National Funds Aim for Solid, After-Tax Returns
While tax returns are expected to be simpler as a result of the Tax Cuts and Jobs Act (TCJA), the search for tax-advantaged income and attractive, after-tax returns remains as intense as ever. Faced with abundant market uncertainties and a low-interest-rate environment, many investors have shown a preference for investment-grade municipal strategies as a means to earn tax-exempt income. However, as has become clear to us, many new and long-time investors are finding it challenging to identify funds in the crowded muni marketplace that meet their personal financial objectives.

Nonetheless, ongoing market uncertainties in this low-interest-rate environment continue to lead many investors to prefer investment-grade strategies, and we believe many are challenged to identify funds in the crowded muni marketplace that meet their personal financial objectives.

The decision to keep as much investment income in your own pocket is pretty easy to make. The decisions about how to do it, however, can be a bit trickier.

The options – for better or worse – are plentiful.

  • Investors can still purchase individual municipal securities as a means to income that is exempt from federal (and in some cases state and local) income taxes. In the run-up to the passage of the tax act, some lawmakers talked of eliminating this long-standing exemption. As has happened countless times in the past, wiser minds prevailed. However, individuals seeking to go it alone may discover that credit research is time-consuming, that their own broker’s mark-up may not be as favorable as another broker’s (though figuring that out will require lots of work), and that it’s hard and expensive to build a diverse portfolio of securities.
  • Some investors work independently or with their brokers to build a ladder of high-grade muni securities with a variety of maturity dates. In theory, as the bond on the lowest rung matures, the principal can be reinvested in a long-term bond that extends the ladder. Low interest rates have lessened the appeal of this approach, because most bonds available for purchase have lower coupons than the bonds that are maturing. Plus, investors who stick to high-grade bonds (as is often recommended) trade off income for the relative safety of their holdings.
  • Muni bond funds, our specialty, also represent a popular route to tax-free income. However, many funds invest primarily in a narrow subset of the credit spectrum. By holding only the highest-grade investments, these funds may make investors “feel safer” but the securities in these funds are still subject to market volatility and other inherent risks. Investors in these funds, like investors with muni ladders, likely trade off income for a sense of security that may or may not exist.
  • Municipal exchange-traded funds (ETFs) and closed-end funds may trade at a discount and thus can be more volatile than municipal mutual funds.
  • Separately managed accounts (SMAs) in the muni space generally offer less diversification than muni mutual funds and tend to be limited to high-credit-quality bonds, which offer lower yields.

As portfolio managers with the Oppenheimer Municipal Fund Management Team, we realized that there had to be a better way to provide what we believe today’s muni investor wants.

That’s why the three national Oppenheimer municipal bond funds – Oppenheimer Short Term Municipal Fund (Class A: ORSTX)Oppenheimer Intermediate Term Municipal Fund (ORRWX), and Oppenheimer Municipal Fund (OPAMX) – are actively managed, have carefully constructed risk constraints and aspire to produce top-quartile yields and returns.1 These three funds strive to generate after-tax total returns that are derived primarily from income exempt from federal personal income taxes.

The funds have strict limits on below-investment-grade holdings, non-rated securities, and state and sector holdings.

The short and intermediate term funds each maintain an average effective maturity (AEM) closer to the short end of the yield curve, and they are designed for investors who would rather not worry about outsized share-price volatility. (Because short-term bonds typically trade within a narrower price range than longer-term bonds, a fund that seeks to maintain a shorter dollar-weighted AEM will generally trade in a narrower price range too. AEM limits also tend to lessen a fund’s sensitivity to interest rate changes.)

OPAMX is a long-term municipal bond fund that does not have a target AEM. Investors should note that OPAMX – unlike ORSTX and ORRWX – may hold municipal inverse-floating-rated securities (inverse floaters).2

None of these three funds invests in securities issued by U.S. territories (i.e., American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands).

The funds employ a security-specific, value-oriented, and research-intensive approach that historically has helped us identify many attractive but overlooked bonds and build portfolios that have delivered solid returns over the long term. (You can read more about our approach below.)

Key details about Oppenheimer Short Term Municipal Fund

  • Charlie Pulire is the lead portfolio manager.
  • He is supported, as needed, by other members of the Oppenheimer Municipal Fund Management Team.
  • This Fund uses a dollar-weighted approach to measuring the average maturity of its securities and seeks an AEM of 2 years or less.
  • The fund may invest up to 5% of its total assets in below-investment-grade securities, or “junk” bonds; the percentage of assets is measured at the time of purchase as is the credit quality of the securities.
  • The fund may invest up to 5% of its total assets in non-rated bonds. These are bonds that have not been rated by a nationally recognized statistical rating organization (NRSRO), such as S&P Global (S&P).Over the years, the Oppenheimer Municipal Fund Management Team has enhanced yield by investing with unrated but creditworthy issuers, many of whom intentionally forgo the time and expense of obtaining a published rating.
  • The fund may invest up to 15% of its total assets in securities with an NRSRO rating below A-minus.
  • State and sector holdings will be limited to 15% each, with certain exceptions.
  • The fund will not invest at all in territory paper or inverse floaters.

