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New Star chief fears bond misselling

Direct-sales teams working for high-street banks could be guilty of misselling corporate bond funds by failing to explain the risks, according to New Star sterling bond fund manger Phil Roantree.

Speaking to Money Marketing this week, Roantree says the success of the corporate bond fund sector in recent years means direct salespeople are highlighting rates of return without making clear the risks.

He says: “Corporate bonds have been the best-selling sector in the market and you hear stories of bank staff telling people they can get more for their money by putting it into a corporate bond fund. Does the consumer fully understand capital loss? I would question that. There is a potential for misselling.”

Roantree does not think the corporate bond bubble is about to burst but he says if gilt yields rise, the premium over gilt rates for being in corporate bonds will seem less attractive.

He says the sector&#39s successful spell is unlikely to continue indefinitely.

He says: “Maybe things have got a bit ahead of themselves. It feels that a bit of selling is starting to happen. Spreads are very tight and it is prob-ably the time to put a bit more into gilts to protect against spreads widening.”

The fund, which now holds nearly £200m, only buys investment-grade bonds, which currently make up 95 per cent of the fund. Roantree says he is comfortable with the holdings which have been downgraded, including British Airways and EMI.

He joined New Star from Aberdeen Asset Manage-ment in February 2003, a month after the sterling bond fund he had managed in a six-year spell at Aberdeen was given a AAA rating from Standard & Poor&#39s, a rating maintained at New Star.

At Aberdeen, he had also been head of the investment-grade credit team.

Roantree says: “We have seen decent inflows since we came over from New Star. It has to be said that there was a problem with the brand at Aberdeen.”

He says the key question facing the corporate bond market is whether Government bond yields go up or down.

He says: “Corporate bonds have performed so well and they always follow gilt yields. Government bonds were poor last year but had a strong rally at the end of the year. The key will be the state of the job market and we have seen an inc-rease in investments in industry which is usually a good indicator for job growth. Given the monetary and fiscal stimuli across the world, I am positive for the sector.”

Roantree is predicting a rise in the Bank of England base rate from the current rate of 3.75 per cent to 4.5 per cent by the third quarter of 2004.

“The monetary policy committee is keen to see how the new heavily ind-ebted consumer is going to react to higher interest rates. Our best bet is that rates will reach 4.5 per cent by the third quarter and then plateau.”

The fund has shown a certain level of volatility recently, being top quartile over the last three months but bottom quartile over the last month although that in part relates to one particular holding. Last December, the fund was hit by Parmalat, which made up 0.5 per cent of the fund&#39s exposure.

Roantree says: “Like most people, we saw a relatively boring dairy company and thought it was worth the risk. There was no way we could see that people were looting billions of euros from the company. We have to hold our hands up and say we got it wrong.

“If there is a strong month for the market, then we will lag because of our yield curve. We are happy with that.”


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