ShareThisA lawsuit recently filed in federal court in Pittsburgh provides a cautionary tale about just how different mutual funds with similar names or objectives can be.
On behalf of investors in the Oppenheimer Pennsylvania Municipal Bond Fund (A shares ticker: OPATX), John R. Woods of Gibsonia, Pa., is suing the fund's officers and trustees, alleging they provided inadequate, false and misleading disclosures about the fund's objectives and the risks fund managers took to achieve them.
While the stated objective was to generate high levels of current income and to preserve capital, "the fund's investment policies were formulated and its operations were conducted virtually in complete disregard for the preservation of capital," according to the lawsuit.
Woods paid $56,800 for shares he bought in 2006 and 2007, the complaint states.
The lawsuit seeks class-action status for investors who purchased shares between Nov. 25, 2005, and Nov. 28, 2008. The fund's net asset value -- the mutual-fund equivalent of a stock price -- decreased by about 28 percent over the three-year period, the lawsuit states.
Over that time, the fund generated negative annual returns of about 8 percent -- roughly eight times the loss generated by a Bloomberg composite index of similar Pennsylvania tax-exempt funds.
Oppenheimer denied the allegations.
"OppenheimerFunds maintains that it acted appropriately in all circumstances and that this claim is without legal merit," the company said in a statement.
The three law firms representing Woods and other investors include their Pittsburgh counsel, Specter Specter Evans and Manogue. They allege that investors got subpar returns because Oppenheimer invested in greater concentrations of low-quality bonds than similar funds, including bonds that weren't rated by Moody's or Standard and Poor's. Unrated bonds accounted for 44 percent of the fund's portfolio as of Sept. 30, the lawsuit states.
Fund managers also used leverage and derivatives and did not adequately disclose the risks of those strategies until November, according to the complaint. By then, the strategies had been discredited and perceptions of what constitutes risk had changed substantially for investors as well as investment managers.
The changed environment is reflected in the Oppenheimer fund's performance. In 2005, before the credit crisis reared its ugly head, Oppenheimer delivered a 9 percent return, about three times greater than Bloomberg's Pennsylvania funds index. But last year, Oppenheimer's offering had a negative 34 percent return versus a negative 11 percent return for the Bloomberg index.
The fund's profile changed as well. As of March 31, unrated bonds accounted for only 12.6 percent of its investments, while bonds rated A or better comprised 29 percent.
As legendary investor Warren Buffett will tell you, you find out who's swimming naked only when the tide goes out. Perhaps some of the fund's aggrieved investors did a clothing check when the market's perception of credit risk began changing in 2007. Before that, curious investors could have wondered why Oppenheimer's fund was doing so much better than its peers. Whether they would have been able to find out why for themselves is another question.
"I can do it. I'm not sure if an individual can do it," said certified financial planner James W. Zalenka of The BaranJames Co. in Scott, Pa.
He said that while higher expenses might explain a small difference in the performances of two similar funds, wider gaps could be explained by only the differences in investment strategy. The first thing he checks is whether a fund with outsized returns is overweighting a sector -- for example, placing bigger bets on financial stocks than its peers.
"They have to be overweighting something, and that can easily turn the other way," he said.
For bond funds, Zalenka recommends looking at the yields as well as maturity dates. Higher yields and bonds that mature later generally command higher rates because they are viewed as riskier.
But even those disclosures have their limits. Doug Kreps of Fort Pitt Capital in Green Tree, Pa., says quarterly filings show only what a fund manager was holding on one given day.
"On a day-to-day basis, we don't know what they're doing," he said.
How much investors know about what fund managers do the rest of the quarter depends on what a fund discloses about its trades and whether investors take time to read the reports or compare a fund's holdings from quarter to quarter.
As for scouring bond reports to determine the credit quality of a portfolio and whether the bonds are insured, the exercise is not as useful as it used to be, according to Kreps.
"We've learned that AAA isn't necessarily AAA ... and that just because (a bond) is insured doesn't mean there can't be significant price declines," he said.
In other words, be careful out there.
(E-mail Len Boselovic at lboselovic(at)post-gazette.com.)
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
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