Ill. wants Bright Start College Savings program's $85M back
'ROGUE FUND MANAGER'? | Thousands of Illinois families affected after Bright Start Savings program suffers huge losses amid questions over an investment strategy that could land fund's former chief in legal jam
The State of Illinois' Bright Start College Savings program has been the victim of a gross mismanagement. That's the charge being made by Illinois state Treasurer Alexi Giannoulias as he prepares to file a lawsuit against Oppenheimer Funds, seeking to recover $85 million of losses in a bond fund that he alleges was imprudently managed. Thousands of Illinois families suffered huge losses as a result.
The charges stem from an incredible 38 percent loss of market value in the Bright Start "Core Plus" bond fund under the watch of then-Senior Vice President of Fixed Income Angelo Manioudakis. The fund was supposed to be invested in "investment grade bonds and U.S. government securities," the most conservative investment strategy -- used by parents who want to limit risk as their child approaches college age.
(AP file)
Similar funds managed by other investment companies showed a positive return of about 5 percent last year, as short term bond prices moved up in response to lower interest rates.
Attempts to reach Manioudakis, who has since left Oppenheimer, for comment were unsuccessful.
Illinois isn't the only state to be victimized. The same Oppenheimer fund is included in 529 college savings plans of Oregon, Texas, Maine, and New Mexico.
But it appears that Illinois will be the first to pursue legal action. Giannoulias is working with Attorney General Lisa Madigan's office to determine the "appropriate legal action," in an attempt to help families recover losses in fund investments as college payments come due.
Morningstar analyst Eric Jacobson has done some digging into this Oppenheimer bond portfolio. In late December, just after Manioudakis left Oppenheimer as a portfolio manager, Jacobson reported that "something just didn't add up."
Even with the fund reporting a 20 percent investment in mortgage-backed securities, the large overall losses couldn't be explained.
Jacobson ties the losses to leverage used by fund managers. The fund had huge exposure to not only mortgage-backed securities, but credit default swaps. In effect, they had investment exposure equivalent to 180 percent of their assets. And when those markets collapsed at the end of September, the bad investment choices were compounded by the leverage, leading to outsized losses.
Morningstar said it couldn't find any disclosures in the funds' legal documents allowing them to use this kind of leverage. And "it was never brought up by the managers in their Morningstar interviews," said Jacobson in his report.
"It comes awfully close to dishonesty by omission," Jacobson said.
Reached Tuesday afternoon, Oppenheimer Funds' chief economist and former head of fixed income, Jerry Webman, said: "The fund was overwhelmingly invested in government bonds and top rated debt securities. In that regard we did just exactly what we were supposed to do. . . . But there was unprecedented volatility in these markets, and the securities we owned did not behave according to any historic precedent."
As to charges that Manioudakis is a "rogue fund manager," Webman responded: "These investment decisions were made by a team of portfolio managers. They took responsible positions, which were damaged by unprecedented market actions.
"It would be highly inaccurate to call Mr. Manioudakis a 'rogue fund manager.' "
But Giannoulias doesn't buy that argument.
He reassured Bright Start investors that his allegations relate to only one fund in the program, and noted that Bright Start Savings has been ranked one of the top 5 college savings programs in the country by Morningstar.
Giannoulias vows to pursue recovery of the losses, saying: "We're taking a proactive approach, fighting for these families that need money to cover college expenses now. . . . We want to hold this fund manager responsible for this reckless investment strategy."
In the end, it appears the courts will decide.
And that's The Savage Truth.