Tuesday, December 16, 2008

OppenheimerFunds Officer Steps Down

--wrong bet on CMBS and CDS killed the Oppenheimer junk funds. By DIYA GULLAPALLI The OppenheimerFunds Inc. executive who oversaw big leveraged bets that backfired has left the company. Senior Vice President Angelo Manioudakis, who headed the firm's Core Plus team, resigned Friday. The team managed more than $16 billion in individual-investor-oriented fund assets. Under Mr. Manioudakis, investments in the likes of mortgage-backed securities and credit-default swaps went awry. Those woes fueled an 82% drop at its flagship junk-bond mutual fund, Oppenheimer Champion Income, one of the worst showings among the roughly 150 U.S. junk funds that invest in high yield, or below-investment-grade, bonds. The average junk-bond fund is down 32% in 2008. The situation is a rare black mark for OppenheimerFunds, a unit of Massachusetts Mutual Life Insurance Co. that recently had $195 billion in assets. OppenheimerFunds is no longer part of Oppenheimer & Co. But OppenheimerFunds owns Tremont Capital Management, an investment-management firm that put hundreds of millions of investors' dollars into funds overseen by Bernard Madoff, who, authorities said, admitted to carrying out a $50 billion Ponzi scheme. Mr. Manioudakis, 42 years old, couldn't be reached for comment. He joined OppenheimerFunds in 2002 and was previously with a unit of Morgan Stanley Investment Management. The firm earlier this month said it is bringing in Geoffrey Craddock as new director of risk management and asset allocation. Mr. Craddock, who formerly headed market risk management at Canadian bank CIBC, will monitor risk for OppenheimerFunds' stock and bond offerings. For Core Plus, Jerry Webman, director of fixed income at OppenheimerFunds, will temporarily take over as team leader. Mr. Webman, 59, acknowledges it's "been a disappointing performance year" for the team's funds. Several have declined sharply relative to peers. At Oppenheimer Champion Income, assets have fallen more than 70% to about $625 million from a peak in May, largely due to declines in the fund's holdings. OppenheimerFunds put $150 million in the fund last month to help boost liquidity. The Champion Income fund was a relatively orthodox junk-bond offering until late 2006, when Mr. Manioudakis's team took over. Since then, the fund gambled more with derivatives. One problem bet involved total-return swaps, which are basically agreements between parties to exchange cash flows in the future based on how a set of securities performs. In this case, the fund was betting that top-rated commercial mortgage-backed securities would rally this year. They didn't. The fund began employing many of those swaps last year. This seemed like a good way to diversify away from the junk-bond market, which in 2007 had started to wobble as the credit crunch commenced. By December 2007, the swaps had appreciated $7.7 million. But the trade has gone south in recent months, as the market for office buildings and other commercial properties has deteriorated amid the slowing economy. The swaps were down $47 million by September, which is the latest data available. The bet "backfired in unprecedented ways" as "what had been the most liquid part of the market turned out to be the most illiquid," Mr. Webman says. Credit-default swaps, or CDSs, have hurt the fund, too, declining $238 million through September. CDSs are basically insurance contracts that protect investors against bond and loan defaults. In exchange for being on the hook to pay out for such issues, CDS sellers receive a stream of interest payments. Selling CDSs can be a particularly risky proposition when insuring companies that are already struggling with credit problems. Indeed, through September the fund was selling CDSs on troubled companies including Lehman Brothers Holdings Inc., American International Group Inc., General Motors Corp. and newspaper company Tribune Co. Many of those firms have collapsed, filed for bankruptcy or otherwise have problems. Funds' Derivative Bets Federal investment rules permit mutual funds to invest in derivatives, and they have done so in recent years to boost returns. However, regulators have worried about the risks these investments can pose for investors. One concern is how swaps can add leverage because they allow a fund to bet on more securities than they actually hold in the portfolio. That can exacerbate losses when a fund's holdings are sinking. On top of that, the Champion Income fund increased its stake in many mortgage bonds that have fallen this year. Mortgage securities tied to Washington Mutual Inc. with a $9 million principal value were valued at only $3 million at the end of September, the last fund reporting date. A set of five Freddie Mac mortgage-backed securities with a combined principal amount of $20 million were valued at just $2.5 million. Prospects for the mortgage market have dimmed since September, as defaults have been rising. Further, the fund erred with corporate bonds for struggling Wall Street houses. The fund bought Lehman bonds between June and September with $29 million in principal value. Lehman filed for Chapter 11 bankruptcy-court protection in mid-September, and those bonds fell to just $144,000. It also added Morgan Stanley bonds with $13 million in principal during that period; they were valued at $8.3 million by the end of September. Strategic Logic Mr. Webman says the firm had focused on bank bonds because "we believed the financial crisis would allow banks to rebuild their balance sheets over time." The fund spread pain beyond its own immediate investors. More than 10% of the fund also was recently held by other OppenheimerFunds offerings. This includes several funds of funds that bundle various products from the firm and at least one target-date retirement offering. One of the hardest hit has been the $290 million Oppenheimer Conservative Investor Fund, which had 4% in the Champion Income fund through November. It is down almost 40% this year, making it one of the worst-performing conservative allocation funds followed by fund tracker Morningstar Inc.

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