Fund Objective

To achieve an above average level of total return (interest income and capital appreciation) through investing, directly or indirectly, in global investment grade bonds.

View on Past Performance

Economic data released over the third quarter showed a deceleration in growth, particularly in Europe. But, economic indicators were not of prime importance for the markets, which were more focused on the financial crisis.The issues within the Financial sector evolved into a systemic crisis late in the quarter - September was amongst the most turbulent months on record for financial markets, especially in the US. Lehman Brothers filed for bankruptcy, Merrill Lynch was bought by Bank of America and the US government bailed out the world's largest insurer, AIG, and nationalised Freddie Mac and Fannie Mae.Failing European banks were also saved, either by being nationalised or from takeover approaches. In this environment, bond markets benefited as investors took flight from riskier assets towards 'safe havens'. As a consequence, rates decreased and yield curves steepened.The materialisation of the financial crisis in Europe led to the eurozone bond market outperforming its US counterpart. Difficulties on the financial markets and slowing economies led to a sharp widening of credit spreads.Inflation-linked bonds suffered from the drop in the price of oil. We consider that this correction is exaggerated and have kept the fund's position on this asset class, which is attractive at current prices.

Future Expectations

The markets are likely to remain extremely volatile.We have trimmed our growth forecasts for the US, UK and the eurozone in both 2008 and 2009, reflecting the intensification of financial market turmoil and the ramifications this will have on the real economy. We also expect all the major central banks to intervene with rate cuts.We have kept a small long fund exposure on duration of the eurozone against the US as we believe that European growth will disappoint.The fund has strong steepening positions because we expect central banks to sustain the short end of the yield curve by cutting their key rates. The long end of the yield curve should suffer from widening budget deficits.Corporate spreads offer a historically high premium but liquidity and visibility are poor. In terms of currencies, we favour a defensive allocation. The fund is overweight the Swiss franc and underweight both the Australian and New Zealand dollars.

Fund Details