U.S. funds still grab Puerto Rico municipal bonds despite risks
By Sam Forgione NEW YORK, May 3 (Reuters) - Top investment firms such as Franklin Templeton and Oppenheimer have funds that still hold significant amounts of high-yielding Puerto Rican municipal bonds, despite risks inherent in the Caribbean island's economy. The Franklin Double Tax-Free Income Fund had 66 percent of its assets invested in Puerto Rican municipal bonds according to an April 30 analysis by Lipper, a Thomson Reuters company. Five of Oppenheimer's Rochester muni funds had over 20 percent exposure to the debt. Puerto Rico, a U.S. territory, pays the highest rates of any major tax-free borrower in the $3.7 trillion U.S. municipal market, given fiscal challenges such as the commonwealth's large structural budget gap, unemployment rate of 14.2 percent, and underfunded public pension system. All three major credit ratings firms have recently downgraded Puerto Rico's bond ratings to just above junk-bond status in the wake of a six-year recession that ended in 2012. "Despite the credit risk, demand for yield has been pretty strong, helping to drive prices higher on Puerto Rico's general obligation municipal debt," said Domenic Vonella, analyst at Municipal Market Data. Yields, which move inversely to prices, on Puerto Rico's 10-year general obligation municipal bonds have fallen from 5.04 percent on April 10 to 4.81 percent as of Thursday, according to MMD data. Those patently higher yields, combined with the price gains since April, have made them more compelling to some investors than their triple-A rated U.S. counterparts. The U.S. bonds offer a lower yield of 1.66 percent as of Thursday, and have seen less price gains since yielding 1.74 percent on April 10. While municipal debt is generally free from federal income taxes, Puerto Rico's municipal bonds are also exempt from state and local taxes in all 50 states on their interest payouts, which is an added perk for investors. The Franklin Templeton fund, for example, has earned a return of 2.45 percent so far this year, above the 1.56 percent return on the Barclays Municipal Bond Index, according to Lipper. The fund had $692 million in assets at the end of March. The fund's managers were not immediately available to comment. Even with those advantages, the risks of holding Puerto Rican municipal debt may outweigh the rewards. "This is a good time to get out of Puerto Rico's municipal debt," said Jeff Tjornehoj, head of Americas research at Lipper, in light of the island's tepid economic recovery and the recent price gains. The following are the top 20 mutual funds and exchange-traded funds that invest in Puerto Rican municipal bonds, according to Lipper: Fund Name Sum of TNA % in Puerto Rico Munis Franklin Double Tax-Free Income Fund 65.98 Wells Fargo Advantage Wisconsin Tax-Free 29.47 Fund Voyageur Delaware Tax-Free Idaho Fund 26.34 HighMark Wisconsin Tax-Exempt Fund 26.24 Oppenheimer Rochester Virginia Municipal 25.46 Fund Oppenheimer Rochester Maryland Municipal 23.83 Fund Oppenheimer Rochester Michigan Municipal 21.69 Fund Oppenheimer Rochester Fund Municipals 21.47 Oppenheimer Rochester Arizona Municipal 20.35 Fund Oppenheimer Rochester North Carolina 18.88 Municipal Fund Oppenheimer Rochester Limited Term New 18.70 York Municipal Fund Oppenheimer New Jersey Municipal Fund 18.67 Nuveen Wisconsin Municipal Bond Fund 17.85 Oppenheimer Rochester Massachusetts 17.71 Municipal Fund PowerShares Insured New York Municipal 16.25 Bond Portfolio Oppenheimer Rochester AMT-Free New York 15.64 Municipals Forward Credit Analysis Long/Short Fund 14.98 Oppenheimer Rochester Ohio Municipal Fund 14.83 Franklin New Jersey Tax-Free Income Fund 14.30 Franklin Missouri Tax-Free Income Fund 14.08
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