The alternative minimum tax (AMT) started as an “add on” tax, created in 1969 after Congress heard testimony about 155 wealthy American who had paid no income taxes. Today, millions of Americans pay AMT each year. Investors who already pay AMT—as well as those who worry that they may have to pay it in the future and those who simply don’t like guessing about taxes when they invest—may wish to consider one of the two Oppenheimer Rochester municipal bond funds that won’t increase their AMT exposure.
Like the entire suite of Oppenheimer Rochester muni bond funds, these two strive to generate total returns that are derived primarily from tax-free income:
- Oppenheimer Rochester AMT-Free Municipal Fund
- Oppenheimer Rochester AMT-Free New York Municipal Fund (for New York taxpayers)
Read some competitors’ prospectuses carefully, and you’ll discover several funds that are merely “close to AMT free,” with as much as 20% of assets in the private-activity bonds that can increase an investor’s AMT exposure.
At Oppenheimer Rochester, we focus on building diverse, AMT-free portfolios that do not hold any private-activity bonds but are rich with investment-grade securities. Our AMT-free funds, investors should note, limit their purchases of below-investment-grade issues to 25% of fund assets.*
An investor’s specific AMT exposure is hard to predict, but several circumstances typically lead to increased exposure. For example, taxpayers who own stocks, bonds or mutual funds can be surprised when these investments elevate their AMT exposure. AMT also tends to affect taxpayers with many dependents, high state and local taxes, second mortgages, large credits or deductions, incentive stock options, long-term capital gains, or interest on qualified private-activity bonds.
The net investment income from our two AMT-free funds is typically exempt from federal personal income taxes and will not increase a taxpayer’s AMT exposure. Income from our AMT-free fund for New Yorkers is also exempt from state and local income taxes, where applicable. Please note that a portion of some distributions may be taxable; capital gains distributions are taxable as capital gains.
While each of our municipal bond funds seeks to provide a meaningful level of tax-free income, our investing practices differ. Our Oppenheimer Rochester AMT-Free New York Municipal Fund typically has a significant portion of assets invested in the municipal securities of New York State. This can make the fund vulnerable to geographic risk, which is the risk related to economic, regulatory or political developments in a given region. Our fund managers may also invest in “territory bonds”—issued primarily in Guam, the U.S. Virgin Islands and the Commonwealth of Puerto Rico—for income exempt from federal, state and local taxes.
Our seasoned portfolio management and credit research teams are known for their yield-driven approach to creating shareholder value. Like all of our funds, our AMT-free funds employ a security-specific, value-oriented and research-intensive approach that helps us identify many attractive but overlooked bonds. We call this investment approach the Rochester Way.
Our AMT-free portfolios—and our limited term and longer-term portfolios—include inverse floating-rate securities, also known as “inverse floaters,” which are structured to produce attractive yields under certain market conditions. Because these securities tend to exhibit higher levels of price volatility than other structures, some investors may wish to consider our short and intermediate term funds, which have never included inverse floaters; our intent is to maintain this practice for those two “maturity managed” funds. The income from these funds, however, may be subject to AMT.
Our AMT-free portfolios often include a diverse mix of 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 it 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 the 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.
Non-rated issues with solid credit qualities also figure into the investment mix. While most of our holdings have been evaluated by a Nationally Recognized Statistical Rating Organization (an “NRSRO”) such as Standard & Poor’s, Moody’s Investors Service or Fitch Ratings, our portfolio managers have enhanced yield over the years by investing with unrated but creditworthy issuers who intentionally forgo the time and expense of obtaining a published rating.
* The restriction is applied at time of purchase and includes unrated securities that are rated internally by OppenheimerFunds, Inc. Market fluctuations or credit rating changes may cause a fund’s holdings of below-investment-grade securities to exceed this restriction.
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.
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. 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.