Corporate & Securities Law

SNSFE Investigating Oppenheimer Champion Income Fund And Oppenheimer Conservative Investor Fund After Steep Losses

By James Eccleston

SNSFE is investigating two Oppenheimer funds that have suffered steep losses this year.  The Oppenheimer Champion Income Fund is down 82% this year, and the Oppenheimer Conservative Investor Fund, which had 4% of its assets in the Champion Income fund, is down almost 40% this year, making it one of the worst-performing conservative allocation funds followed by fund tracker Morningstar.

Oppenheimer Champion Income changed the way it was investing in late 2006.  Since then, the fund gambled more with derivatives and they haven't paid off.  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 the top-rated commercial mortgage-backed securities would rally this year.  Well, they didn't.

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, American International Group, General Motors Corp. and newspaper company Tribune.  Many of those firms have collapsed, filed for bankruptcy or otherwise have problems.

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 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 same period.  They were valued at $8.3 million by the end of September.

Those with information concerning either Oppenheimer Conservative Investor Fund or Oppenheimer Champion Income Fund should feel free to contact attorneys at SNSFE.

Source:  The Wall Street Journal

Full post as published by FinancialCounsel on December 17, 2008 (boomark / email).