Fund Objective

The aim of the Preferred Income Fund is to generate high income.

View on Past Performance

The pain intensified for UK bond investors during the second quarter of 2007 as higher than anticipated inflation data kept expectations for UK interest rates firmly on an upward path. At the beginning of the quarter, a common expectation amongst economists was that the peak of the interest rate cycle was close at hand and that one more increase to 5.5% would suffice for the balance of the year.Most importantly, the rate of UK inflation hit its highest level for fourteen years and the Consumer Price Index ("CPI") breached its 3% target ceiling, resulting in the Governor of the Bank of England having to write an open letter of explanation to the Chancellor of the Exchequer for the first time since the Bank was granted independence over interest rate policy in 1997.The increase in rates to 5.5% in May was universally expected by the time it arrived, but the realisation that vote to hold rates in June was only carried by the narrowest of margins and July's subsequent move to 5.75% caught many by surprise. By now, markets are fully anticipating rates of 6% with the risk of a further move thereafter.

Future Expectations

Although inflation data has since begun to moderate, the open question remains on the extent to which it will strengthen again towards the end of the year and into 2008, which in turn will directly influence the extent to which the Bank of England continues to raise rates.Despite the recent increase in yields, risks to forecasts still seem to lie to the upside until such time as the outlook for inflation begins to clarify. In these circumstances, UK bonds will find any meaningful rally difficult although from time to time high grade issues will benefit from a flight to safety - the jitters over sub-prime lending in the US having been the latest catalyst.

Fund Details