Fund Objective

To achieve a high income with capital growth prospects.Investment will be predominantly in UK corporate bonds and UK government and other public securities and other fixed-income securities anywhere in the world.

View on Past Performance

Interest rates expectations rose over the quarter, largely due to higher than expected inflation data. In reaction to these strong figures, base rates rose once in May by 0.25%, with rates ending the quarter at 5.50%. Corporate bond prices suffered from this increase in rates, with AAA-rated corporate bond spreads in 10 year maturities widening by 4bps.Concerns surrounding sub-prime mortgages affected the performance of bonds issued by financial institutions. The fund performance was negatively affected by this during the quarter due to an overweight in First-tier issuers in this sector.We however continue to favor subordinated financial corporate bonds at the expense of industrials on the premise that late on in the economic cycle the former historically outperform the latter. As we believe the cycle to be quite mature, we favor this defensive stance.In duration, the Bank of England has raised rates aggressively and we now consider that UK bonds are cheap compared to US and in particular EU bonds.

Future Expectations

The Bank of England is widely expected to increase the base rate by 25bps to 5.75% in July as recent prints of economic figures have been strong and inflation figures remain high. The market is currently expecting a further hike to 6.0% and a high chance that rates will reach 6.25%.We would argue that slowing house price rises and lower disposable incomes on the back of higher mortgage rates will begin to bite into consumer confidence.This should limit rates rises and it looks unlikely they would reach 6.25%; we actually believe there is a 50% chance they will not reach 6.0% in the short term as the market currently expects.

Fund Details