OppenheimerFunds increased Puerto Rico risk in two safer funds
By Tim McLaughlin
BOSTON Feb 12 (Reuters) - Some investors in OppenheimerFunds may be exposed to more uncertainty than they bargained for: The company has ramped up holdings of Puerto Rican debt in two of its lower-risk municipal bond funds, even as much of the U.S. mutual fund industry reduces its exposure to the island's newly junk-rated debt.
The $387 million Oppenheimer Rochester Short Term Municipal Fund's exposure to the Caribbean island's debt surged to 13 percent of net assets at the end of December, from 7 percent a year ago, according to Lipper Inc, a unit of Thomson Reuters. Its smaller, $66 million Intermediate Term Municipal Fund saw its exposure more than double to 17 percent.
Both funds have a 5 percent restriction on how much junk-rated debt they can hold, according to the prospectus governing them. But Oppenheimer does not have to unload the troubled assets to get below that threshold because they were downgraded after the purchases. Data detailing the funds' holdings since the end of December are not yet available.
Fitch on Tuesday became the third credit rating agency in a week to downgrade Puerto Rico to junk, citing worries about the cash-strapped U.S. territory's shrinking economy and reduced ability to finance itself in capital markets.
Oppenheimer has been a vocal supporter of Puerto Rican bonds, which offer high yields, tax exemption, and a guarantee by the territory that payments to creditors will be prioritized above even the most basic public services. The company on Wednesday also downplayed the risks posed by the investment, saying the bulk of the bonds have the additional backing of insurance.
"In the unlikely event of a default or restructuring, which we continue to believe is unlikely, insurers pay coupon and principal payments as they come due," OppenheimerFunds spokeswoman Kaitlyn Downing said in a statement.
But not all of the bonds are insured. Some 4 percent of the Rochester short-term fund's Puerto Rico municipal bonds are uninsured, while 27 percent of the Puerto Rico holdings in the intermediate fund are uninsured, OppenheimerFunds said in a statement.
Short- and medium-term funds are typically billed as offering lower returns and lower volatility than long-term funds, in which investors can ride out dips and get higher yields for their risk taking. Continuación...