New Star Strategic Government Bond Fund

As representative in Malta for the promotion and sale of the New Star Strategic Government Bond Fund, I refer to comments made by Anthony R. Curmi (The Sunday Times, June 8) with reference to an interview by Malcolm J. Naudi with Philip Goldsmith, managing director of New Star International Investments Products Ltd, published on May 25.

Mr Curmi made reference to an article in the May issue of Portfolio International on the New Star Strategic Government Bond Fund. The article quoted Ravi Anand, corporate finance director at New Star Asset Management, who stated that the fund will be initially weighted by 70 per cent in emerging markets, but did not believe the fund was high risk.

He went on to say that "when you look at default risks, the average of default for a triple B-rated bond is just 1.1 per cent over 20 years; we will not invest in local currency debt, which tends to default faster, just international US dollar issues."

Mr Anand added that over the last ten years government bonds have delivered positive returns on an annual basis and emerging market bonds have outperformed equities. Equally, emerging market bond funds and US treasury bonds have outperformed cash and high-yielding corporate bonds.

As regards the allocation of the portfolio the following should be noted:

It is true that the fund may have 70% in emerging market bonds (the range is likely to be typically 60-80%), but the portfolio will be diversified and it is expected that initially around 50% of the portfolio will be investment grade (i.e. rated BBB or better).

The portfolio will be managed to minimise the risk of loss through diversification, holding at least 90% in bonds rated B or better and only investing in Eurobond/international issues rather than local currency bonds

We believe that the fund is suitable for investors seeking steady, lower risk growth because of the above reasons and also the risk profile of holding government bonds is low compared to other investments. In fact, the average annual default rate on government bonds is 4.7%, this compares to 8.3% for corporate bonds (source: Moody's 1985-2002 issuer weighted average cumulative five-year default rates), while the average annual default rate of BBB-CCC foreign currency bonds is 1.1% (with the highest being only 2.5% (1975 - Q3 2002) (source: Standard & Poor's).

Mr Curmi also mentioned Argentinian government bonds and the bad experience of local investors. It is precisely because of risks such as Argentina that individuals should invest in bonds through a professionally managed fund. On Argentina specifically the Eurobonds were downgraded to CCC three months prior to their default and therefore, based on New Star's risk controls, Argentina would not have been in the portfolio, as New Star's policy is that all bonds that are downgraded to CCC should be sold within 30 days of the downgrade.

I assure Mr Curmi that potential investors are being well informed of all potential risks associated both with emerging market bonds and sub-investment grade bonds as is very clearly indicated in all advertising material relating to the New Star Strategic Government Bond Fund.