I bet there are plenty off people in New York who wish that 1 out of 4 of their winter days felt like Puerto Rico’s (which is 40 degree warmer in December!)
… but for those who can’t afford the plane ticket, some investors will have to settle for living vicariously through their bond fund. That’s right, for some New York Municipal Bond Fund holders (and many others), a large part of their funds are invested in the balmy (in more ways than one) US Territory.
Because of Puerto Rico’s territory status, investors in their government bonds enjoy not only federal tax exemption, but also state exemption. That much tax-free income has been hard for some fund managers to resist. And this year, it has had huge implications for investors seeking “home state” tax-free returns.
In Jacobson’s list of Funds with the largest weighting in Puerto Rico, here are some notables:
- Franklin Double Tax Free Income (FPRTX) tops the list with 61.29%
- Oppenheimer Rochester VA Municipal Fund (ORVAX) @ 31.07
- Oppenheimer Limited Term NY Municipal (LTNYX) @ 26.06%
And closest to home, the Oppenheimer North Carolina Municipal Fund (OPNCX) has 30.55% invested far south of South of the Border.
Holding to the rule of “yield is rarely free” these funds mentioned above that are heavily invested in Puerto Rico have experienced large losses year to date (though duration, state specific risks, and other factors influence returns also). And, as Jacobson notes, the scramble for the exits by investors to sell the funds, has caused some forced selling of individual bonds by the managers, continuing the cycle.
As we say often here, a big part of investing is about “knowing what you own, and why you own it”….and wearing sunscreen.