NOTICE: 2019 Capital Gains Available. View PDF here.

Ultra Short Tax-Free Income Fund Commentary

2Q 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 U.S. employment picture improved in June after slipping in May, which enabled the monthly nonfarm payrolls to gain an average of 171,000 for the quarter. First-quarter gross domestic product1—released during the period—exceeded expectations with a 3.1% annualized pace of growth. Current growth forecasts for the second quarter are in the 2% range, but the market and the Federal Reserve Board (the Fed) will be paying close attention when the figure is released in late July. Other focal points for the market and Fed include the ongoing U.S.-China trade talks as well as inflation, which have remained relatively benign.

While the Fed didn’t lower rates during the period, it indicated that it is prepared to do so in the second half of 2019. Although the domestic U.S. economy doesn’t necessarily warrant an easing, the ongoing trade tensions, and global rate environment provide the leeway for a move. Yields in the 1-year maturity range of the municipal market continued to drift downward during the quarter, as rates fell about 20 basis points (0.20%). This was in anticipation of a rate cut at an upcoming Federal Open Market Committee meeting as well as continued inflows to municipal bond funds. Variable rate demand note (VRDN) yields, which typically rise during tax time, were extremely volatile during the quarter. The SIFMA index1 began the quarter at 1.50%, reached 2.30% at the end of April, and then fell to 1.32% in May before finishing the period at 1.90%.

The best opportunities in the short end of the fixed rate muni market actually came at the outset of the quarter as yields fell steadily throughout the period. As referenced above, VRDNs were attractive during portions of the quarter. The biggest challenge for investors was finding value in deploying cash as rates drifted downward and muni bond funds had record inflows.

What were your primary investment strategies during the quarter?

The Fund maintained a mix of fixed rate and variable rate bonds throughout the quarter. VRDN rates were volatile during the period, but their average was higher than the fixed rate yields. Despite the attractive rates on VRDNs, the Fund underperformed its benchmark due to the strong rally in the 1-year maturity range.**

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

The Fed has signaled that it is prepared to lower rates in the second half of 2019 if warranted. If that occurs, yields in the short end of the muni market will fall in conjunction with taxable rates.

The Fund will look for opportunities to extend the duration by locking in attractive fixed-rate yields in the 9 to 12-month maturity range. While yields are typically suppressed during July, the late August/early September timeframe has historically presented such buying opportunities.**

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.


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. Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index, produced by Municipal Market Data (MMD), is a 7-day high-grade market index comprised of tax-exempt variable rated demand obligations (VRDO’s) from MMD’s extensive database. SIFMA is a leading securities industry trade group representing securities firms, banks, and asset management companies in the U.S. and Hong Kong.

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

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 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 6/30/2019 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.


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