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DJ CANADA TIP SHEET: Carpani Isn't Fretting About Inflation

By Ben Dummett
Of DOW JONES NEWSWIRES

TORONTO (Dow Jones)--Mark Carpani, manager of the C$80 million Ridgewood Canadian Bond fund, isn't overly concerned about a near-term jump in inflation.

Predictions of rising prices and a resulting increase in interest rates has garnered a lot of attention lately because of the massive government stimulus programs that were introduced to kick-start the slumping global economy.

Carpani takes the view that inflation will stay down at least for a little while because the excess capacity in the system suggests it will take time for wage pressure to mount even when the economy starts to rebound and unemployment levels start to decline.

Carpani doesn't believe inflationary pressure "is a 2009 or early 2010 story," so "we're not really looking at that when we are managing our portfolio at the present time."

Against that backdrop, Carpani is finding value in the bond market, particularly in bonds that fall within the middle part of the yield curve, which has backed up more than the short and long ends of the curve.

"The mid area got dragged up quite a bit with the back-up in the U.S. market," largely on supply concerns which weren't an issue for the Canadian market, the money manager said.

Further, indications by Bank of Canada Governor Mark Carney that he doesn't plan to raise the overnight target rate until June 2010 also adds to the attractiveness of the middle part of the bond market, Carpani said.

Carpani recently participated in the new debt issue of New Brunswick Municipal Finance with a 5% coupon maturing 2019, as well as in the new issue of York Municipal Finance, also due 2019 with a 5% coupon rate.

He also holds some Royal Bank of Canada (RY) corporate bonds due 2015 with a coupon of 4.87%.

By contrast, in the second quarter Carpani took some profits in the fund's holding of Bank of Montreal (BMO) Tier 1 debt. "We bought (it) at issue at very high yields of close to 9%-10% and (it is) now trading down approximately in the 6% area, so we think (it) is due for a little pause," Carpani said.

For the one-year period ended May 31, the fund is up 7.1%, outpacing the group average gain of 3.0% and a 2.9% rise in the Globe Canadian Fixed Income Peer
Index, according to Globefund.com

For corporate bonds, Carpani likes to diversify the fund's holdings across sectors to limit risk. By holding corporate bonds, "you are adding another level of risk so when you add that layer of risk, you want to try to limit any of the shocks that will occur to the portfolio," he explained.

About 60% of the fund is in corporate bonds, reflecting Carpani's bullish move to take advantage of historically high corporate bond yields late last year and early this year as a result of the market "pricing in pretty much a doomsday scenario for some very high-quality, investment-grade names."

Some holdings include a bond of Shoppers Drug Mart Corp. (SC.T), a drug-store operator, with 4.8% coupon maturing 2012 and a bond of industrial manufacturer Caterpillar Inc. (CAT), which carries a coupon of 5.2% maturing in 2013.

 Ben Dummett, Dow Jones Newswires; 416-306-2024; ben.dummett@dowjones.com

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(END) Dow Jones Newswires

07-07-09 1200ET

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