Oppenheimer defends Puerto Rican bond holdings OppenheimerFunds, one of the largest managers of US municipal bond funds, has defended its commitment to holding Puerto Rican debt, despite falling prices of the territory's bonds. Morningstar data show that Oppenheimer runs 12 of the 14 muni funds with most exposure to Puerto Rico. Most of those funds have lost more than 10 per cent of their value since the end of May, when bond investors became nervous that the Puerto Rican government may not be able to pay all its debts. Oppenheimer last week was one of three asset managers to receive letters from the authorities in Massachusetts questioning whether its mutual fund investors knew that they were buying such heavy exposure to Puerto Rico. Oppenheimer has penned a series of white papers and blog posts designed to reassure investors that the Puerto Rican holdings are safe, amid rising concern from fund analysts. "Our team has researched and invested in the island's muni bonds for decades and believe that the fiscal conditions on the island are better now than they have been in the past six years," fund managers at Oppenheimer's Rochester division wrote in a recent post. Morningstar, which is widely followed by US investors for its ratings of mutual funds, does not recommend any Oppenheimer muni funds, said Eric Jacobson, Morningstar senior fund analyst. "These funds have been run in a very aggressive fashion for some time, and the $64,000 question is whether their shareholders really know that," he said. I think the adviser community gets that. Oppenheimer has a very strong distribution network and excellent communication with shareholders and advisers, and that seems to have helped them in previous bouts of volatility. Most of the funds with large holdings of Puerto Rican debt are so-called "single state" funds focused on a particular mainland US state, and make no reference to the island in the title of the fund. They are permitted to invest a portion of their assets outside their home state, however, and have long used debt from US overseas territories, which tends to have higher yields, in order to juice returns. The Oppenheimer Rochester Virginia Municipal fund, for example, invests mainly in local government debt in Virginia but has one-third invested in Puerto Rico, according to Morningstar data. Its value has fallen 19 per cent since the end of May. The Oppenheimer Rochester Maryland Municipal fund, which has 29 per cent invested in Puerto Rico, is down 17 per cent over the same period. The Puerto Rican investments "are disclosed and discussed at length in the funds" public disclosures," Oppenheimer says. An S&P index of the value of Puerto Rican municipal debt has fallen 24 per cent since the end of May, and the territory's borrowing costs have continued to rise to new records despite tax increases and a new financial plan aimed at balancing the budget. Reports about the territory's financial restructuring efforts "failed to emphasise . . . the significant progress that has been made in recent years by the administrations of Luis Fortuño and Alejandro Garcîa Padilla, the former and current governors," according to Oppenheimer's Rochester team. The concerns over Puerto Rico come at a difficult time for muni bond fund managers, who have seen investor outflows accelerate through this year. Bonds of all stripes have fallen out of favour, because of the risk that prices will fall as interest rates rise.