Buy Side

Investors Flee Puerto Rico Funds

Correction: An earlier version of this story incorrectly described the data from Lipper FMI on flows from the funds. The figures reflect monthly flows.

Oppenheimer Funds, manager of 12 of the top 14 funds in exposure to Puerto Rico, has suffered the biggest outflows in the industry since mid-September as investors continued to shy away from the commonwealth’s debt after yields surged.

Net redemptions from Oppenheimer’s municipal bond funds totaled $647 million in the month through Oct. 23, bringing the total for the period to about $1 billion, Lipper FMI data show.

Yields on Puerto Rico debt rose as high as 17% earlier this month, raising concern among regulators over whether investors were adequately informed of the risk of the territory’s finances. Though yields have recovered after a conference call by officials of the commonwealth, the Securities and Exchange Commission is conducting a nationwide “limited scope examination” of mutual funds with exposure to Puerto Rico debt.

The New York Regional Office of the Securities and Exchange Commission issued a letter on Oct. 10 seeking information on the outflows. The letter, sent by assistant regional director Joseph DiMaria, asks if redemptions have been met by drawing on a line of credit or another facility. The recipient’s name was redacted from a copy of the letter obtained by The Bond Buyer.

The Franklin Double Tax-Free Income fund has 61.3% of its assets in Puerto Rico, the most among mutual funds, according to Morningstar. The Nationwide Ziegler Wisconsin Tax Exempt A fund ranks 12th, and the rest of the top 14 are all managed by Oppenheimer. The Oppenheimer Funds’ holdings of Puerto Rico debt range from 15% to 33%.

“Some are arguing that investors would start to see the losses in Puerto Rico and start selling all municipal bond holdings for cash, as opposed to switching into another fund, and that starts to put pressure on munis in general,” said Tom Graff, head of fixed income at Brown Advisory. “That makes sense, but I would argue that the big outflows have more to do with interest rates rising.”

A spokeswoman for Oppenheimer did not return calls or emails seeking comment.

Other municipal funds have been hit as well, with Wells Fargo Funds Management and Nuveen Fund Advisors suffering the second and third highest net redemptions this month, according to Lipper. Investors have withdrawn $226 million from Wells Fargo and $196 million from Nuveen. The Lipper data is limited to funds that report weekly, and don’t include Franklin Templeton.

The letter issued by the New York Regional Office asks the unidentified manager about percentage of ownership in Puerto Rican debt, redemptions of more than 10% in the third quarter, communications to shareholders related to Puerto Rican debt, how the debt is priced, and if any of the funds purchased Puerto Rican debt in the past two months.

Investors have been pulling money from muni bond funds for 22 consecutive weeks, withdrawing $746 million in the most recent week after $1.31 billion in redemptions the previous week. Outflows have been widespread, with money being pulled from long-term funds, high-yield funds, intermediate funds, national funds, and muni market funds.

Some say this week’s report on outflows is less discouraging than it would be because the outflows were concentrated in the largest 10 mutual funds. “The ten funds reporting the largest outflows this week accounted for 23% of all weekly reporting fund outflows,” said Chris Mauro, head of U.S. municipals strategy at RBC Capital Markets. “However, six of those ten funds were associated with a single fund sponsor. These six funds made up 13% of all muni outflows but they constituted only 5% of total weekly reporting muni fund assets. Moreover all of the funds associated with this one sponsor collectively accounted for 21% of all muni fund outflows this week but only 10% of total assets.”

Graff said Puerto Rico is indeed putting pressure on the market, but bid lists emerging in the secondary market by sellers are much lighter now than they were in May or June.

“A manager that has performance problems is always going to be vulnerable to outflows,” he said. “But as long as the investors consider it an issue with that manager and they go buy another fund, it doesn’t create pressure on the muni market in general.”

On Oct. 3 the SEC’s San Francisco Regional Office issued a similar letter to the one sent by New York Regional Office.

Puerto Rico has also been under the microscope in Massachusetts. Earlier this month, the Secretary of the Commonwealth William Galvin sent inquiry letters to Fidelity Investments, Oppenheimer Funds, and UBS Financial Services. Galvin’s securities division is looking at whether Massachusetts investors were made adequately aware of the investments’ risks and whether they were kept up to date about Puerto Rico’s changing financial situation. The division is also looking at whether the bonds have been properly priced.




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