Oppenheimer Rochester funds stand by Puerto Rico as investors flee

BOSTON Mon Sep 9, 2013 1:08pm EDT

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BOSTON (Reuters) - Managers of Oppenheimer Rochester municipal bond funds are standing by their heavy weighting in Puerto Rico debt, even if investors are not.

During the past month, investors have yanked $1.2 billion from a group of 20 Rochester funds with about $29.2 billion in net assets. Year to date, redemptions total about $3.2 billion, according to Morningstar research.

The exodus came as Puerto Rico bonds have suffered what research firm Municipal Market Advisors (MMA) described as dreadful losses in the past month. The declines have roiled a slew of U.S. municipal bond funds.

The Rochester funds, part of Massachusetts Mutual Life Insurance-owned OppenheimerFunds, have had some of the heaviest weightings in Puerto Rico bonds, according to August 31 data. Sixteen of the 20 funds have at least 10 percent of their assets in Puerto Rico debt, according to Morningstar. Some funds have as much as 30 percent.

Managers of the Rochester municipal funds "continue to stand by their research and portfolio decisions," said Tanya Valle, a spokeswoman for the funds.

Valle said she could not comment on whether the funds were making any strategic shift amid the redemptions and poor performance, citing legal restrictions.

The S&P Municipal Bond Puerto Rico index declined 8.88 percent in August, compared with a 1.68 percent loss in the S&P National AMT-Free Municipal Bond Index. The Puerto Rico index is down 17.4 percent so far in 2013.

Interest paid on the territory's debt is exempt from U.S. state taxes, making it attractive to U.S. fund managers.

Still, Puerto Rico bond prices have plummeted amid renewed concern over the island's chronic deficits. The latest weekly spread on $52 billion worth of debt was 4 percentage points above benchmark triple-A yields. Illinois, with $33 billion in tax-supported outstanding bonds, was second worst with a weekly spread of only 1.78 percentage points above benchmark yields, according to Municipal Market Data.

Yields move inversely to prices.

Yields on some of Puerto Rico's general obligation debt rose to more than 10 percent in Monday trading as concerns about the island's economy mounted.

"Although Detroit's bankruptcy has dominated municipal headlines recently, municipal sales and trading has been consumed with news over Puerto Rico, a far more imposing systemic risk to the market at large," MMA said in a recent research note.

Out of the 20 Rochester funds, 15 have suffered 1-month returns worse than at least 90 percent of their peers, according to Morningstar.

The $6.5 billion Rochester Municipals fund is down 4.82 percent over the past month and off 11.54 percent during 2013. Year-to-date redemptions have totaled about $719 million at the fund, and it is performing worse than 92 percent of its peers, according to Morningstar.

Boston-based Breckinridge Capital Advisors, which oversees $18 billion in bond assets, warned investors in March that Puerto Rico was flirting with insolvency.

"Breckinridge has long avoided obligations of Puerto Rico, but we believe all municipal bond investors should now be cognizant of its problems," the asset manager said in a research paper in March. "A Commonwealth default would have significant ramifications for the municipal market."

(Reporting by Tim McLaughlin; Editing by Richard Valdmanis and Jeffrey Benkoe)

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