Fortunately for Oppenheimer Rochester shareholders, 2018 was also a year of peace, love, and understanding.
The year brought peace of mind to investors in the 13 Oppenheimer Rochester municipal bond funds whenever they calculated the taxes that do not have to be paid. Shareholders celebrated the love of seeing their investment dollars contribute in important ways to the well-being of U.S. municipalities and in most cases to their bottom line, too. And they gained a deeper understanding of why the Rochester Way, our investment team’s value-oriented, research-intensive, and security-specific approach to yield-driven investing, has such staying power.
All 13 Rochester funds generated a positive total return at net asset value (NAV) for the year ended December 31, 2018, and 10 of them also experienced NAV increases during the year.1 Double-digit total returns at NAV made Oppenheimer Rochester Limited Term New York Municipal Fund (LTNYX), Oppenheimer Rochester New Jersey Municipal Fund (ONJAX), Oppenheimer Rochester Pennsylvania Municipal Fund (OPATX), and Oppenheimer Rochester Short Duration High Yield Municipal Fund (OPITX) the standout performers of 2018.
Impressive as Rochester’s overall results were in 2018, they were all the more so given the realities of the financial markets. “For the first time in decades, every major type of investment has fared poorly,” The New York Times reported in mid-December, weeks before the real market mayhem began. The article’s headline asserted that 2018’s investors had nowhere to hide, and the reporter’s opening paragraph was short and to the point: “Stocks? Messy. Bonds? Meh. Commodities? Not pretty.”
The same could be said about the U.S. municipal bond market. In 2018, the $3.8 trillion market produced a total return of just 1.28%, according to the Bloomberg Barclays Municipal Index, a widely used index of the performance of the general municipal bond market.2 Since the turn of this century, the muni market has delivered an average annual total return of 5.0% and has generated positive total returns in all but two years.
What Rochester has Delivered
As portfolio managers, we prefer value creation to conformity. We focus on the creditworthiness and yield potential of each security from the time of its purchase until it matures or is called or sold. In 2018, as in many previous years, this investing approach has led to handsome and highly competitive yields.
The Rochester funds compete in 11 Lipper municipal bond fund categories, and the 12-month distribution yields at NAV for the Class A shares of 9 funds earned top-quartile distinctions; two of these funds – Oppenheimer Short Term Municipal Fund (ORSTX) and OPITX – finished 2018 in the top 5% of their respective Lipper categories. Top-quartile Oppenheimer Rochester funds beat their category averages by a mean of 86 basis points, and OPITX provided the biggest yield advantage, topping the average fund in its Lipper category by 154 basis points.
Key Fund and Market Developments
In 2018, performance across the Rochester complex was driven by muni sectors that have underperformed in recent years, which we believe demonstrates the importance of remaining focused on fundamentals and the long-term potential of each portfolio’s securities. Some asset managers and investors push the sell button at even a hint of volatility or headline risk, often locking in losses and forgoing future opportunities for tax-free income. Sometimes, a short burst in the stock market leads investors to ignore both their carefully reasoned asset allocations as well as the potential for a rout to follow a rally.
High-yielding securities contributed substantially in 2018 to the net investment income that was distributed to our funds’ shareholders as monthly dividends. Three of our funds – ORSTX, Oppenheimer Municipal Fund (OPAMX), and Oppenheimer Rochester California Municipal Fund (OPCAX) – maintained their distributions of tax-free income throughout the year, and Oppenheimer Intermediate Term Municipal Fund (ORRWX) increased its payout in April and October. These funds defied the interest-rate climate, which continued to create downward pressure on the dividends of many U.S. funds, including a number of Rochester funds.
The Rochester team decided at the end of 2018 to increase the daily dividend accruals for four funds, beginning January 1, 2019. While specific distributions cannot be guaranteed, the team anticipates higher January dividends for shareholders in Oppenheimer Rochester Fund Municipals (RMUNX), Oppenheimer Rochester AMT-Free New York Municipal Fund (OPNYX), Oppenheimer Rochester High Yield Municipal Fund (ORNAX), and ONJAX. Most investors in the Rochester funds reinvested their dividends during 2018, and the complex ended the year with $21.6 billion in assets under management.
Tax-free income comprised 100% of the annual total return of ORSTX, ORRWX, and OPAMX, further evidence supporting our team’s focus on yield as the long-term driver of fund performance.
Every year brings new opportunities and new challenges, and 2018 was no different. What the Rochester investment team does, however, remains the same:
- We collaborate to limit tax bills, enhance communities, and put the precepts of the time-tested Rochester Way to work
- We actively manage our funds for competitive levels of tax-free income and attractive, yield-driven total returns.
- We try to add some “peace, love, and understanding” to our investors’ lives.
Our promise to our shareholders is unwavering: No matter what happens, we will always be united in our focus on your best interests.
The full version of this article can be found in the 2018 Annual Overview.
- ^During 2018, Oppenheimer Rochester made several changes to its fund lineup. Before June 29, 2018, Oppenheimer Short Term Municipal Fund and Oppenheimer Intermediate Municipal Fund were known as Oppenheimer Rochester Short Term Municipal Fund and Oppenheimer Rochester Intermediate Term Municipal Fund, respectively. On October 15, 2018, Oppenheimer Rochester Minnesota Municipal Fund was renamed Oppenheimer Municipal Fund and became a national 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. Additionally, as previously announced, 7 single-state funds were liquidated in 2018.
- ^The index consists of a broad range of investment-grade municipal bonds, is unmanaged, and cannot be purchased. Our funds’ investments are not limited to the investments comprising the index. The performance of the index includes reinvestment of income but does not reflect transaction costs, fees, expenses, or taxes.
Fixed income investing can entail credit and interest rate risks; as interest rates rise, bond prices generally fall and a fund’s share price can fall, too. A portion of a municipal bond fund’s distributions may be subject to tax and may increase taxes for investors subject to federal alternative minimum tax. Capital gains distributions are taxable as capital gains.
Below-investment grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk. Under certain market conditions, some unrated securities may trade less actively than rated securities. Our funds can have a relatively high portion of their portfolio holdings in particular segments of the municipal securities market, such as tobacco bonds or real-estate-related securities. They may also invest substantially in municipal securities within a single state or related to similar type projects, which can increase volatility and exposure to regional issues. Some funds may also invest substantially in Puerto Rico and other U.S. territories, commonwealths and possessions, and could be exposed to their local political and economic conditions. Deterioration of the Puerto Rican economy could have an adverse impact on Puerto Rican bonds and the performance of the Rochester municipal funds that hold them. Diversification does not guarantee profit or protect against loss.