This entry was posted on Tuesday, June 30th, 2009 at 12:06 pm and is filed under Stock Reports.
Email This Post

Lee Munson and Lorn Owen Davis provide an update on our independent fund research on Oppenheimer Rochester Municipal Funds (ORNAX).

Listening to the Oppenheimer Rochester Municipal Funds Conference Call on June 24, 2009 we got a chance to hear the thoughts of the experts on the municipal bond markets. The fund managers were extremely upbeat about the markets and the situation they were trading in. They view the municipal market as being in a far better place than 6 months ago with strong positive moves, though the past few weeks have seen weaker prices with the influx of large bond deals such as the biggest tax-exempt bond issue in over 2 months offered by Puerto Rico and the Build America bond program. All of these new issuances have been difficult for the market to absorb but the team at Oppenheimer thinks that the worst is over. A lot of these issuances have also been in the high grade sector with AAA ratings or above, which doesn’t really affect ORNAX since it focuses on high yield bonds.

They pointed out the attractiveness of municipal bonds over Treasuries, with the municipal bonds wide spreads and continued “dislocation” between the municipals and Treasuries continuing evidenced by the 5.26 yield on 30 year municipals versus the 4.43% on the 30 year Treasury. At Portfolio, we prefer to call the “dislocation” a complete blow up of the muni markets in 2008. The municipal/Treasury spread remains wide at 111% having crossed over the 100% line for the first time at the end of 2008. The credit spreads are being tightened but remain very wide. Furthermore, tobacco revenue bonds have corrected themselves after having their spreads drop. The management team of ORNAX said they classified the signing of the FDA legislation on tobacco as a non-event, noting that some of the big name tobacco companies helped to write it and shouldn’t have any effect on their tobacco revenue bonds. Fitch Ratings is going to be reassessing the tobacco revenue bonds and said to expect upgrades and downgrades which the team at ORNAX said shouldn’t affect them much though there might be some volatility in the market.
One final issue that was addressed by the managers was that of dividend stability and default rates. They explained their method of dealing with non-accruals, which currently is 3.1% of NAV for ORNAX, in which they try and work with the borrowers to get some sort of dividend payment if not the whole thing. While they termed it “conservative,” we at Portfolio Asset Management view 3.1% as a large percentage of non-accruals, but they’re the experts and we pay them to do their job the way they know how. Furthermore they explained that the non-accruals are already priced into the NAV that we see. Regarding default rates they were elusive only saying that they expected it to be stable with the possibility of increasing slightly. Keep in mind this is a high yield fund and defaults are part of the business. We just want to keep and eye on the monthly distribution and the rate of change of the defaults. Those two items are the “tell” if things start going south.
To sum it up they are comfortable with the market and are working hard to continue their 3-year positive total return. They don’t see any issues arising in the future with the expectation of spreads to continue coming closer together as the markets stabilize further. The bottom line is that you must have a world-view not just of the competence of the managers, but if their preferred sand box will yield outsized returns against a risk free rate. In this case, we would rather put money in high yielding muni’s given the current default and non-accrual rates than a longer term investment in Treasuries. While in our ACIP portfolio we trade Treasuries all the time, it is always as a rental. This fund is fine for new money depending on the client’s tax, risk, and goals. No changes will be made at this time.

Tags: , , , , , , , , , , ,