Invesco Ltd.’s decision to buy OppenheimerFunds from Massachusetts Mutual Life Insurance Co. proves that opposites attract — at least when it comes to strategies in the $3.9 trillion U.S. municipal-bond market.
First, the rationale for the $5.7 billion transaction: Active management is losing out to passive, low-fee indexing products, and the remaining stock and bond pickers need to consolidate to stay afloat. Invesco’s deal, which is expected to close in the second quarter of 2019, is supposed to yield about $475 million in cost-savings over two years. It’s the latest move by the Atlanta-based company, which earlier this year closed a $1.2 billion acquisition of exchange-traded funds from Guggenheim Partners. OppenheimerFunds has large stock funds that invest globally and in the emerging markets.
It may be an uphill sell for investors. As Bloomberg News reported, recent efforts by asset managers to grow through mergers haven’t turned out to be immediate success stories. And going at it alone isn’t working well either: Franklin Resources Inc. was downgraded in June by Moody’s Investors Service, which cited “competition with passive products.” It was the first cut to a single-A asset manager’s rating in five years.
One area where Invesco and OppenheimerFunds are well known — and which has proved more resilient than others to passive investing — is in municipal bonds. In particular, they command a large share of the high-yield tax-exempt market. Invesco’s fund is the second largest overall, at about $9.2 billion, while OppenheimerFunds’s is sixth, at $5.9 billion, according to data compiled by Bloomberg. The sheer size is about where the similarities end, though. When it comes to tax-exempt bonds with juicy yields, investors for years were left with a binary choice: load up on Puerto Rico debt, or avoid it if you can.
OppenheimerFunds chose the first strategy. On first glance, it seems to have paid off: the Oppenheimer Rochester High Yield Municipal Fund, with the ticker ORNAX, produced an annualized return of 8.3% over the past five years, better than 98% of its Bloomberg peers. This year, as fixed-income markets have slumped worldwide, the fund is up 7.8 percent, besting 97% of competitors. It helps that Puerto Rico bonds have rebounded in 2018 from record-low levels.