OppenheimerFunds stays uniquely committed to Puerto Rico's muni bonds

Big bets by the Rochester muni bond team lead to feast-or-famine performance record

May 5, 2017 @ 2:40 pm

By Jeff Benjamin

Puerto Rico's recent bankruptcy filing shines fresh light on the so-called Rochester team at OppenheimerFunds, which has remained stubbornly committed to the U.S. territory even as it has rumbled toward a wall of financial woes.

The filing on Tuesday represents the largest municipal bankruptcy in U.S. history. At $73 billion, Puerto Rico's bankruptcy is four times the size of the previous record, Detroit's $9 billion filing in 2013.

But even as Puerto Rico's gradual economic breakdown has been well-documented, including the default on a $1 billion debt payment last summer, the muni bond team at OppenheimerFunds has remained doggedly committed to the Caribbean island's high-yielding debt.

According to Morningstar, OppenheimerFunds muni bond funds represent 17 of the 18 funds most heavily exposed to Puerto Rico.

The allocations range from 9.44% in the Oppenheimer Rochester Limited Term California Municipal Fund (OLCAX) to 27.51% in the Oppenheimer Rochester Maryland Municipal Fund (ORMDX).

Respectively, those two funds that bookend a courageous confidence in Puerto Rican debt have five- and four-star performance ratings from Morningstar.

But Morningstar isn't the only outlet praising the risky returns generated by the muni bond managers.

Last year Barron's ranked OppenheimerFunds' tax-exempt fund family No. 1 on its list of the top 50 fund families.

A passion for Puerto Rico's debt
The OppenheimerFunds Rochester municipal bond funds continue to carry a high concentration of Puerto Rico debt

And just last month, the muni bond team was showered more than a dozen Lipper Awards for performance.

OppenheimerFunds spokeswoman Kimberly Weinrick said the Rochester, N.Y.-based muni bond portfolio management team would not be available for comment for at least the next several days.

"Our Rochester funds are long-term investors in Puerto Rico and have supplied much-needed financing to the commonwealth for more than 20 years," she said.

For investors in any muni fund holding Puerto Rico's debt, there will be a likely decline in values as the bonds are repriced under the shadow of bankruptcy. But as Ronald Bernardi, president of Bernardi Securities, explained, "This is just the second inning of a long game."

As the bankruptcy negotiations start to unfold, the various forms of municipal debt will be prioritized, with some bondholders forced to take bigger "haircuts" than others, but all bondholders should expect to get something less than 100 cents on the dollar, Mr. Bernardi said.

The appeal of Puerto Rico's debt by the muni bond team at OppenheimerFunds has unfolded virtually in tandem with the Puerto Rico's economic challenges.

Last summer, for example, an analyst at Ameriprise Financial warned investors against investing OppenheimerFunds' muni bond funds.

"As Puerto Rico bond defaults accelerate, the mutual funds may have to cut dividend rates as bond interest payments are missed," wrote analyst Jeffrey Lindell. "The net asset value of the mutual funds could also be volatile as the price of Puerto Rico bonds reacts to speculation and news, or as potential principal haircuts occur."

Some investors have taken heed, as witnessed by recent net outflows from the muni bonds with heavy allocations to Puerto Rico.

According to Morningstar, all 17 of OppenheimerFunds' muni funds with the largest allocation to Puerto Rico had net outflows last year.

This year through the end of April, 13 of those funds have experienced net flows.

However, performance has been in line with what might be expected from funds taking bigger bets.

This year through May 4, for example, the OppenheimerFunds Rochester Virginia Municipal Fund (ORVAX) gained 9.14%, which compares to a gain of 2.38% for the Bloomberg Barclays Municipal Bond Index.

Last year the fund gained 4.27%, while the index gained just 25 basis points.

But while this fund is currently in the top percentile in its category, and finished in the fourth percentile last year, it finished in the 98th percentile in 2015 with a 1.62% decline against an index gain of 3.3%.

But in 2014, it finished in the first percentile with a 17.6% gain, compared to an index gain of 9.1%.

"When you see the highest of highs and the lowest of lows it's a good sign that a fund is taking on a lot of risk," said Todd Rosenbluth, mutual fund and ETF analyst at CFRA.

He cited the $5.8 billion OppenheimerFunds Rochester Municipals Fund (RMUNX), which has seen a similar pattern of performance feast or famine, as another example of a five-star rated fund that is taking investors for a wild ride.

The fund is yielding 4%, which is double the category average.

"What's easy to miss when you're investing based on past performance is the risk, and in this case, it's credit risk," Mr. Rosenbluth said. "From a performance perspective, you can't deny that this is a good fund, but there might be more risk than investors are ready to stomach.

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