The credit crunch has strengthened its grip as several large financial institutions across the globe failed completely or had to be rescued. This resulted in the worst month for the UK corporate bond market since records began in the early 1990s. The decision of the US authorities to allow the bankruptcy of Lehman Brothers rather than help the bank to survive, started a chain reaction across the world, pushing more financial institutions to the brink of collapse.September was a poor month for the fund which had exposure to two failed banks, Lehman Brothers in the US and Bradford & Bingley in the UK, as well as insurer AIG. While AIG was rescued, its bonds have fallen materially in price, making a negative contribution to performance. Fund activity in September included purchases of new issues from HSBC, Imperial Tobacco and Centrica, as well as reductions in our holdings in BAA, Stena, Banco Santander, Xstrata and Taylor Wimpey.The fund bought Pearl Group (formerly Resolution) after its bonds fell sharply. Profit was made by selling subordinated bonds (those bonds which are paid out immediately after the primary creditors in the event of a corporate failure) issued by Siemens before buying them back a week later at a materially lower price. A painful economic slowdown is certain, with the continuing fragility of the banking system limiting the extension of credit.However, credit spreads (corporate bond yields relative to gilt yields) have now collapsed to levels last witnessed in the early 1930s and whilst bearish sentiment is well justified, current levels of credit spreads seem to be exaggerating the future outlook. The fund is overweight medium maturity bonds, favouring 10 year issues over 30 year issues due to the prospect of heavy issuance to fund a substantial budget deficit in the UK.
99.94p
