Tax-Free Income Can Help Investors See Future
What do you see when you look back at 2016?
If you’re like us, you see another year in which Oppenheimer Rochester municipal bond funds provided handsome levels of income in a low-interest-rate world. You are aware that municipal bond issuance set a record in 2016, credit fundamentals remained strong and liquidity was constant. You know that the municipal bond market continued to help millions of investors meet their long-term objectives for tax-free income.
If you’re like us, you smile slyly even when you reminisce about your tax returns, knowing as you do that the net investment income generated by municipal bonds and municipal bond funds was generally exempt from federal personal income taxes and, in some cases, from state and local income taxes, too.
Perhaps you spent 2016 picturing the life that tax-free income can help you finance.
While others were taking a lot of selfies, our investment team focused exclusively on our shareholders’ best interests and worked tirelessly to deliver what we believe matters most to investors: industry-leading dividend yields and competitive levels of tax-free income.
At the end of 2016, an Oppenheimer Rochester fund was ranked first in 12-month distribution yield at net asset value (NAV) in 15 of the 17 Lipper municipal bond fund categories in which our funds compete. For the most part, the Class A shares that are popular with many retail investors also had 12-month distribution yields at NAV that were highly ranked in their respective categories: Class A shares of 19 of our 20 funds were in the top quintile at year-end, Class A shares of 18 of our funds were in the top decile of their categories, and Class A shares of 14 were among the top 5%.
A comparison of our funds’ Class A 12-month distribution yields at NAV on December 31, 2016 to the average results in each fund’s Lipper category demonstrates the power of Rochester’s yield-focused approach to investing. At year-end, the 12-month distribution yields generated by 17 of our funds were at least 100 basis points (1 percentage point) higher than the average in each fund’s peer category. The 12-month distribution yields at NAV for 10 Rochester funds exceeded their Lipper categories’ averages by at least 200 basis points, and one fund – Oppenheimer Rochester Virginia Municipal Bond Fund – ended 2016 with a 12-month distribution yield at NAV that was more than 300 basis points higher than the average among the 30 funds in its Lipper category.1
The types of year-end yield advantages that our funds produced did not just materialize in the waning months of 2016. Long before the prices of municipal securities began their post-Election Day slide, which served to raise bond yields, the Oppenheimer Rochester team was already distinguishing itself in the low-interest-rate world by delivering highly competitive levels of tax-free income to its shareholders.
As long-term fund investors have learned over the years, the Rochester investment team has had an extended history of delivering yields that few (if any) competitors have been able to match or beat. We take pride that this history has remained intact while U.S. Treasuries, saving accounts and certificates of deposit have provided minimal income.
The importance of focusing on yield was abundantly clear in the fourth quarter when the decline in bond prices erased virtually all of the market’s positive total return. On September 30, 2016, according to the Bloomberg Barclays Municipal Bond Index, the market’s year-to-date total return stood at 4.0%.2 By Election Day, year-to-date performance was down to 3.1%, and on December 31, 2016, it was just one-quarter of 1%. In other words, at year’s end, some investors found themselves standing almost exactly where they had been a year earlier.
Because a fund’s total return, or performance, reflects the income a fund earns and the changes in the fund’s NAV, our team’s focus on yield-driven total return allowed our funds to outperform the 2016 muni market in dramatic fashion. The Class A shares of all 20 Oppenheimer Rochester’s municipal bond funds produced positive total returns at NAV for 2016, and all outperformed their benchmarks and the averages in their Lipper fund categories. The average outperformance – that is, the average amount by which the funds outperformed their benchmarks – was just over 300 basis points as of December 31, 2016.
1 The Virginia fund was closed to most new investors as of the close of the New York Stock Exchange on March 24, 2016.↩
2 This index, formerly known as the Barclays Municipal Bond Index, measures the performance of the general muni bond market and is an unmanaged index of a broad range of investment-grade municipal bonds. The index cannot be purchased and 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.↩