OppenheimerFunds Inc.'s hot streak in the Section 529 college savings plan business is coming to an end.
The fallout from the implosion of OppenheimerFunds' Core Bond Fund, which lost 36% of its value last year, has become a major albatross for the firm — just as a number of 529 contracts are coming on the market in Colorado, Kentucky, Massachusetts, Nebraska, New Mexico, Oregon and Vermont.
Oregon Attorney General John Kroger filed a lawsuit against New York-based OppenheimerFunds last month seeking to recover $36.2 million that the state claims 529 in-vestors lost as a result of the fund's taking “extreme risks in a search for speculative large returns.”
A state suing its 529 program manager over investment performance and tactics appears to be unprecedented, said Joe Hurley, president and chief executive of Pittsford, N.Y.-based Savingforcollege.com LLC.
In a letter sent to investors in Oregon's 529 plans last month, newly elected state Treasurer Ben Westlund, who oversees the plans, said that his three-month investigation revealed that OppenheimerFunds “was not acting in the best interests of participants in the Oregon plan.”
He went on to accuse OppenheimerFunds of “breach of contract and fiduciary duty, negligence, misrepresentation and violation of the Oregon Securities Law.”
Oregon is suing to recover money “lost to plan members as a direct result of OppenheimerFunds' decision to place Oregonians' college savings in a bond fund that changed from a conservative bond fund into a fund investing in highly aggressive and risky investments,” Mr. Westlund wrote.
The attorneys general of Illinois, Maine, New Mexico and Texas are also investigating the investments their respective 529 plans made in OppenheimerFunds and are in talks with the firm to try and recover money from bond fund losses.
What's more, Illinois is exploring legal options, “including possible litigation,” to recoup money for in-vestors who lost an estimated $85 million in OppenheimerFunds in the state's Chicago-based Bright Start Savings Program, according to state treasurer Alexi Giannoulias.
In a prepared statement, OppenheimerFunds officials said that the firm is “prepared to defend itself and its reputation vigorously against these claims, which lack legal merit.”
Critics noted that while the bond fund fell 36%, the benchmark index for the fund, the Lehman Brothers (now Barclay's Capital) Aggregate Bond Index, rose 5%. Eric Jacobson, a senior analyst and fixed-income investment specialist at Chicago-based Morningstar Inc., contrasted the Core Bond Fund's performance with the Vanguard Total Bond Market Index Fund, which returned 5.2% last year and is offered in the Utah Educational Savings Plan.
The negative publicity surrounding the Core Bond Fund has both tarnished OppenheimerFunds' 529 brand and severely damaged the company's chances of getting new business, industry observers say.
“It has really hurt Oppenheimer's reputation,” said Greg Brown, a mutual fund analyst who specializes in 529 plans for Morningstar.
“You don't want to have five attorneys general investigating you when you're competing for contracts,” said one industry veteran who asked not to be identified.
To that point, OppenheimerFunds' two 529 contracts in Oregon, the state where the furor over the Core Bond Fund started, are up this year.
Requests for proposals for the state's direct-sold program, the Oregon College Savings Plan, which has about $356 million in assets, are due tomorrow. And Oppenheimer's contract for the adviser-sold OppenheimerFunds 529 plan, which has about $97 million in assets, runs out at the end of the year.
Before the Core Bond Fund cratered, the firm was considered one of the 529 industry's top program managers. But OppenheimerFunds' chances of being awarded the Oregon contracts now seem remote, industry observers say.
“It's very clear OppenheimerFunds is going to be replaced in Oregon,” said one industry observer who asked not to be identified.
However, OppenheimerFunds is expected to be an aggressive bidder for the Oregon contracts, as well as for other RFPs this year and “remains very much committed to the 529 business,” according to Raquel “Rocky” Granahan, a senior vice president and director of the company's 529 business.
When asked how big a setback the Core Bond Fund controversy has been, she replied: “OppenheimerFunds is disappointed with the performance of the Core Bond Fund and its impact for our business.”
Continued success for OppenheimerFunds will be “a difficult avenue to pursue,” Mr. Brown said.
Two industry veterans, however, cautioned that OppenheimerFunds shouldn't be dismissed just yet. They noted that in the past few years, the company has racked up impressive gains, adding asset-rich 529 programs in Illinois and Texas.
“They are at a disadvantage, both politically and substantively, in Oregon. However, OppenheimerFunds has been very effective in restructuring some good 529 programs, and they shouldn't be counted out in the long run,” said Peter Mazareas, vice chairman of the Washington-based College Savings Foundation and chief executive of Nahant, Mass.-based Strategic Advancement Group Inc.
“Oppenheimer has been a good story and they've committed a substantial amount of resources to building a fundamentally strong 529 business,” said Andrea Feirstein, the managing member of New York-based AKF Consulting LLC. “The issue now is, how does the very notion of these investigations impact the assessment of their business?”
E-mail Charles Paikert at [email protected].
