Muni investors generally fall into two camps:
- Many have shown a preference for investment-grade municipal strategies as a means to earn tax-exempt income. Investors in this camp are typically concerned about current market uncertainties, may have relatively lower tolerance for risk, and are finding it challenging to identify funds that meet their personal financial objectives in this low-interest-rate environment.
- Others harbor dreams of high levels of tax-free income and find themselves imagining the wealth of opportunities this income could create. Investors in this camp typically have a relatively higher tolerance for risk and may have a longer time horizon, two characteristics that serve to lessen their worry amid bouts of market volatility.
The Rochester investment team has designed a family of funds designed to meet the needs of investors in both camps. As portfolio managers, we work hand in hand with the Rochester team’s credit research analysts to amass securities from a diverse set of sectors as well as securities with different levels of creditworthiness and a range of maturities.
Of the 13 municipal bond funds managed by the Rochester investment team manages, 6 are national funds for U.S. investors seeking tax-free income. The national funds aspire to produce at least top-quartile yields and returns and to generate after-tax total returns that are derived primarily from income that is exempt from federal personal income taxes.
All employ a security-specific, value-oriented, and research-intensive approach (we call it the Rochester Way) that has historically helped us identify many attractive but overlooked bonds and build portfolios that have delivered solid returns over the long term. We believe our approach to active fund management has been the key factor in our historic ability to maintain competitive distribution rates.
However, because the Rochester team seeks to meet the diverse financial objectives of fixed-income investors, these 6 funds have different parameters and risk profiles.
Oppenheimer Short Term Municipal Fund (ORSTX) and Oppenheimer Intermediate Term Municipal Fund (ORRWX) are for investors who would rather not worry about share-price volatility, which can be triggered by interest rate movements.1 Each primarily holds investment-grade securities and seeks to maintain an average effective maturity (AEM) closer to the short end of the yield curve: 2 years or less for the short fund and between 3 and 7 years for the intermediate fund. (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.)
The purchase of below-investment-grade issues is limited to 5% of assets for ORSTX and to 10% of assets for ORRWX; the percentage of assets and the credit quality of the securities are measured at the time of purchase, and the credit quality is based on Nationally Recognized Statistical Rating Organization (“NRSRO”) ratings or, if no NRSRO rating, on internal ratings.
Oppenheimer Municipal Fund is a long-term fund that does not have an AEM target. It may invest up to 15% of total assets in below-investment-grade securities and has a 40% cap for the sum of the assets of unrated securities and the assets of NRSRO-rated securities that do not have one of the top three investment-grade ratings.
Investors should note that OPAMX – unlike ORSTX and ORRWX – may hold municipal inverse-floating-rated securities (inverse floaters).2
ORSTX, ORRWX, and OPAMX cannot invest in securities issued by U.S. territories (i.e., American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands).
Oppenheimer Rochester AMT-Free Municipal Fund (OPTAX) may invest up to 25% of total assets in below-investment-grade securities. It does not hold private-activity bonds and therefore will not raise an investor’s exposure to the federal alternative minimum tax. As a long-term fund, it does not have an AEM target.
Oppenheimer Rochester offers two national funds that are designed for investors with a higher tolerance for risk: Oppenheimer Rochester Short Duration High Yield Municipal Fund (OPITX) and the long-term Oppenheimer Rochester High Yield Municipal Fund (ORNAX).
The short duration high yield fund seeks an average effective maturity of 5 years or less and may invest up to 35% of assets in below-investment-grade securities.
The long-term high yield fund has neither a limit on below-investment-grade holdings nor a maturity cap, which gives Oppenheimer Rochester managers the broadest investment discretion. ORNAX typically invests between 50% and 70% of assets in high-yield bonds. This fund may exhibit levels of volatility at odds with an investor’s risk tolerance, so consulting with a financial advisor is highly recommended.
Muni investors, we know, have many choices. We hope that the six Rochester national funds stand out from the crowd.
- ^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.
- ^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.
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.