Fund Objective

The objective of this Fund is to achieve income and capital growth.

View on Past Performance

The Legg Mason UK Income Fund increased by 0.52%1 in sterling terms during the first quarter, compared to a sterling increase of 4.54% recorded by its benchmark, the FTSE All Share Index.Stock selection was the main reason behind this underperformance, while the Fund's sector allocation had a broadly neutral impact. Stock selection was most detrimental to returns in the construction & building materials sector, along with banks. In the former, the Fund's holdings in housebuilders such as Persimmon and Bellway detracted from performance as the sub-sector felt the effects of higher interest rates.Elsewhere, stock selection in the telecoms and mining sectors also contributed negatively. The Fund was underweight in Vodafone, for example, while in the latter sector it was underweight in Rio Tinto, which performed well, partly thanks to bid speculation. On the positive side, stock selection in the consumer staples group was beneficial to the Fund's returns, with its holding in drinks company Britvic being particularly strong.Turning to sector asset allocation, the Fund's overweight exposure to the oil & gas sector - taken via holdings in stocks such as energy company BG Group and oil giants BP and Royal Dutch Shell - was a positive influence on its performance. An underweighting to the pharmaceuticals sector, including industry leader Glaxo, was also helpful. An underweight position to the strongly performing mining sector partially offset these gains, however.Trading activity during the second quarter included reducing holdings in some interest rate sensitive sectors. Financial company Northern Rock was sold for example, and the Fund's exposure to housebuilders was reduced.

Future Expectations

Looking ahead, the Fund's investment manager remains broadly positive on the prospects for UK equities in 2007. The manager believes that valuations in the UK continue to look attractive, given the ongoing strength in corporate results and high levels of M&A activity. In addition, the domestic economic backdrop remains broadly supportive amidst buoyant consumer spending and business investment.The manager believes that such areas need to be monitored very closely, however, as there are some signs of a slowdown in housing and consumer demand as the effects of recent interest rate rises filter through the economy. Regarding the dividend outlook for UK equities, the manager continues to believe that despite some slowdown in profits growth, dividend increases look set to remain between 9% and 10% over the next two years, in line with their growth over the past five years.

Fund Details