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Bonds likely to languish as inflation looms

Analysts say diversification is a key strategy when returns are weak, KEITH DAMSELL writes

MUTUAL FUNDS REPORTER

Suck it up, bond investors.

That's the hard-luck advice of financial advisers and money managers when it comes to the depressing state of bond yields. A surging global economy has pushed central banks to raise interest rates to stave off inflation. The fallout? Weak bond prices and returns. Satish Rai, Toronto-Dominion Bank's guru of the asset class, expects bonds and bond funds will, on average, return less than 5 per cent annually for the next three to five years, less than half the annual gains of much of the past decade.

"We do not see the same returns coming from bonds as we have in the past. The best defence is to diversify," said Chris Reynolds, president of Investment Planning Counsel Inc. of Mississauga, who recommends a 60-per-cent equity, 40-per-cent fixed-income split for most portfolios.

Investors need to trade off the promise of higher returns for the sake of stability and predictability, F. Blaine Dickson, branch manager of Capri Intercity Financial in Kelowna, B.C. "Find a good bond fund with a good track record and hold on to it," he said. "Some investors will give up returns for knowing that they can sleep at night and bonds to some degree provide the Nyquil."

But there may be some relief for investors willing to consider some new fixed-income options.

For example, Centrefire Capital Management Inc. is marketing a U.S. high-yield income fund to be managed by U.S. heavyweight Financial Management Advisers LLC. The closed-end fund will invest in the $1-trillion (U.S.) corporate bond market, holding about 80 per cent of its asset mix in U.S. debt rated "B" or better by Standard & Poor's.

"We are targeting to pay 7 per cent [monthly distribution] and that's not including capital gains," said Stanley Archdekin, Centrefire president and chief executive officer. The U.S. corporate bond market is a "very misunderstood" asset class with limited risk in a well-diversified portfolio, he said.

Elizabeth Lunney, senior vice-president and portfolio manager at Franklin Templeton Investments Corp., recommends a "basket of income vehicles," including high-yield international bonds. About 8 per cent of the fund company's $1-billion Quotential diversified income portfolio is held in global bonds. "There's a danger that investors, when we talk about global bonds, just look to the U.S. market . . . there are fairly attractive yields elsewhere and increasingly in the Asian markets," Ms. Lunney said.

The weak bond market has been a godsend for high-interest cash accounts, especially Altamira Investment Services Inc.'s High-Interest CashPerformer. The company closely guards sales figures but analysts estimate there's several billion tucked away in the money-market fund promising a 3.5-per-cent return.

"It's because of the bond rates . . . do you want to be in something that you are locked in?" asked James Whitman, newly appointed senior vice-president of sales and service at Altamira, a unit of National Bank of Canada.

Portus cheques returned

Fifty-six small investors have learned first-hand that timing is everything.

The group planned to sink a total of about $600,000 into Portus Alternative Asset Management Inc. Fortunately, their cheques and bank drafts were dated after regulators issued an order preventing the failed Toronto hedge fund from accepting new clients. Receiver KPMG plans to return the cheques and bank drafts to investors. In the event the investor cannot be located, KPMG will void the cheques.

Portus was shut down in March, 2005, when the Ontario Securities Commission pushed it into receivership amid a flurry of investigations that now includes an RCMP probe. At the time, Portus had more than $800-million in assets and roughly 26,000 investors.

Mallard leaves AssanteBrian Mallard & Associates, a Saskatoon financial adviser that has been the focus of a legal dispute, has left Assante Corp. and is moving to Quadrus Investment Services Ltd.

Brian Mallard & Associates has advised clients that it will join the London, Ont.-based firm, the mutual fund dealer arm of London Life and an affiliate of Great-West Life Assurance Co. Clients were advised by letter of the dealership transfer earlier this month.

"We have fundamentally different views on carrying on business within the financial services sector," Assante, a unit of Toronto's CI Financial Inc., said in a statement. "Brian and his associates and the Assante Group have come to a mutually acceptable and amicable parting of the ways."

Mr. Mallard is the founding chairman of industry association Advocis. His business practices came under scrutiny in 2004 following the launch of a wrongful dismissal suit by former employee Kent Shirley.

According to court documents, Mr. Shirley alleged Mr. Mallard over-billed clients and misrepresented fees. Mr. Mallard denied the charges, and in a counterclaim alleged Mr. Shirley was a poor employee. Mr. Shirley had turned company files over to the Saskatchewan Financial Services Commission, the Mutual Fund Dealers Association and the RCMP. He died suddenly on Dec. 24, 2004. The case remains before the courts.kdamsell@globeandmail.com

© 2007 The Globe and Mail. All rights reserved.

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