With the battered performance of its bond funds creating a financial nightmare for investors, OppenheimerFunds Inc. is fighting to rebuild its image and win back the confidence of financial advisers — a job that will likely take years, industry experts said.
“We're working our asses off in trying to rebuild the
trust advisers had in us for a number of years,” said John Murphy, chairman of New York-based OppenheimerFunds.
It has taken more than five years for another asset manager scarred by past underperformance — Janus
Capital Group Inc. of Denver — to rebuild its brand, said Don Phillips, a managing director with Morningstar Inc. of Chicago.
“That's the kind of timetable [OppenheimerFunds] is looking at,” he said.
The company's bond funds lost an average of 29% last year, compared with a 7.9% average decline for all bond mutual funds, according to Morningstar.
The $1.11 billion Oppenheimer Core Bond Fund (OPIGX) was hit particularly hard, losing 37.6% last year. The benchmark index for the fund, the Lehman Brothers (now Barclay's Capital) Aggregate Bond Index, rose 5%.
A big reason for the poor performance was the bets that OppenheimerFunds managers made on commercial-mortgage-backed bonds — bets that were amplified because of the use of derivatives to attain leverage.
OppenheimerFunds' efforts to elevate risk management and re-establish its brand have yet to win over unforgiving advisers.
To that point, OppenheimerFunds officials met this month with staff members of The Mutual Fund Store LLC, an Overland, Kan.-based firm with about $3.5 billion in client assets.
Despite assurances that OppenheimerFunds had addressed the issues that led its bond funds to implode, Adam Bold, chief executive of The Mutual Fund Store, said that it may still pull clients out of two recommended OppenheimerFunds bond funds.
“It's not just the performance problems,” he said. “My concerns are on the risk-management and corporate-governance side.”
OppenheimerFunds officials announced changes in March aimed at alleviating advisers' concerns about risk. The heads of risk management, internal audits and compliance now report directly to Bill Glavin, who was named chief executive of OppenheimerFunds in January.
They had reported to Kurt Wolfgruber, who stepped down as chief investment officer April 30 and is no longer with OppenheimerFunds.
The firm also announced changes aimed at strengthening the investment organization by creating two positions: CIO of equities and CIO of fixed income.
Chris Leavy, director of equities, is now the CIO of equities.
In the fall, he announced plans to leave OppenheimerFunds on March 31. But after helping to shape the business plan for the company, Mr. Leavy decided to stay.
Art Steinmetz, director of fixed-income investments, is now CIO of fixed income.
Both CIOs will also report directly to Mr. Glavin.
All those changes are steps in the right direction, said one East Coast registered representative who asked that neither his name nor the name of his firm be published because he hadn't been given permission to speak publicly.
But if OppenheimerFunds is serious about rebuilding its image among advisers, it would offer to reimburse clients who lost money in its bond funds, this rep said.
But OppenheimerFunds contends that isn't realistic.
“No one could have predicted the unprecedented market volatility we experienced last year. We are disappointed in the performance of the funds and have taken steps to address that going forward,” said Jeaneen Pisarra, a spokeswoman for OppenheimerFunds.
In addition, Oregon Attorney General John Kroger filed a lawsuit against the company last month, seeking to recover $36.2 million that the state claims that investors in a Section 529 college savings plan lost because OppenheimerFunds' Core Bond Fund took “extreme risks in a search for speculative large returns”
(InvestmentNews, May 4).
At least four other states — Illinois, Maine, New Mexico and Texas — are also looking into possible legal action.
OppenheimerFunds also faces a spate of class actions related to various bond funds.
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.
“With so many people suing them they have to be very careful,” said Burton Greenwald, a Philadelphia-based mutual fund consultant.
Careful, however, doesn't mean going into “radio silence,” Mr. Phillips said. That was the mistake that Janus made when its funds — heavy with technology stocks — saw re-turns plummet after the technology bubble burst in 2000, he said.
Rather than follow Janus' example, OppenheimerFunds appears to have taken a page from Putnam Investments of Boston to rebuild its image, he said. Like Putnam, OppenheimerFunds has made executive changes, and is being very open with investors about what changes it is making, Mr. Phillips said.
OppenheimerFunds may have the right idea, but that doesn't mean that advisers will immediately forgive the company.
“They certainly have a challenge in front of them,” Mr. Phillips said.
E-mail David Hoffman at [email protected].
