Bt Investments Blog

With the help of Oppenheimer, at least one of Illinois' "Bright Start" College Funds is in the gutter.

"Core Plus", a supposedly conservative fixed income strategy was marketed to parents whose children were at or near college as a way to protect their investments. The strategy managed to lose 38% in 2008, resulting in a lawsuit and a subsequent settlement.

Investors are now finding out that the settlement will be less than expected because losses were greater than expected. Please consider the Chicago Tribune article Illinois Bright Start college fund settlement less than expected.

The losses in a mutual fund that was part of the Illinois Bright Start college savings plan totaled about $150 million in 2008, more than double what the state had previously disclosed. As a result, families will recoup about half of what they lost, where six months ago some expected to recover a higher percentage of their losses.

The $77 million settlement with OppenheimerFunds Inc., announced Tuesday by Treasurer Alexi Giannoulias and state Attorney General Lisa Madigan, would partially reimburse about 65,000 account holders.

But in finalizing the settlement, the treasurer's office said the $85 million in losses occurred between April 2008 and the end of 2008. The pact covers a longer period -- between Jan. 1, 2008, and Jan. 25, 2009 -- and the losses over those 13 months were about $150 million, the treasurer's office said.

The additional $65 million in losses occurred from January through March of 2008 and in January 2009, Giannoulias spokesman Scott Burnham said.

The losses occurred for investors in Oppenheimer's Core Plus Fixed Income Strategy, one of Bright Start's 21 mutual funds. Core Plus was supposed to be a conservative investment but lost 38 percent of its value in 2008, state officials said. By comparison, the bond index used as the fund's benchmark rose 5.24 percent in the same period.

"Thousands of 529s, 401(k)'s and pension funds experienced enormous losses over the last year, this is one of the few funds in the country where investors are going to get some money back," Giannoulias said.

The Core fund borrowed money to buy mortgage-linked securities that plunged in value when the residential real estate market collapsed. Burnham said those investments were outside the bounds of what was allowed and that Illinois was the first state to notice the problems with the fund and launch an investigation.

Oppenheimer marketed Core Plus to parents whose children were at or near college as a way to protect their investments. A tentative settlement was announced in June but a final agreement took longer than anticipated because of the complexity of issues and the number of states involved. Bright Start participants who had losses of at least $20 as of Sept. 30 will be eligible for settlement proceeds.

Conservative College Fund?

Borrowing money (ie using margin leverage) in a plunging real estate market is well beyond stupid. Even more so for what was marketed as a conservative college fund.

Please consider this description of Fixed Income Core Plus, off Oppenheimer's website.

The OIM Core Plus Fixed Income strategy is rooted in the idea that individual security selection produces the best opportunity for risk-adjusted excess returns over time. Through an extensive, bottom-up research process, our portfolio management team focuses on optimal bond selection of investment grade corporate bonds, mortgage-backed securities, US Government Treasuries and taxable municipal bonds. The team employs a tightly controlled duration discipline and closely manages all portfolio risk factors. The portfolio management team’s objective is to produce predictable, consistent excess returns net of fees over the Barclay's Capital Aggregate Bond Index.

Excuse me for asking but ....

• Where was the "extensive, bottom-up research process"?
• Where was the "optimal bond selection"?
• Where were the "predictable, consistent excess returns"?
• Where was the "tightly controlled duration discipline"?
• Most importantly where was the "close management of all risk factors"?

Where Are The Losses?

As long as we are asking "where" questions. Where are the losses?

That might seem to be a strange question to be asking in light of 38 percent reported losses, and a $77 million settlement that will not begin to cover those losses. However, I just cannot see any losses.

Actually, what I mean to say, is Oppenheimer's website is not reporting any losses for the strategy in question.

Please consider charts from Fixed Income Core Plus Performance straight off Oppenheimer's website.

Core Plus Annualized Performance



click on chart for sharper image

Core Plus Annual Performance



click on chart for sharper image

Losses? What Losses?

Forgive me for asking so many questions but I am in an inquisitive mood today.

Pray tell why does the above chart show the strategy gained 1.69% in 2008 and is solidly in the green in 2009 if there were huge losses?

Did Oppenheimer put the Bright Start teachers' fund in something other than Core Plus Fixed Income? If so what? And why? And who is to blame? And why do multiple articles mention Core Plus Fixed Income as the problem child?

On the other hand, if the teachers' fund was in Core Plus Fixed Income, losing money, then why do the above charts show Core Plus Fixed Income was not losing money?

Regardless of anything else, if Oppenheimer did use leverage and mismanage the funds as reported, Oppenheimer ought to refund all of the losses, period.

Instead, in Agreement reached after college fund losses ABC is reporting ...

OppenheimerFunds Inc. has agreed to pay Illinois more than $77 million. That money will be given to thousands of eligible Bright Start account holders who lost money.

The problem -- and this settlement has to do with one of them -- Oppenheimer's Core Plus fund, which lost over a third of its value in part because of mismanaged investments.

