Recently,
this blog reported on investigations into UBS’ sales practices concerning $10
billion worth of bond funds concentrated on Puerto Rico municipal debt. Puerto Rico has been hit hard by serious
economic problems, including slow economic growth as well as the unsustainable
growth in its public pension obligations.
Any bond fund with sizeable holdings in the Puerto Rico municipal bonds
can expect significant losses, as the S&O Municipal Bond Puerto Rico Index
was down 21% year-to-date through October 10, 2013.
OppenheimerFunds
are the most recent example of municipal bond funds suffering large declines in
NAV because of large bets on the same Puerto Rico municipal bonds that have
afflicted UBS investors. As reported by
InvestmentNews, the Oppenheimer Rochester Virginia Municipal Bond Fund (ORVAX) held
33% of its assets in Puerto Rican debt as of the end of August 2013, which
resulted in a decline in the fund’s value of 15% this year, nearly three times
the average single-state municipal bond fund decline over the same time period.
While the Oppenheimer Virginia Fund
had the largest holdings of Puerto Rico debt, several other Oppenheimer
single-state municipal bond funds, including Oppenheimer Rochester North Carolina, Arizona, Massachusetts and
Maryland funds, all hold more than one quarter of their assets in Puerto Rico
bonds. As a result, each of these bond
funds is down more than 11%.
A Morningstar analyst quoted by
InvestmentNews described Puerto Rico as “a risky credit. . .Taking on a lot of
Puerto Rican bonds essentially turns a fund into a high-yield state municipal
bond fund. Investors need to be aware of
that.”
The problems with the various
OppenheimerFunds harken back to 2008, when Oppenheimer Core Bond Fund plummeted
35% due to its concentration in mortgage-backed debt and which led to charges
filed by the Securities and Exchange Commission.
