As investors attempt to recover some of their losses in the Oppenheimer Core Bond fund — which was used by at least five 529 plans — one researcher is claiming they should have seen trouble coming long before the fund famously collapsed late last year.
According to a new analysis of the Oppenheimer bond fund debacle by Markov Processes International LLC of Summit, N.J., a returns-based style analysis would have alerted plan sponsors and investors that not only had the fund made a bad bet on commercial mortgage-backed securities, which tanked with the real estate market, but also it added even more risk by applying leverage to that bet.
Returns-based style analysis compares a portfolio's total returns to the total returns of benchmark indexes to see if the manager is drifting from the fund's investment style.
The Oppenheimer Core Bond fund lost 35.8% in 2008, compared with its benchmark index, the Barclays Capital Aggregate Bond index, which rose 5.3%.
Oregon's 529 plan sued OppenheimerFunds, a subsidiary of MassMutual Financial Group, Springfield, Mass., in April for understating the fund's risks and is looking to recover $36 million. Another five states — Illinois, Maine, Nebraska, New Mexico and Texas — are investigating whether Oppenheimer violated its fiduciary duty to investors in state-sponsored 529 college savings plans by failing to disclose its exposure to mortgage-linked securities. Last month, the Illinois treasurer's office announced a tentative agreement to recoup $77 million from OppenheimerFunds. All five states are in talks with the company, confirmed OppenheimerFunds spokeswoman Jeaneen Pisarra.
“We're involved in active discussions with all five states and are looking forward to potentially resolving the matter and moving on with our 529 business,” Ms. Pisarra said. Oregon is not involved in the talks, Ms. Pisarra said.
Michael Markov, CEO and director of research at Markov Processes International, said there were plenty of red flags at Oppenheimer Core Bond that these states and other investors could have picked up on. According to the firm's report, which was written by research analyst Daniel Li, investors first should have analyzed the fund's risk and return characteristics vs. its benchmark and its peer group benchmark of intermediate bond funds.
“You're really just trying to reconcile performance with the manager's stated style,” said Mr. Markov. “If they disagree, you have a problem.”