Oppenheimer: Moving Forward, But Still Work to Do

Morningstar recently issued a new Stewardship Grade for OppenheimerFunds. The firm's overall grade--which considers corporate culture, fund board quality, fund manager incentives, fees, and regulatory history--is a C. What follows is Morningstar's analysis of the firm's corporate culture, for which Oppenheimer also receives a C. This text, as well as analytical text on the other four Stewardship Grade criteria, is available to subscribers of Morningstar's software for advisors and institutions: Morningstar Advisor Workstation(SM), Morningstar Office(SM), and Morningstar Direct(SM).

The end of 2015 marked a year and a half since Art Steinmetz became CEO of OppenheimerFunds in July 2014, replacing Bill Glavin. In many ways, Steinmetz represents continuity in Oppenheimer’s corporate culture, especially on the investment side. Before taking over the top spot, he was a portfolio manager on the firm’s taxable fixed-income team for more than 25 years (the first Oppenheimer CEO to come from the investment ranks), and he served as chief investment officer during Glavin’s five-year tenure. He has not made any major changes to OppenheimerFunds’ basic structure, in which investment teams organized by asset class (domestic equity, global equity, taxable fixed-income, and so on) operate with relative autonomy while receiving the resources they need. He has also continued the expansion of the fund lineup that began under Glavin, launching one new fund in the second half of 2014 and three in 2015.

But Steinmetz has also started trying to put his own stamp on the company and to move it forward in a positive direction as it continues to put a period of turmoil behind it. Most recently, he has been working to help Oppenheimer counter the big increase in market share by passive investment vehicles, by focusing on funds that can outperform their indexes and by providing “more creative solutions” that passive and index vehicles don’t do well. Some of this effort has come through newly launched funds in areas that are not well-served by index funds, such as Oppenheimer Global Multi-Alternatives ODAAX, Oppenheimer Global Multi-Asset Income QMAAX, and Oppenheimer Global Multi-Asset Growth QMGAX. In such cases, there’s always a danger that a firm could seem to be chasing trendy areas of the market, though Oppenheimer has primarily used in-house managers to run these funds, including some that it recently acquired. In 2010 Oppenheimer bought SteelPath, an operator of master limited partnership funds, in order to broaden its lineup of income-focused mutual funds. In September 2015, under Steinmetz, the firm bought VTL Associates, which operates the RevenueShares strategic-beta exchange-traded funds. This latter move came after several other big fund shops had already snapped up other strategic-beta ETF firms.

Oppenheimer went through significant turmoil during the 2007-09 financial crisis and its immediate aftermath. Several of Oppenheimer's prominent fixed-income funds experienced massive losses during the crisis because of exposure to risky mortgage-related securities, amplified by economic leverage from off-balance-sheet derivatives. Even investors who had examined the funds' financial statements were not aware of their inherent risks, because Oppenheimer’s disclosure at the time fell far short of what it should have been. The bond-fund collapses had a ripple effect, resulting in big losses in funds that used them in their fixed-income sleeves and leading to multi-million-dollar settlements with the SEC, shareholders, and several states (over losses in the firm’s 529 plans).

Glavin arrived from parent firm MassMutual in January 2009 to clean up this mess, and he, along with Steinmetz and other executives, did a significant amount of house cleaning over the next five years. They merged away underperforming or redundant funds, including the Transition target-date series, and hired industry veteran Krishna Memani from Deutsche Bank to head up the firm's government-bond offerings. There were several other departures, arrivals, and promotions in 2009, including changes in leadership at the Rochester municipal-bond funds, where firm veteran Dan Loughran took over, and the Main Street funds, where Mani Govil brought his team from RS Investments. More recently, the firm replaced the managers of the struggling Oppenheimer Value CGRWX and Oppenheimer Small & Mid Cap Value QVSCX with Laton Spahr, formerly of the RiverSource funds.

Oppenheimer also implemented new risk controls on Glavin's watch, in an effort to prevent a reprise of the 2008 debacle. In December 2008, the firm hired Geoff Craddock, previously head of market risk management at Canadian bank CIBC, to serve as chief risk officer. Since joining Oppenheimer, Craddock has amassed a team of more than 20 people who track investment risk, counterparty risk, enterprise risk, and many other types of risk across the firm's 70-plus funds. He has implemented a system in which minor violations prompt a conversation between a portfolio manager and the chief investment officer, whereas more glaring risks are reviewed by the Investment Risk Management Committee. The goal of the system is to create consistent risk controls while still allowing portfolio managers the freedom to take enough risk to outperform their benchmarks while ultimately preventing another meltdown. Most recently, the firm created an information security committee to assess, report, control, and respond to cybersecurity risks for OppenheimerFunds and its subsidiaries.

Performance across the fund lineup has generally improved since the depths of the financial crisis, though it hasn’t been great across the board. The firm’s taxable-bond offerings have bounced back nicely, with Oppenheimer Core Bond OPIGX and Oppenheimer Limited-Term Bond OUSGX both posting top-decile five-year returns as of January 2016, and Oppenheimer Corporate Bond OFIAX ranking in its category’s top quartile since its 2010 inception. Most of the Rochester municipal-bond funds have also performed very well since the crisis; that’s not surprising given their higher-yielding, riskier portfolios, but it also means they’ve been more volatile than their peers. The U.S. equity funds have had mixed results over the past five years; some, such as the small-cap

Steinmetz hasn’t been at the helm for long, but often leaders who hail from a firm’s investment ranks cultivate an investor-centric rather than sales-centric corporate culture. He’s also indicated that he wants to develop more of an ownership culture among key employees by enhancing forms of equity ownership among portfolio managers. It remains to be seen to what extent that initiative will help Oppenheimer attract and retain investment talent over the long term. Over the past five years its manager-retention rates look pretty good compared with other large asset managers, now that all the shuffling following the financial crisis has rolled off.

As noted above, in recent years Oppenheimer has moved from fix-it mode to one more of growth and relevancy. Steinmetz acknowledges a need to strengthen performance in some core areas and increase the funds’ active share, especially given the renewed emphasis on beating out passive alternatives. He also says he'd like distribution to reach beyond the firm’s traditional wirehouse relationships to other financial advisors. To that end, Oppenheimer has been partnering with various intermediaries who sell its funds, creating a “CEO Advisor Institute” that provides training materials so that Oppenheimer and those intermediaries are all on the same page. All this is tied in with Oppenheimer’s development and rollout of new funds, though Steinmetz says the firm is setting the bar high when it comes to what will ultimately be offered to investors. While growth can also help a firm attract and retain investment talent and generally contributes to the overall health of an organization, there can also be risk involved.

To Oppenheimer’s credit, the firm has generally proved a responsible steward of investor capital apart from the missteps of 2008-09. It grew organically in the 1990s and early 2000s through mostly sensible fund launches, and it was not involved in any of the market-timing or late-trading scandals in 2003-04 that blemished many other mutual fund companies. However, the crisis of 2007-09 resulted in quite a bit of turmoil and significant changes at the firm. While things have now settled down for the most part, Oppenheimer is still something of a work in progress as it tries to set itself apart from other big fund shops. Until it can do that consistently, it still earns a Corporate Culture rating of C.