New Star Strategic Government Bond Fund

I refer to the article "New international bond's launch for Malta listing" (The Sunday Times, May 25) based on an interview with Mr Goldsmith of the New Star Fund Managers and their local agents Jesmond Mizzi Financial Services Ltd.

During the interview the gentlemen concerned highlighted the fund managers' intentions with a view to achieving their targeted annual income of 5%. The stated criteria include "emerging market government debt" but it is stated that the portfolio will include "G7 government bonds, secured AAA and AA bonds".

What strikes me however is that no mention is made that initially the Fund will be weighted by as much as 70% in emerging markets. This information was published in an article in the May issue of Portfolio International, a monthly magazine described as being the professional's guide to cross-border investment.

Mr Goldsmith is reported as having gone into some detail on the type of grading of bonds that will be aimed at. He revealed that the lowest grade of emerging market debt would be BBB to B and was quoted as having said that "the only reason we would have CCC is if something was going to be upgraded in their credit rating. Anything that drops from B to CCC in the normal course of business we would get rid of."

I consider these to be extraordinary statements considering that this fund is being marketed as being suitable for investors "seeking steady, lower-risk growth". In discussing the balance between yield and risk Mr Goldsmith opined that "there is an awful lot of misinformation out there. You mention emerging markets and everyone thinks first of all of stock markets and they think of Argentina, which is a particularly sore point here."

I agree with only part of this statement which is the last bit. Yes, Argentina is a sore point with Maltese investors and rightly so! This is because so many such people were deluded by some local financial advisers into believing that Argentinian government bonds were low-risk! The rest is history, though a very painful one for many.

I emphasise I am referring to bonds and not equity investments, as Mr Goldsmith gives the mistaken impression that the Maltese lost money in the Argentinian stock market rather than in Argentinian government bonds.

Instead of making loaded statements like these I would have expected Mr Goldsmith firstly to have come out with the fact that initially no less than 70% of the bond investments will be in emerging market paper. With respect, this is what well informed potential investors are really interested in before parting with their money rather than the fact that the fund managers have $6 billion under management and 500,000 clients.

Secondly, it would not have been remiss for the article to explain what the stated internationally recognised bond ratings quoted by Mr Goldsmith stand for.

For example, only bonds not lower than BBB (the highest being AAA) are considered to be "investment grade", i.e. lower risks. The other three categories lower than this, and which are planned to be included in the New Star Strategic Government Bond Fund being marketed in Malta, are:

Standard & Poors Grade BB (faces major ongoing uncertainties, questionable financial security);
Grade B (assurance of payment over longer term is slimmer);
Grade CCC (very poor security).

Indeed, bonds falling in the above-mentioned three grades are referred to as 'junk' bonds. Need one say more?