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Old Mutual makes the grade

Old Mutual Fund Managers – Corporate Bond Fund

Aim: Income through investing mainly in UK investment-grade bonds.

Minimum investment: £1,000 lump sum, £50 per month.

Investment split: 98% UK corporate bonds, 2% cash.

Yield: 6.7%

ISA link: Yes

PEP transfers: Yes

Charges: Initial 3.5%, annual 1.1%

Commission: Initial 3%, renewal 0.35%

Tel.: 020 7332 7570.

Broker Panel:-

Alison Gaunt – Partner, Gaunt Hall Independent IFAs

Eric Woodward – Managing Director, EP Ward Investment Services

Alan Lakey – Senior Partner, Highclere Financial Services

Brian Pack – Principal – Brian Pack Financial Services

Bob Vaughn – Partner, Ashley Vaughn Partnership

Broker Ratings (ave. marks out of 10):-

Suitability to market: 6.0

Investment strategy: 7.0

Past performance: 5.2

Company&#39s reputation: 4.6

Charges: 6.2

Commission: 7.2

Product literature: 7.0

Old Mutual has introduced a corporate bond fund that invests in UK investment-grade bonds.

Looking at how well the fund fits into the market, Gaunt says: “This fits well between the returns from lower-risk corporate bond funds and those investing primarily in non-investment-grade bonds. It may encourage some deposit investors to seek higher returns without experiencing too high a risk.”

Lakey says: “This is a well-designed and priced product that will appeal if the fund manager proves he can produce the goods.”

However, Pack thinks this is a rather crowded market at the moment with many better known names.

Woodward says: “There are already several funds of this type, so Old Mutual is comparatively late in the cycle in launching this fund.”

Vaughn comments: “This is one of 70 such funds. The issue offers slightly above-average income at about a 6.7 per cent headline rate net of annual charges but it is likely to fall slightly towards a redemption yield of 5.7 per cent as maturing investments are replaced with less attractive yields.”

Turning to the types of client for whom the fund is suitable, Woodward says: “This is for risk-averse investors and those seeking more income than is available from building society accounts.”

Vaughn says: “This product is for a relatively cautious client, usually retired and a basic- or higher-rate taxpayer, looking for a high income level with possible limited capital erosion.”

Gaunt comments: “This is for a client requiring consistent income with lower risk than some funds available.”

As far as the marketing opportunities are concerned, the panel are lukewarm. Pack thinks the product provides no opportunities at all, while Lakey says: “It offers nothing innovative or sensational, so there are few opportunities present.”

Woodward thinks the opportunities will be limited slightly by the fact that the prime market will be mainly Isa-related.

Vaughn says: “There are limited opportunities beyond the Isa allowance as it is possible to achieve similar net yields without undue risk to capital or falling income.”

However, Gaunt is more positive. She says: “It provides marketing opportunities to those requiring a steady, reasonably safe income and also to retired people who have had monies on deposit.”

Evaluating the main useful features of the fund, Vaughn says: “A high proportion of the corporate bond fund invests in lower-risk investment-grade bonds. Some other products are offering higher income but also greater capital risk.”

Lakey says: “It has an extremely consumer-friendly brochure and information sheet. There are acceptable charges and a clear investment strategy.”

Gaunt points to the expertise of the fund management team and adds: “The underlying investments are seen to be of lower risk than some funds which have a higher yield.”

Pack thinks that the product has a good investment policy, while Woodward says: “There is a good yield with a high-quality portfolio.”

Turning to the drawbacks of the fund, Lakey says: “It has a low company profile and historically below-average investment returns. Also, there is the lack of anything that will differentiate the product from rival issues.”

Gaunt says: “The drawbacks include the fact that it is not clear whether the charges come from income or capital along with the fact that it has a lower yield than some funds.”

Vaughn comments: “As with all corporate bonds, it is limited as to the amount that can be invested to obtain gross income. The initial charge of 3.5 per cent plus 1.1 per cent annual charge reduces the yield. Also, it only offers quarterly income, while some competitors offer monthly income.”

Woodward and Pack agree that the only drawback is that the product will be entering a crowded market with a lot of competition.

The investment strategy wins the approval of the panel. Pack regards it as being good and reasonably safe, while Vaughn says: “It is reasonably sensible bearing in mind the potential client market of older investors requiring income with relative safety.”

Gaunt thinks the investment strategy is clear, concise and easily understood.

Lakey says: “The strategy is commendable given that most corporate bond investors are not prepared to suffer any potential capital erosion.”

Commenting on Old Mutual&#39s reputation, Pack says: “I only know Old Mutual as a South African company. Its English reputation is little known.”

Vaughn says: “It is not well known among the public but has a growing awareness due to takeovers and an increasing profile due to advertising.”

Lakey says: “Its reputation is not very good. It pulled out of the critical-illness market after developing a superior product. Will it remain in the investment market?”

Turning to Old Mutual&#39s past performance record, the panel are split. Vaughn regards it as being only average, while Pack says it appears to be very good.

Gaunt says: “Its investment past performance record is varied but it has good global bond performance.” Woodward says: “It is somewhat mixed. Some funds are very good while some are pretty average.”

Lakey says: “It is distressingly below average for many funds. However, its Far Eastern and emerging markets funds are above average and its global bond fund shows good consistent performance, which offers hope for the new fund.”

Identifying the funds that will provide the main competition to the product, Gaunt points to CGU&#39s monthly income plus fund as well as M&G&#39s high-yield corporate bond fund for those requiring higher income.

Vaughn suggests: “The competition from with-profits bonds cannot be ignored.”

Lakey sees the main competition coming from products issued by Credit Suisse and Britannic. Woodward looks to Fidelity&#39s Moneybuilder fund as well as funds from Schroder and Aberdeen.

Evaluating the product literature, Vaughn says: “It is quite good, being concise and easy to read.”

Gaunt says: “It is clear and attractive and emphasises the quality of the investment.”

Lakey says: “The literature is extremely good. Other companies could learn from the clear commitment to providing essential generic and fund information.”

But Woodward is less positive, saying: “It is not bad but is somewhat limited in giving enough of the sales points.”

In summing up, the panel are cautious. Vaughn says: “With a belief that interest rates may have peaked and a possible downturn may not be far away, this product may well prove very popular in the shorter term, that is, over the next 18 months. There is, however, a limit to the amount of low-risk high-yield investments available.”

Woodward says: “Competition is high in this market and many potential buyers will already have investments with other groups, so it will be important to deliver well above-average performance.”

Lakey says: “I would find it difficult to assume fund performance will be above average. If it is, the overall design will make it an attractive proposition.”


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