Funds Centre

New Star Sterling Bond - research update

Management of the New Star Sterling Bond Fund has passed to the Henderson managers Stephen Thariyan, their Head of Credit, and Philip Payne.Clearly in the last year of its life at New Star, the Sterling Bond Fund had an abysmal run of performance.

There has been an unprecedented re-pricing of bonds across the market and the fund was hit by a heavy weighting in the financial sector.  Performance was further hindered by the lack of liquidity in this area which meant that trading became extremely difficult and selling positions almost impossible. This helped push the fund down far below what anyone would have expected.Coincidentally, since the fund has been handed over to Henderson the outlook for financials has slowly but surely been improving. What has happened? Well first the banks’ capital situation, given government intervention, has improved considerably. Liquidity has also improved and thirdly there has been lots of cheap new issuance; it has therefore been possible to sell some of the older bonds and buy some of the new opportunities. This certainly wasn’t possible a few months ago.So the new managers have been reducing the exposure to financials within the fund, and likewise the pub and property sectors. They are seeking to diversify in to other areas as and when they can.  They are increasing exposure to more stable sectors such as telecoms, utilities tobacco and healthcare.Additionally, some of the new bond issues are extremely attractive to the team. These include companies such as Rolls Royce with ten year bonds at around 7%. At the same time the team have also been switching some of their riskier bank bonds into more secure bonds issued by the same institution.The upshot of this refocusing of the portfolio is that overall financial exposure has fallen from 60% of the fund to 40%. This is still a significant position, but remember that the fund fell on the back of a financial crisis, but could also rise greatly if any improvement is sustained.The fund managers strongly believe that the next six months will see an improvement in the portfolio, and indeed the last few weeks have seen a marked pick up in performance (see below). Our own view is that the fund should be considered a hold; it is not currently part of the Wealth 150, our list of favourite funds in each sector.Mark Dampier, Head of Research> Key Features of the New Star Sterling Bond FundPerformanceBetween 31/12/07 and 31/03/09 the New Star Sterling Bond Fund fell 43.2% compared to a 16.1% fall for the sector average. However, in the six week period from 31/03/09 to 12/05/09 the fund rose 10.4% compared to a gain of just 2.5% for the sector average.

03/05/04 02/05/05 01/05/06 01/05/07 01/05/08 02/05/05 01/05/06 01/05/07 01/05/08 01/05/09 New Star Sterling Bond 7.68% 3.82% 1.93% -5.74% -37.31% IMA £ Corporate Bond 6.81% 3.61% 1.01% -3.32% -11.75%

Past performance is not a guide to future returns.