Throughout the year, trading was active and liquidity constant. Millions of investors included municipal bond funds in their portfolios, attracted by the favorable tax treatment on the funds’ distributions of net investment income.
In 2017, communities grew stronger and jobs were created as muni investments financed infrastructure repairs and civic projects across the United States and in its territories. Whereas the 2016 muni market delivered minimalist returns, the 2017 market – despite the challenging circumstances that dominated the news cycle – performed admirably.
As is often the case, the particulars depend on where you – and your assets – sit.
According to the Bloomberg Barclays Municipal Bond Index, the $3.8 trillion market produced an annual total return of 5.45% as of December 31, 2017.1 This result, the muni market’s best since 2014, was a welcome improvement over 2016’s total return of a mere one-quarter of 1%. Long-term issuance totaled $436 billion at year-end, 2% less than the record-setting volume of 2016. The year ended with a stronger-than-usual burst of new offerings, as municipalities sought to borrow before the introduction of new federal tax laws.
The Oppenheimer Rochester funds, for the most part, delivered on all three objectives.
Highly attractive yields
At the end of 2017, an Oppenheimer Rochester fund was ranked first in 12-month distribution yield at net asset value (NAV) in 11 of the 12 Lipper municipal bond fund categories in which our funds compete. 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 12 of our 13 funds were in the top quartile at year-end, Class A shares of 10 of our funds were in the top decile of their categories, and Class A shares of 8 were among the top 5%.2
The funds’ investments in tobacco bonds, which are backed by payments fromthe landmark 1998 Master Settlement Agreement, represent a powerful example of below-investment-grade securities that have proven to be more rewarding than risky. The sector has been an outperformer in many recent years, and issuers of tobacco bonds have consistently made all scheduled interest payments. The sector was far and away the strongest contributor to 2017 performance in the Rochester complex.
Competitive levels of tax-free income
To the benefit of our investors, all 13 funds provided monthly distributions of tax-free income throughout the year, and none of the funds made a distribution of capital. The dividend of the Oppenheimer Rochester Minnesota Municipal Fund (OPAMX) remained steady throughout 2017, and the dividends of our two newest national funds – Oppenheimer Rochester Short Term Municipal Fund (ORSTX) and Oppenheimer Rochester Intermediate Term Municipal Fund (ORRWX) – increased in July.
In 2017, most Rochester fund investors continued to reinvest their dividends, buying new shares (often at favorable NAVs) and positioning themselves to collect dividends on a greater number of shares in the future. Whether taken as cash or reinvested, tax-free dividends served to enhance our investors’ lives in 2017.
Positive total returns (for the most part)
The Class A shares of 9 Rochester muni bond funds generated positive total returns at NAV in 2017.
The Class A shares of ORSTX and ORRWX outperformed the funds’ benchmarks, the Bloomberg Barclays Municipal 1 Yr (1-2) Index and the Bloomberg Barclays Municipal 5 Yr (4-6) Index, respectively. ORRWX’s total return at NAV not only eclipsed the return of its own index, but it also outpaced the overall market index.
The Class A shares of Oppenheimer Rochester AMT-Free Municipal Fund (OPTAX) and Oppenheimer Rochester High Yield Municipal Fund (ORNAX), both of which are also designed for investors across the United States, also delivered stronger performance than their benchmark, the main Bloomberg Barclays muni index.
The Class A shares of 5 other long-term Rochester portfolios also generated positive total returns: two funds for New York-based investors – our flagship Oppenheimer Rochester Fund Municipals and Oppenheimer AMT-Free New York Municipal Fund – as well as our long-term portfolios for investors in California, Minnesota, and Pennsylvania. Despite handsome distribution yields, these portfolios were not able to outperform their benchmarks in 2017.
Four other Rochester portfolios with highly competitive 12-month distribution yields at NAV in 2017 included a surfeit of holdings that faced steep price declines during the year. While these 4 have achieved positive average annual total returns since inception and for periods longer than 10 years, the Class A shares of Oppenheimer Rochester Limited Term California Municipal Fund, Oppenheimer Rochester Limited Term New York Municipal Fund, Oppenheimer Rochester New Jersey Municipal Fund, and Oppenheimer Rochester Short Duration High Yield Municipal Fund failed to produce positive total returns in 2017.3
From the outset, the Rochester team has demonstrated a commitment to active management, forsworn interest rate predictions, and invested in a diverse set of holdings and sectors. Our adherence to these strategies, we believe, will continue to generate the long-term, yield-driven total returns that our investors seek.
The full version of this article can be found in the 2017 Annual Overview.
Follow @RochesterFunds for more news and commentary.
- ^A widely used index of the performance of the general municipal bond market, the Bloomberg Barclays Municipal Bond Index includes a broad range of investment-grade municipal bonds and is unmanaged. 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.
- ^Oppenheimer Rochester currently offers 13 funds, 12 of which are open to new investors. Oppenheimer Rochester Minnesota Municipal Fund was closed to most new investors as of the close of the New York Stock Exchange on March 24, 2016. In filings submitted to the Securities and Exchange Commission on December 1, 2017, OppenheimerFunds disclosed its intention to liquidate 7 single-state funds in 2018: The funds – for investors in Arizona, Maryland, Massachusetts, Michigan, North Carolina, Ohio, and Virginia – were opened in 2006 and closed to most new investors as of the close of the New York Stock Exchange on March 24, 2016. Our website, oppenheimerfunds.com, includes information about these 7 funds; month-end data and documents for Rochester’s current line-up of funds; and a wide variety of literature.
- ^Prior to June 1, 2017, Oppenheimer Rochester Short Duration High Yield Fund was known as Oppenheimer Rochester Limited Term Municipal Fund. As of June 1, the threshold for below-investment-grade securities was raised to 35% of total assets at the time of purchase, from 5%.
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. 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.
OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity.
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.