Six states went after Oppenheimer, and Illinois now becomes the first to settle on recouping some of the losses. The agreement means Core Plus investors will get back 57 cents on the dollar.

Inquiring minds might be interested in Illinois Attorney General on Oppenheimer Core Plus Underperformance.

Final Question

Is there anyone, anywhere in the business capable of saying "We are sorry, we were grossly negligent, and therefore we will reimburse your losses?"

Here's the deal. Losses are one thing and I would not expect any fund to reimburse losses made in accordance with the fund's stated strategy. However, losses caused by gross negligence and wild deviation from a fund's stated strategy are another thing altogether.

If Oppenheimer has a response to my questions I will gladly post it.

Addendum:

The question of reported performance has been resolved.
There are two unrelated Oppenheimer Mutual funds using the same name.

For details, please see Oppenheimer: There are Two Unrelated "Oppenheimer" Funds with the same "Fixed Income Core" name.

The disastrous results and the lawsuit are in relation to OppenheimerFunds which bills itself as "The Right Way To Invest".

Here is the chart from the "Bright Start" College Funds OppenheimerFunds Core Bond Fund.



Oppenheimer Investment Management (OIM) offers a Fixed Income Core Plus strategy that had positive results. Those are the charts in the main body of this post. OIM is not related to OppenheimerFunds.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

A Mutual Fund is a collection of stocks and other investments that are packaged by an investment company. Generally speaking it is a means by which the average pay check earner may enter the stock market. Some Mutual Funds require only a $1,000 initial investment and a small number of Mutual Funds may be purchased with as low as an initial $250 initial investment.

 

The key to investing in Mutual Funds is to read and evaluate the individual prospectives available to potential investors.  You may review the performance of the Mutual Fund on-line or request the prospective by mail.  The prospective gives you the Mutual Funds performance over the past quarters, years and decades. It also provides you with the fees that are charged to investors of Mutual Funds.

 

Certain Mutual Funds are no-load funds. Generally these funds are offered by state and municipal entities. It means the fund does not charge a fee to invest and is exempt to some taxes.  There may be other charges for handling your Mutual Funds and charges if you decide to withdraw funds or move your investment elsewhere.  This knowledge is essential before you commit a single dime to a Mutual Fund.

 

Your investigation should include the name of the stocks and other investments the Mutual Fund you are considering is currently investing.  This point is critical because knowledge of the broader market is essential in determining if a particular fund is going to do well.  If you have a penchant for global stocks , technology, financial or energy stocks you want to be assured these sectors are doing well in the overall stock market.

 

Some investors own single equities and Mutual Funds along with other investments in their portfolio. Most brokerage houses have financial planners who can review all of your investments including realty, equities, bonds and Mutual Funds to give you a full picture of your financial health and goals for your investing.

 

As with the stock exchanges Mutual Funds investing allows the investor to determine their risk level. There are municipal bonds funds, blue chips funds, growth funds, Asian Funds, Emerging Markets and combinations in between.  The investor determines the choice of investment by his or her objective. For some it is for retirement, others income and tax consequences. The range of risk is provided by most Mutual Fund investment companies.

 

There are some excellent advisory services that provide star ratings on various Mutual Funds. The Morningstar advisors have up to date information on the health of various funds. There are also articles in the Wall Street Journal and Investors Daily about Mutual Fund Managers.  There are stars in the Mutual Fund field. The star manager is only as good as his or her last year earnings.  It is important to know who is doing well currently before you invest.  

 

There are several families of Mutual Funds I would recommend reviewing. The Vanguard Funds, Fidelity, Oppenheimer and American Mutual  Funds. Within these family of Mutual Funds there is a fund for about any level of interest and risk level.  The information is available on-line or by mail. 

 

The current bothersome area in the real estate market in particular sub-prime loans for at risk buyers is yet to be fleshed out on a global scale.  The possible spill over effect to banks, financial institutions,  mortgage companies and the commercial paper they have sold may be a factor in your consideration of which Mutual Fund to select.  The true impact at this point is speculative as to the ripple effect that may ensue if the small percentage of risky mortgages end up in foreclosures. Presently the effect is an unwelcome squeeze in the credit market making it difficult to get loans for individuals and some lending institutions.

 

As with any uncertainty a good rule of thumb is to seek out Mutual Funds with a minimal amount of exposure to sub-prime mortgage woes.  The Blue Chip or America’s stand-by stocks may have some advantages as some are undervalued. The technology and some exposure to China and Emerging Markets may be worth a look.  Most Mutual Funds companies have stocks and investments that may fit the current trends and moods in the financial markets.  Review the institutional investors in each fund.  A rule of thumb is that big institutional investors generally do not invest in ‘dog” investments.

Richard M Weaving
A Stock Trader and promoter of stock market Ideas and Stock Software
Follow My Stock Blog   http://www.BestStockTradesBlog.com
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Tags: global stocks, mutual funds performance, mutual funds investing, municipal entities, investing in mutual funds