Solid Credit Work Shapes Rochester Portfolios

For years now, asset managers have faced the headwinds of stubbornly low interest rates. Muni volume was high, but the market offered fewer securities as attractive as those maturing or being called. The problem was exacerbated because issuers were highly motivated to pre-refund their high-coupon bonds.¹

By 2017, the pre-refunding trend had largely run its course and the muni market’s total return was solid, though not nearly as stellar as the equity markets’ performance. An asset manager’s ability to deliver competitive levels of tax-free income in this type of market, among others, often depends on the long-term vision and time-tested perspective of its credit team.

Our in-house credit research team, led by Rich Stein, CFA, has worked through many challenging markets over the years. The team employs stringent credit criteria designed to help mitigate various risks inherent in muni bonds. The team’s 11 members review securities in the primary and secondary market and then apply their sector-specific expertise to evaluate each security’s potential to drive performance.

No investments better exemplify the credit team’s profound contributions to long-term value creation than tobacco bonds, which are backed by the proceeds of the landmark 1998 Master Settlement Agreement (MSA). From the start, the sector’s complexities and risk factors deterred many asset managers. Our team also analyzed the risk/reward trade-offs, but it was not daunted by the sector’s potential risks. Instead, our team believed that the bonds would offer long-term structural and yield advantages.

The Bloomberg Barclays High Yield Tobacco Index had a total return of 21.5% in 2017 and an average annual total return of 9.1% for the 5 years ended December 31, 2017.² As in 2016, the Rochester complex sold some tobacco holdings in 2017 as a means to capture price appreciation while lessening its exposure to below-investment-grade credits. However, our long-term view on the sector remains bullish, and our portfolios continue to be overweight relative to our competitors’.

To the benefit of our investors, tobacco bonds were the strongest contributors to the 2017 performance of the Rochester portfolios.

Well-researched securities, we believe, are central to the value proposition at Oppenheimer Rochester.

For additional examples of how solid credit analysis can benefit muni investors,  read the full sector story in the 2017 Annual Overview.

Follow @RochesterFunds for more news and commentary.

 

1. ^{^}Proceeds from a refunding or pre-refunding are escrowed in U.S. Treasury bonds, which are backed by the full faith and credit of the U.S. government, and earmarked to pay off the previously issued bond—at the original coupon.
2. ^{^}The Bloomberg Barclays High Yield Tobacco Index measures the performance of non-investment-grade, tax-exempt municipal bonds that are backed by the proceeds of the tobacco Master Settlement Agreement. Indices cannot be purchased by investors. Index performance includes reinvestment of income but does not reflect transaction costs, fees, expenses or taxes. Index performance is shown for illustrative purposes and does not predict or depict fund performance.