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.
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.
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- ^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.
- ^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.
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.