Ultra Short Tax-Free Income Fund Commentary

4Q 2019

How did the municipal bond market perform?

The employment situation remained a strength in the U.S. economy, as nonfarm payrolls gained an average of 184,000 in the quarter and the unemployment rate ended 2019 at 3.5%. While growth hasn’t been robust, it has been steady and is expected to stay in the 2% range in the near future. U.S. consumers continue to be resilient as evidenced by a strong holiday shopping season. The Federal Reserve Board (the Fed) lowered the overnight lending rate at the October Federal Open Market Committee meeting, but then left rates unchanged at the December meeting and indicated that they may be on hold in the coming months.

The short end of the municipal market was relatively quiet in the fourth quarter, as rates in the 1-year fixed-rate market traded in a fairly tight range during the period. However, there was some volatility for yields on variable rate demand notes (VRDNs). Yields dropped in October in conjunction with the Fed move, held steady in November, but then rose rapidly in December in response to year-end pressure, as the SIFMA Index¹ closed 2019 at 1.61%, rising from 1.06% at the beginning of the month.

The fixed-rate portion of short end of the muni market didn’t provide many buying opportunities during the quarter, but the spike in VRDN rates at the end of the year made those an attractive option for investors.

As has been previously mentioned, the supply/demand dynamic is a big driver in the muni market. Lipper has been tracking muni bond fund flows since 1992 and 2019 was a record year for inflows, so demand was quite strong. Supply was robust in the quarter, but one trend that bears watching is the amount of taxable muni bond issuance. The tax reform act took away the ability for muni issuers to advance refund their deals, but the low-rate environment enabled them to issue taxable muni deals. If this trend continues, it will provide a challenge to investors who are seeking tax-exempt bonds.

What were your primary investment strategies during the quarter?

The Fund continued to hold a mix of fixed-rate bonds and VRDNs throughout the quarter, which proved to be effective at times during the period, but underperformed the benchmark for the quarter on the whole.**

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

Given the current economic situation—steady growth, strong labor market, benign inflation—it appears that the Fed will be on the sidelines in the coming months, leaving short-term muni rates fairly range-bound. Market participants will be closely monitoring the supply/demand dynamic. If the taxable muni issuance continues to reduce the tax-exempt supply, investors could face a challenging environment for deploying cash.

Aside from the market fundamentals, the first half of 2020 could see some volatility due to the Trump impeachment trial, the Democratic primary season heating up, and the trade deal (or tension) with China.

If short-term muni bond rates are relatively range-bound, the Fund will look to take advantage of buying opportunities as they arise in the coming months. Tax time has historically been a window to lock in fixed-rate purchases, so the Fund will extend duration if that occurs.**

Market participants will also be watching the Democratic primaries. If a more progressive candidate emerges as the frontrunner, muni spreads could be affected, with a rise in income tax rates priced into the market.

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.

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 2020, 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.

© 2020 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.

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. 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. The index is

Since December 31, 2017.

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 12/31/2019 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