Ronald Fielding prospers by buying tax-exempt bonds that others hate. While the typical municipal bond mutual fund is packed with plain vanilla, low-risk bonds backed by the general taxing power of states and cities, Fielding, who runs the Oppenheimer Rochester family of 18 muni funds, specializes in the most unloved, lowest-rated, and seemingly riskiest tax-exempt bonds in the market. Whether by loading up on munis supported by payments from airlines or by buying the bonds of obscure public financing
agencies, he has succeeded at finding gems in what everyone else considers trash. "Show me the stuff that's ugly, and let me decide if there's a valid reason for why everyone finds it disgusting," he explains from his corner office a few miles from downtown Rochester, N.Y. "Then I'll find out what's disgusting, but not bad."
Fielding's contrarian style, a rarity in the world of muni bond investing, means that his fund performance is awful every few years—whenever a major sell-off hits. But those declines provide the opportunities that have helped his fund outperform over the long haul. "They do take on a lot of risk," says Morningstar (MORN) analyst Greg Carlson. "But they've got a pretty impressive research team, and they've gotten so many calls right over the long term."
One of Fielding's worst years was 2002, when a wave of bankruptcies by power providers and telecom companies spooked bond markets. Investors dumped the lower-rated muni bonds he owned. His New York muni fund (RMUNX) trailed the average return for similar funds by four percentage points for the year; it was worse than 60% of its competitors, according to Morningstar. As the market tanked, Fielding built up a 20% stake in "inverse floaters," notoriously volatile securities whose yields rise when interest rates decline. And as the post-Enron panic subsided and rates on munis fell, yields on the bonds jumped and the fund performed magnificently from 2003 through 2006, beating the average of its peers by almost four percentage points a year and outperforming at least 97% of its competitors in each of those four years.
Fielding, 59, discovered early on that many investors were confused by the very nature of nonprofit government bond issuers. In 1978, at his first portfolio management job, he was surprised to learn that analysts at his firm, a bank now known as Chase Lincoln First, considered the New York Power Authority too risky. The analysts saw that its revenue barely covered interest payments owed. What they missed was that the Authority, a nonprofit, was selling electricity at rates far below the market and could raise rates if needed. "I said, 'Don't look at what they make now—figure out what they could make if they charged market prices,'" recalls Fielding.
In 1986 he opened his first mutual fund, which focused on New York munis. Again, Fielding found rich opportunity when other investors dumped what they considered risky debt. The State of New York Mortgage Authority had issued nine series of bonds in the mid-1980s, when rates were relatively high, to generate funds to lend to homeowners. But when rates tumbled in the second half of 1987, potential borrowers found they could get lower rates from banks. So the Authority, relying on an overlooked loophole in its bond documents, retired a large portion of the debt early. Furious investors, who had bought the bonds thinking they couldn't be retired early, began selling. Fielding scooped up the bargains and collected a yield of almost 10%. That sent the yield on his fund to the top of the charts, dramatically boosting sales. In two years, assets grew from $5 million to $50 million. Fielding sold his management firm to Oppenheimer in 1996.
Investor disgust with the airline industry has provided Fielding some of his best picks. Airline stocks have lost tens of billions over the years through dozens of bankruptcies.