From the Desk of Jim Eccleston at Eccleston Law:
OppenheimerFunds’ municipal bond funds have backfired again due to the Puerto Rican debt, stirring up memories of its Coe Bond Fund’s disastrous 2008. Oppenheimer Rochester Virginia Municipal Bond Fund (ORVAX) is down more than 15% this year, coming in dead last among single-state municipal bond funds and second-worst among all municipal bond funds. The average single-state municipal bond is down only 5.58%.
The main culprit behind the fund’s underperformance has been its big bet on Puerto Rican bonds, which have tremendously underperformed the broad municipal bond market. In particular, the S&P Municipal Bond Puerto Rico Index was down 21% year-to-date through October 10, 2013, which is 1,900 basis points worse than the S&P Municipal Bond Index. According to Morningstar Inc., the Virginia fund held 33% of its assets in Puerto Rican debt as of August 31, 2013, which is the most of any single-state municipal bond fund.
Puerto Rican debt is not entirely unheard of in single-state bond funds because they are exempt from state taxes in most states. But Puerto Rico bonds carry higher yields because of the risks surrounding the territory’s pension deficits and slow economic growth, leading to high risk credit ratings. Investing in high risk Puerto Rican bonds is not prudent for mutual funds and investors seeking more conservative investments.
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