Fund Objective

To provide a combination of a good level of income and, where possible, capital growth.

View on Past Performance

During the third quarter, a lethal combination of deteriorating economic fundamentals and bank failures led a massive flight to quality into treasury bonds, while ongoing de-leveraging led to further underperformance of credit and spread products. In this environment, our main macro positions contributed positively, while our overweight positions to US financials and CMBS product were the main detractors.Our duration and country selection positions added to returns, led by our euro and UK overweight positions. In terms of curve positioning, our UK curve steepener was a contributor, while our US curve barbell a detractor. Our currency trades were an additional positive across the quarter. The Fund underperformed its benchmark slightly over the quarter, with September being the only negative month.Global yield curves steepened overall;US two-year yields ended the quarter 66bps lower,to 1.97%,and 10-year yields were down 15bps,to 3.83%.In terms of activity,we reduced our risk exposure during the quarter,and moved to a small underweight effective duration position.In the dollar bloc,we moved to an underweight duration stance overall,by moderately increasing our underweight to the US,while leaving our overweight position to Australia unchanged and moving to a neutral stance in Canadian rates In Europe, we tactically managed our overweight duration position and our overweight core-versus-peripherals allocation.We became increasingly bullish on euro and sterling rates, as economic fundamentals deteriorated, and increased our overall duration position in EUR rates before quarter end, as the market was not pricing in any rate cut until Spring 2009. In credit, we have been actively trading two-ways trying to improve the quality and liquidity of our assets. We think valuations remain attractive for long-term holders, but technical headwinds remain challenging.

Future Expectations

In Europe, we maintain a long duration exposure in the expectation that growth remains on a sharply slowing trajectory and that current circumstances will necessitate further monetary easing by the ECB. We remain short in Japan, focusing on the short end of the yield curve.In terms of currencies, we are overweight the Japanese yen relative to the euro, overweight the Australian dollar versus the US dollar, and overweight the US dollar versus sterling. We are overweight high-quality, short-duration CMBS, MBS and ABS paper.

Fund Details