2 Unconventional Options in a Low Rate Environment
By Krishna Memani / Chief Investment Officer, Fixed Income
The conventional wisdom in the investing world expects interest rates to rise over the next two to three years. However, the conventional wisdom ignores that there are some very important reasons to believe global interest rates could remain low for much longer than many people anticipate.
Over the long term, interest rates have typically been a function of economic growth and inflation. Historically, nominal gross domestic product (GDP) and interest rates tend to track each other very closely. Both developed and emerging economies have seen a slowdown relative to their trend growth rates prior to the financial crisis. In addition, with the exception of a few places, inflation across the world is quite low. As such, interest rates worldwide have been near historic lows since 2008, and we expect this low rate environment to continue.
This anticipated lack of a return to normal interest rates has significant investment repercussions and makes some asset classes particularly attractive. We believe the best opportunity in the fixed income universe right now is in credit. We also believe clients should underweight Treasuries given current and anticipated market forces, which should continue to drive more than desirable levels of volatility in this fixed income asset class. Senior floating rate loans offer numerous compelling attributes in today’s market, while alternative investments such as master limited partnerships offer a lot of unique properties.
Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall, and a fund’s share prices can fall. Investments in below-investment-grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk. Diversification does not guarantee profit or protect against loss.
Senior loans are typically lower rated and may be illiquid investments (which may not have a ready market).
Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. Each Fund’s investments are concentrated in the energy infrastructure industry with an emphasis on securities issued by MLPs, which may increase volatility. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. MLPs may trade less frequently than larger companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling. Additional management fees and other expenses are associated with investing in MLP funds. The Oppenheimer SteelPath MLP Funds are subject to certain MLP tax risks. An investment in an Oppenheimer SteelPath MLP Fund does not offer the same tax benefits of a direct investment in an MLP. The Funds are organized as Subchapter “C” Corporations and are subject to U.S. federal income tax on taxable income at the corporate tax rate (currently as high as 35%) as well as state and local income taxes. The potential tax benefit of investing in MLPs depends on them being treated as partnerships for federal income tax purposes. If the MLP is deemed to be a corporation, its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution which could result in a reduction of the fund’s value. MLP funds accrue deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments. This deferred tax liability is reflected in the daily NAV and as a result a MLP fund’s after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked.
These views represent the opinions of OppenheimerFunds and are not intended as investment advice or to predict or depict performance of any investment. These views are as of the open of business on November 8, 2013 and are subject to change based on subsequent developments.
Carefully consider fund investment objectives, risks, charges and expenses. Visit oppenheimerfunds.com, call your advisor or 1.800.225.5677 (CALL-OPP) for a prospectus with this and other fund information. Read it carefully before investing.
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