Fund Objective

The Standard Life Investments Select Income Fund aims to provide a level of income, before charges, above that available on UK Government bonds by investing predominantly in investment grade bonds.

View on Past Performance

Investment grade bond returns turned negative during the month of January, as the spread premium over gilts that companies pay to borrow in the bond market widened steadily, driven by the impact of falling interest rates. Medium-dated corporate bonds outperformed long and short-dated bonds during the period, while the high-yield sector had its worst month since June 2002.Bond markets remain volatile with unexpected pricing behaviour in the midst of ongoing concerns about the full effects of the sub-prime mortgage crisis and an uncertain growth, inflation rate and interest rate environment.The Select Income Fund underperformed its peer group over the month, returning -1.95% against an IMA Sector average return of -0.87%. Although returns were negative for the month, some of the negative relative performance can be attributed to the day-todate volatility and a timing difference in Fund pricing between Standard Life Investments and much of the rest of the mutual fund sector.Exposure to high-yield bonds and an underweight position in medium-dated bonds accounted for the rest of the months underperformance. However, this was partially offset by our holdings of gilts and investment grade supranational bonds from KfW and the European Investment Bank.Over the month we reduced our exposure to high-yield bonds and increased investment in medium dated gilts, which we believe will put the Fund on a more solid footing over a period of further volatility and falling interest rates. Among the issues we sold were Nordic Telephone Holdings, TNT Logistics, Hellas Telecommunications and Edcon Proprietary.

Future Expectations

Credit markets remain nervous as investors try to gauge the likelihood of further sub-prime losses and commercial paper markets remain dislocated. The emergence of possible downgrades to bond insurance companies raised the spectre of forced selling within bond markets.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. We remain focused on investing in companies with robust cashflows that will continue to pay their coupons without difficulty, even in a less benign economic environment.

Fund Details