Fund Objective

The Fund aims to achieve a high income return together with capital growth.

View on Past Performance

Economic data released during August continued to show that the UK economy was suffering from falling output and rising inflation. Together with falling confidence in the UK Government's ability to handle the current economic challenges, this helped promote a 5% fall in the value of sterling against a basket of currencies. This in itself is of course inflationary and comes on the back of input price rises of 30% over the year to the end of July.It also amounts to a certain amount of monetary easing and in isolation reduces any need for the UK to cut rates. On this score, the markets moved to discount rate cuts of almost ½ % by the end of Q1 2009 from no change a month ago. The housing market continued to see falling activity and prices and with disposable incomes still under pressure, the outlook for the consumer still looks very poor.We see a similar profile to the market in terms of interest rates especially after the gloomy outlook from the Bank of England and the Chancellor. Despite all that, the Bank decided to leave rates unchanged in August but interestingly with a three-way voting split.Sterling Investment Grade bonds underperformed gilts again over the month as the economic outlook and expected high levels of issuance dominated behaviour. On average, Yields widened by 0.1% against Gilts. This led to a total return of 1.7% for the corporate bond universe compared to 2.4% for the 5 to 15 year Gilt Index. Underperforming sectors included insurance and asset backed issues. Bank issues were basically in line with the universe as a whole.During August, the fund returned 2.3% - in line with the Merrill Lynch 5-15 year Gilt index return of 2.3%. The fund continues to wait for opportunities that will come with the pick up in issuance due over the next few months and there was no significant activity during August. Duration was kept in line with the benchmark.

Future Expectations

Economic conditions are generally not supportive of corporate bonds in the short term at least. However, this is well and truly priced in for investment grade corporate bonds which are offering yield premia at historically high levels. The fund is heavily weighted in Bank and Insurance Company bonds which have been hit very hard over the last year and now discount very bad scenarios.Comfort should be taken from the fact that most of these bonds are at the best end of the capital structure and quite short duration too. The fund has the flexibility to increase its risk appetite if and when better opportunities arise.

Fund Details