Key details about Oppenheimer Intermediate Term Municipal Fund

  • Michael Camarella is the lead portfolio manager.
  • He is supported, as needed, by other members of the Oppenheimer Municipal Fund Management Team.
  • This Fund uses a dollar-weighted approach to measuring the average maturity of its securities and seeks an AEM of 3 to 7 years.
  • The fund may invest up to 10% of its total assets in below-investment-grade securities, or “junk” bonds; the percentage of assets is measured at the time of purchase as is the credit quality of the securities.
  • The fund may invest up to 15% of its total assets in non-rated bonds. These are bonds that have not been rated by an NRSRO.
  • The fund may invest up to 40% of its total assets in rated and non-rated securities with a rating below A-minus.
  • State and sector holdings will be limited to 15% each, with certain exceptions.
  • The fund will not invest at all in territory paper or inverse floaters.

Key details about Oppenheimer Municipal Fund

  • Michael Camarella and Charlie Pulire are the lead portfolio managers.
  • They are supported, as needed, by other members of the Oppenheimer Municipal Fund Management Team.
  • The fund may invest up to 15% of its total assets in below-investment-grade securities, or “junk” bonds; the percentage of assets is measured at the time of purchase as is the credit quality of the securities.
  • The fund may invest up to 20% of its total assets in non-rated bonds. These are bonds that have not been rated by a nationally recognized statistical rating organization (NRSRO), such as S&P Global (S&P). Over the years, the Oppenheimer Municipal Fund Management Team has enhanced yield by investing with unrated but creditworthy issuers, many of whom intentionally forgo the time and expense of obtaining a published rating.
  • The fund may invest up to 40% of its total assets in rated and nonrated securities with a rating below A-minus.3
  • State and sector holdings will be limited to 15% each, with certain exceptions.
  • The fund may invest up to 10% of its total assets in inverse floaters.
  • The fund will not invest at all in territory paper.

Each of these three national portfolios typically includes a diverse mix of bonds including high-quality small issues, and premium-coupon, callable bonds.

High-quality small issues typically reward bondholders with attractive yields and payment schedules. While these bonds may trade less frequently than larger issues, a diverse set of holdings generally offers a fund sufficient liquidity to help achieve its objectives.

Premium-coupon, callable bonds generally provide favorable yields. As these bonds approach their call dates, they tend to have less exposure to interest rate moves and less price volatility than other tax-free investments. Because issuers can be highly inefficient about exercising their call options, we have often collected above-market yields long beyond a bond’s call date. In these instances, the market’s inefficiencies can reduce call risk (when an investor receives less income than had been expected) as well as reinvestment risk (when the market fails to offer equally attractive investment opportunities). Historically, premium-coupon, callable bonds have been a positive for fund shareholders.

As portfolio managers, we work hand in hand with the credit research analysts on the Oppenheimer Municipal Fund Management Team to amass securities from a diverse set of sectors as well as securities with different levels of creditworthiness and a range of maturities. We believe our approach to active fund management has been the key factor in our historic ability to maintain competitive distribution rates.

Muni investors, we know, have many choices. We hope that the risk constraints established by the Oppenheimer Municipal Fund Management Team will help ORSTX, ORRWX and OPAMX stand out from the crowd.

Follow @OppFunds for more news and commentary.

 
  1. ^Before June 29, 2018, Oppenheimer Short Term Municipal Fund was known as Oppenheimer Rochester Short Term Municipal Fund and Oppenheimer Intermediate Term Municipal Fund was known as Oppenheimer Rochester Intermediate Term Fund. Before October 15, 2018, Oppenheimer Municipal Fund was known as Oppenheimer Rochester Minnesota Municipal Fund. Various changes were made to each fund's prospectus on either June 29 or October 15, 2018. Past performance, therefore, is not indicative of future results. Investors are encouraged to review each fund’s prospectus and summary prospectus for additional details.
  2. ^Inverse floaters are tax-exempt securities whose interest payments move inversely to changes in short-term interest rates. Inverse floaters entail the use of leverage and often exhibit greater price volatility than fixed-rate bonds of comparable maturity and credit quality.
  3. ^For any security rated by an NRSRO other than S&P, the sub-adviser, OppenheimerFunds, Inc., converts that security’s rating to the equivalent S&P rating. If two or more NRSROs have assigned a rating to a security, the highest rating is used. For securities not rated by an NRSRO, the sub-adviser uses its own credit analysis to assign ratings in categories similar to those of S&P. The use of similar categories is not an indication that the sub-adviser’s credit analysis process is consistent or comparable with any NRSRO’s process.