CORPORATE MONTHLY INCOME FUND
Type: Offshore open-ended investment company.
Aim: Income by investing in corporate bonds.
Minimum investment: Lump sum £1,000, monthly £50. Isa lump sum £500.
Place of registration: Dublin.
Investment split: Securitized 6.9 per cent, banking 2 per cent, basic industry 5.4 per cent, capital goods 4.4 per cent, communications 23 per cent, consumer cyclical 11.6 per cent, consumer non-cyclical 10.8 per cent, energy 3.4 per cent, finance 3.4 per cent, real estate 7.8 per cent, services cyclical 6.8 per cent, utility 8.8 per cent, other 5.7 per cent.
Isa link: Yes.
Charges: Initial 3.5 per cent, annual 1.25 per cent.
Commission: Initial 3 per cent, renewal 0.5 per cent.
Tel: 0800 0151646.
David Cowell, Associate, Andrews Gwynne & Associates,
John Holian, Certified financial planner, Maunby Investment Management, Brian Pack, Principal, Brian Pack Financial Services
Suitability to market 3.7
Investment strategy 3.4
Past performance 3.5
Company's reputation 4.7
Product literature 5.0
The corporate monthly income fund from Govett Investments is an offshore open-ended investment company that invests in fixed interest securities mainly in the UK. It also invests in European and overseas bonds.
Looking at how the product fits into the market, Cowell says: “The market is already well served with corporate bond funds. This one tries to make a virtue of its offshore tax position. Tax tails should not, however, wag investment dogs.”
Pack says: “It fits very well in a market with a steady increase in demand.” Holian says: “There is always a demand for income products particularly those paying higher-than-average income.”
Moving on to the type of client the fund might suit, Pack says: “Those seeking above average interest without taking a high risk.” Holian says: “High income seekers willing to take more risk with their capital to pursue higher yields.” Cowell says: “Someone requiring high regular income and who is willing to take appreciable risks to achieve it.”
When asked about the possible marketing opportunities for the fund, Holian can find no particular opportunities. Cowell says: “Very few. The sales literature doesn't appear to tell the whole story and the fund performance is likely to lead to a reduction in capital.” Pack says: “There may be some interest among my safety-minded clients.”
Identifying the strong points and useful features of the fund, Cowell is not impressed. He says: “The only useful feature is the monthly income.” Pack goes for the special tax rates and target rate of 7.4 per cent.” Holian points to the tax advantages it has as an offshore fund.
Analysing the investment strategy, Pack says: “It is fairly sound.” Holian says: “As with a lot of high income bond-based products, the portfolio contains some better quality investment grade bonds, with some lower quality to bolster the yield. The danger would be if the US goes into recession, some of these may default even if they seem unlikely to now.”
Cowell says: “It is an odd contradiction. The literature majors on the use of high quality investment grade bonds, then says it will have up to 20 per cent in sub-investment grade bonds to enhance the yield. Is this perhaps a touch underhand?”
Discussing the drawbacks of the fund, Holian reiterates his earlier thoughts on the possibility of default in the event of a recession in the US and adds: “Being based in Ireland, it will not feature among unit trust data and so it may be overlooked by IFAs.”
Cowell and Pack both pick up on the same feature. Cowell says: “The annual management charge is levied on the capital which could well lead to an erosion of capital.” Pack simply says: “The annual charge is taken from the capital.”
Turning to the company's reputation, Pack says: “It has a good name within the industry but there is a lack of public awareness.” Holian says: “It is not as high profile as some providers of these types of funds.” Cowell says: “It has been extremely quiet for a number of years and I do not think this offering will enhance its reputation.”
Moving on to past performance, Cowell says: “In the bond sector, it has been poor. Its corporate bond fund has been third or fourth quartile over periods of up to three years. The offshore UK high income fund is similar.” Pack thinks it is average.
Holian says: “Govett's existing corporate bond fund does not show startling performance in its sector. But with a low yield, it appears to be a lower-risk product than this new fund.”
Identifying the potential competition for the fund, Pack opts for Scottish Widows, Foreign & Colonial, Legal & General. Holian says: “Other high yielding bond funds such as Aberdeen fixed interest and Invesco Perpetual monthly income plus.”
Cowell says: “Those adopting a more realistic attitude to corporate bond investing. Now is not the time to go income hunting in sub-investment grade bonds as they are currently overpriced. The likes of M&G and Threadneedle are preferred with the much smaller Old Mutual fund set to surprise.”
Assessing the charges, Cowell says: “At 1.25 per cent, Govett is charging equity prices for bond investment and taking it from capital.” Pack says: “The charges are slightly high, but not excessive.” Holian says: “The charges are fair and reasonable, but the charge to capital for the annual management charge could cause a drag on the fund.”
Discussing the commission, the panel agree it is reasonable. Looking at the product literature, Pack thinks it is adequate. Holian says: “The literature is simple. It explains corporate bonds and their risks quite well.” But he feels the capital risks of this fund should be made clearer in the main brochure rather than hidden away in small print at the back.
Cowell says: “It is not very comprehensive. It makes great play of the running yield and the tax position, but doesn't mention the likely redemption yield. This is a very material figure.”
Summing up, Cowell says: “I rang its marketing department to clarify a tax point and was told someone would ring back with the answer. I am still waiting - perhaps they aren't sure.”