Fund Objective

To provide relative security of capital, as well as providing an income in the medium to long term.

View on Past Performance

We reduced the curve steepening bias during the month but maintained fund duration close to neutral. We added the HBOS government-guaranteed bond issue to the Fund as it was issued at a large spread to underlying government bonds.Fund performance was close to benchmark as interest rate duration was close to benchmark.

Future Expectations

Global economic growth is slowing sharply in response to the financial crisis. In our opinion, most regions of the world will experience a slowdown, with several major economies likely to experience an outright recession, including the US and the UK. As a result, inflation is also expected to decline in 2009 and interest rates are expected to move lower as central banks try to stimulate a recovery.Financial asset prices have already become distressed as a result of the increase in defaults on US mortgage assets and the rapid de-leveraging that is taking place in the global banking sector. Government bond yields are low (less than 4.5% in the UK, less than 4% in Europe and the US).As such, the long-term returns from this asset class are likely to be low in nominal terms as over a 3 to 5-year period bond yields are likely to rise. Governments will be borrowing more so the supply of government bonds is likely to rise, which will contribute to upward pressure on yields over the medium-term. Of the major bond markets we expect the European bond markets to perform best and the US to perform the worst.

Fund Details