Fund Objective

The Standard Life Investments Corporate Bond Fund aims to generate an income, before charges, above that available on UK Government bonds by investing mainly in Sterling denominated corporate bonds.

View on Past Performance

Corporate bond markets suffered further risk aversion bought on by ongoing problems stemming from the US mortgage-market inspired credit crisis. Newsflow concerning accounting irregularities at AIG, uncertainty over the future of so-called 'monoline' bond insurers such as AMBAC and further banking writedowns related to mortgage-backed securities weighed heavily on corporate bond markets. The situation was worsened by talk of a drawn out conclusion to the credit crisis.A surge in credit costs, similar to that which occurred in December, resulted in the US Federal Reserve providing relaxed collateral requirements for emergency borrowing. This temporarily reassured investors but did not solve the problem.The Corporate Bond Fund returned -2.13% over the month, compared to the IMA sector average return of -2.01%. An underweight position in AAA-rated bonds and an overweight position in subordinated financial issues 'wrapped' bonds such as Aspire all held back performance in February. A slightly longer duration position and a lowered risk profile helped to partially offset these negatives.We reduced risk during February, selling bonds from FT, Telefonica, Wellcome Trust Santander to buy AAA-rated supranational bonds from the European Investment Bank. We swapped some conventional gilts into inflation-linked gilts, and adding duration by swapping exposure to the 2020 gilt into the 2055 gilt.

Future Expectations

Corporate bond markets remain nervous as investors try to gauge the likelihood of further sub-prime losses and money markets remain dislocated. The emergence of possible downgrades to bond insurance companies has raised the spectre of forced selling within bond markets. Banks remain extremely cautious and liquidity is in short supply. As long as the banks continue to announce asset writedowns the credit market will remain tight.Looking further out, the market remains concerned about the potential for an economic slowdown in the US that might cause an increase in default rates, although we do not think this will be as bad as some are predicting. In this environment, AAA-rated bonds should remain in demand, and index-linked bonds are also looking more attractive. We have structured the Fund slightly long of duration, with a preference for medium-dated bonds and holdings in inflation-linked bonds.

Fund Details