Amid a spate of class actions and investigations by five states into losses associated with its bond funds, OppenheimerFunds Inc. has launched an aggressive effort to strengthen its business operations.
It is too early to tell whether that effort will repair OppenheimerFunds' image, but the New York-based firm clearly needed to address its troubles, according to observers.
The company's bond funds lost an average of 29% last year, compared with a 7.9% average decline for bond mutual funds, according to Morningstar Inc. of Chicago.
A big reason for the poor performance was big bets that OppenheimerFunds managers made on commercial-mortgage-backed bonds — bets that were amplified because of the use of derivatives to attain leverage, said Eric Jacobson, a fixed-income specialist with Morningstar.
"These guys were playing with fire, and they got burned," said Burton Greenwald, a Philadelphia-based mutual fund consultant.
That has led OppenheimerFunds' bond fund investors to take action.
Class actions have been filed related to losses incurred in the Oppenheimer California Municipal Fund (OPCAX) and the Oppenheimer Champion Income Fund (OPCHX). The lawsuits claim that the risks associated with investments in the funds weren't disclosed to investors.
529 PLAN ISSUES
Meanwhile, attorneys general in Illinois, Maine, New Mexico, Oregon and Texas are also looking into possible legal action related to losses as a result of OppenheimerFunds' bond funds in the states' Section 529 college savings plans.
"OppenheimerFunds cannot comment on the investigations," said Jeaneen Pisarra, a spokeswoman for the company. "Having said that, OppenheimerFunds maintains that it acted appropriately in managing the funds for which it serves as investment adviser."
Nevertheless, OppenheimerFunds is trying to address some of the issues that gave rise to the lawsuits.
The firm announced major changes late last month aimed at strengthening the investment organization and elevating risk management.
OppenheimerFunds created two new positions: chief investment officer of equities and chief investment officer of fixed income. As a result, Kurt Wolfgruber, the firm's chief investment officer, will leave April 30.
Chris Leavy, director of equities, will take on the role of chief investment officer of equities. Although he had announced in the fall his plans to leave OppenheimerFunds on March 31, after helping shape the business plan for the company, he decided to stay, according to a statement from the company on that date.
Art Steinmetz, director of fixed-income investments, will become chief investment officer of fixed income.
Both he and Mr. Leavy will report directly to Bill Glavin, who was named chief executive of OppenheimerFunds in January.
"It strengthens our leadership," Mr. Glavin said of the moves. "It resolves some issues around portfolio teams where we had ... poor performance, frankly, to new teams that are going to try and drive better long-term excellent performance for shareholders."
Complementing those changes, OppenheimerFunds also last month named Joseph Welsh head of a newly formed high-yield-corporate-debt team. He will serve as portfolio manager of the Oppenheimer Champion Income Fund, the high-yield portion of Oppenheimer Strategic Income Fund (OPSIX) and all related high-yield strategies.
Mr. Welsh will continue as co-portfolio manager of the Oppenheimer Senior Floating Rate Fund (OSAX), which invests in syndicated loans to below-investment-grade companies.
Actions being taken by OppenheimerFunds to elevate risk management may have an even greater impact on fund performance.
Geoff Craddock, head of risk management, Kristina Olson, head of internal audit, and Mark Vandehey, head of compliance, all will report directly to Mr. Glavin.
INSIGHT AND ACCESS
"First, it gives me much more insight and involvement into the critical controls and functions of our firm," he said.
"Second, it gives [Mr. Craddock, Mr. Vandehey and Ms. Olson] direct access to me in situations — and we don't expect there to be a lot of these — where they feel it's important for the CEO to know and understand things going on inside the organization, good or bad."
For shareholders, these are positive changes, said Jeff Keil, president of Keil Fiduciary Strategies LLC, a Littleton, Colo.-based industry adviser.
"Not every organization has a chief risk officer," he said.
"That in and of itself shows a commitment to mitigate risk. Couple that with the new reporting lines ... that will be a winning combo."
E-mail David Hoffman at [email protected].
