Fund Objective

To achieve a return in excess of global bond markets.

View on Past Performance

The yield-to-worst on the Merrill Lynch BB/B constrained index ended the quarter at 12.04% as spreads widened 281 bps to +904 on an OAS basis. Spreads and yields moved near all-time highs. Financial markets suffered dramatically amidst unprecedented financial failures and stresses, growing recessionary concerns and complete risk aversion.The 12-month trailing domestic default rate increased to 1.34%, still well below historical averages. New issuance volumes have fallen since May and have yet to recover.

Future Expectations

Market valuations are attractive but price improvement will be dependent on stabilising credit conditions. Sentiment swings concerning the depth of the economic weakness and the extent of the financial crisis will drive near term spread levels. Longer term, we believe current valuations will prove attractive and we expect spreads will tighten as current levels overly discount our expectation for defaults.Corporate default rates will increase in 2009, but we expect them to remain below the market's draconian expectations. This is because, compared to previous cycles, the majority of companies in the high yield universe today have stronger balance sheets and minimal refinancing needs, unlike many credits in the investment grade universe, which should help mitigate credit deterioration in the current economic downturn.Security selection takes on greater emphasis in this difficult market environment and we will rely on our bottom-up security selection process to capitalise on dislocations in relative value.

Fund Details