Obtain a prospectus from your financial professional or contact: AQUILA GROUP OF FUNDS SM 800-437-1020 www.aquilafunds.com
    41. 41. Conclusion <ul><li>Supporting your Success </li></ul><ul><li>Dedicated Management Team </li></ul><ul><li>Exceptional Marketing and Service Team </li></ul><ul><li>Highly Motivated Teamwork </li></ul>
    42. 42. AQUILA THREE PEAKS HIGH INCOME FUND GROUP OF FUNDS THE AQUILA SM
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