Wednesday, May 4, 2011

SLCG Research: Oppenheimer Champion Income Fund

SLCG released today ‘Oppenheimer Champion Income Fund’.

Oppenheimer’s Champion Income Fund (the Fund) was an open-end mutual fund that invested in high-yield bonds. It lost 80% in the second half of 2008, the highest loss for a mutual fund in Morningstar’s high-yield bond fund category.

In this paper, we look at the portfolio management rules and decisions of the Fund in the context of what was happening in the markets. Leverage using debt to fund further investments was prohibited by the Fund. To get around the restriction, the Fund invested heavily in credit default swaps (CDS) and total return swaps (TRS) as an alternative way to leverage its investments in corporate debt and asset-backed securities. However, CDS and TRS became increasingly risky during late-2007 and early-2008. While other high-yield bond funds reduced their holdings in CDS and TRS, the Fund increased such holdings. The Fund also increased its holdings of commercial mortgage-backed securities and other mortgage-backed securities just when these markets were collapsing. These decisions directly contributed to the huge losses of the Fund. Furthermore, we find that the Fund failed to adequately disclose the risk of its holdings to its investors.

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