Fund Objective

To generate a high level of income, payable monthly into a UK bank or building society account.

View on Past Performance

The portfolio maintained its conservative positioning during the month, closing the month overweight cash and short duration securities and slightly underweight the more speculative part of the market. While trading was relatively light, we had some short duration names mature and used this liquidity and some additional cash to increase our positioning in short duration names. Absolute returns of the universe were the worst for the year if not since 2001.The portfolio did, however, significantly outperform the high yield universe. Performance was driven by portfolio construction and credit picking across the entire spectrum of high yield credits. The most notable area of outperformance came in the more speculative portion of the market. The overweight position in short duration securities was also a positive factor when compared to the benchmark.

Future Expectations

Although the high yield market has not been the primary focus of the current financial crisis, valuations were pushed significantly lower by increased risk aversion on the part of investors. Technical pressure on high yield spreads was exerted by both the bank loan market and the investment grade bond market and lead to significant widening across the entire spectrum of credit quality. Spreads widened to 1230 bps and the average YTW was 16%.At this point, it seems that spread widening will continue to be driven by turmoil in the financial sector. The dislocation in these markets is starting to impact the corporate sector, with liquidity becoming scarce. If this continues it will not only be the weaker credits that will find it difficult to refinance themselves but also the more seasoned names in the market, which will result in a significant spike in future default rates.

Fund Details