NOTICE: 2019 Capital Gains Available. View PDF here.

Ultra Short Tax-Free Income Fund Commentary

3Q 2019

The Fund returns presented reflect fee waivers that have been in effect during the applicable periods. Without such waivers, the total returns would have been lower. Currently, contractual fee waivers are in effect from December 26, 2018 through December 31, 2019.

How did the municipal bond market perform?

The employment situation and consumers continue to be the strongest components of the U.S. economy. Monthly nonfarm payrolls gained an average of 157,000 for the quarter and the unemployment rate fell to 3.5% at the end of September. U.S. consumers remained resilient despite the ongoing trade war, which has not shown signs of getting resolved, as well as signs of an economic slowdown, especially from the manufacturing sector. The Institute for Supply Management Non-Manufacturing Index1 fell to 52.6 in September, which was its lowest level since August 2016. On the economic growth front, market participants are expecting third-quarter gross domestic product1 growth to fall below 2%.

The Federal Reserve Board (the Fed) lowered the overnight lending rate by a quarter point at the Federal Open Market Committee (FOMC) meetings in July and September and reiterated its stance that it will continue to monitor the trade situation and economic data in the coming months to determine whether further cuts are needed.

The short end of the municipal market presented an opportunity to buy fixed-rate paper at attractive levels at the outset of the quarter, but rates drifted steadily lower until mid-September, when they began to move higher.

Yields on variable rate demand notes (VRDNs) were fairly steady during the period, averaging 1.40% for the quarter. However, one surprise came after the Fed lowered rates at the September 18 FOMC meeting. VRDN yields typically fall after a Fed ease, but they rose about 25 basis points (0.25%) in the second half of September as quarter-end pressure led remarketing agents to keep the rates elevated in an attempt to entice crossover buyers and reduce inventory.

The low rate environment presented the biggest challenge for investors in the short end of the muni market during the quarter. Muni bond funds continued to see inflows at a record pace, which created even more pressure from a supply and demand perspective.

What were your primary investment strategies during the quarter?

The Fund maintained a mix of fixed-rate paper and VRDNs, which proved to be effective for most of the quarter, particularly in the second half of September, when VRDN yields rose despite the Fed lowering rates. The Fund also extended the duration through fixed-rate purchases in the 9- to 12-month range. This was done in anticipation of future Fed rate cuts, which should cause VRDN yields to fall.**

The Fund outperformed the benchmark in September, but slightly underperformed for the quarter.

How do you expect to position your Fund in the coming months?

The Fed has indicated that it would most likely lower the overnight lending rate at least one more time in 2019, which will most likely affect yields in the short end of the muni market.

The Fund will continue to look for opportunities to extend the duration by purchasing fixed-rate bonds in the 9- to 12-month range. We believe the fourth quarter is often an attractive time to buy due to supply and demand imbalances.**

**
Portfolio composition is subject to change.
Each Lipper Mutual Funds average is an equally weighted average of the mutual funds within their respective investment objectives, adjusted for reinvestment of capital gain distributions and income dividends.
1

Definitions

Bloomberg Barclays 1-Year Municipal Bond Index includes bonds with a minimum credit rating of BAA3, are issued as part of a deal of at least $50 million, have an amount outstanding of at least $5 million, and have maturities of 1 to 2 years. The index is unmanaged and does not reflect the fees and expenses associated with a mutual fund. An investor cannot invest directly in an index. Gross Domestic Product (GDP) measures the market value of the goods and services produced by labor and property within the respective country/economic region. ISM Non-Manufacturing Index is an index based on surveys of more than 400 non-manufacturing firms' purchasing and supply executives, within 60 sectors across the nation, by the Institute of Supply Management (ISM). The ISM Index tracks economic data, like the ISM Non-Manufacturing Business Activity Index. A composite diffusion index is created based on the data from these surveys that monitors economic conditions of the nation.

2
Since December 31, 2017.

Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. To obtain performance information current to the most recent month end, call 800-762-7085 or visit us at www.cavanalhillfunds.com.

The Lipper Mutual Funds Average is an equally weighted average of the mutual funds within their respective Lipper classification, adjusted for reinvestment of capital gains distributions and income dividends. Lipper ratings are not intended to predict future results, and Lipper does not guarantee the accuracy of this information. More information is available at www.lipperweb.com. Thomson Reuters Copyright 2019, All Rights Reserved.
Morningstar rankings are based on a fund’s average annual total return relative to all funds in the same Morningstar category. Fund performance used within the rankings, reflects certain fee waivers, without which, returns and Morningstar rankings would have been lower. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100.
© 2019 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

An investor should consider a fund’s investment objectives, risk and charges and expenses carefully before investing or sending money. This and other important information about an investment company can be found in the fund’s prospectus. To obtain a Cavanal Hill Funds prospectus or summary prospectus, please call 800- 762-7085 or visit us at www.cavanalhillfunds.com. Please read it carefully before investing.

Cavanal Hill Investment Management, Inc. is an SEC registered investment adviser and a wholly-owned subsidiary of BOKF, NA, a wholly-owned subsidiary of BOK Financial Corporation, a financial holding company (“BOKF”). BOKF, NA serves as the custodian for the Cavanal Hill Funds. Cavanal Hill Investment Management, Inc. provides investment advice, administration and other services for the Funds and receives a fee for providing such services as fully described in the prospectus. The Funds are distributed by Cavanal Hill Distributors, Inc., a registered Broker/Dealer, member FINRA and wholly-owned subsidiary of BOKF. SEC registration does not imply a certain level of skill or training. Bank of Oklahoma and its affiliates Bank of Arkansas, Bank of Albuquerque, Bank of Texas, Bank of Arizona, Mobank and Colorado State Bank and Trust offer investment management and administrative services nationally and administer more than $35 billion in assets for numerous clients, including foundations and endowments, and high-net-worth individuals.
Commentary provided is for the period ended 9/30/2019 and is designed to provide a frame of reference and does not constitute investment advice. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. The opinions expressed herein reflect the judgment of the authors at this date and are subject to change without notice and are not a complete analysis of any sector, industry or security. This document contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates, and projections about the Cavanal Hill Funds, the securities and credit markets and the economy in general. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “plans,” “projects,” variations of such words and similar expressions are intended to identify such forwardlooking statements. Management judgments relating to and discussion of the value and potential future value or performance of any security, group of securities, type of security or market segment involve judgments as to expected events and are inherently forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expressed, implied, or forecasted in such forward-looking statements. The potential realization of these forward-looking statements is subject to a number of limitations and risks, which are described in the Funds’ prospectuses, and investors or potential investors, are cautioned to review the Funds’ prospectuses, and the description of such risks. Neither the Funds nor the Funds’ investment adviser, Cavanal Hill, undertake any obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events or otherwise

MUTUAL FUNDS AND OTHER INVESTMENTS: NOT FDIC INSURED • MAY LOSE VALUE • NO BANK GUARANTEE

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