Fund Objective

The Fund aims to provide a high and stable level of income by investing mainly in a selection of UK and European securities.

View on Past Performance

At the end of September, the Fund underperformed its sector average over three months. Corporate bonds performed very poorly in September, as a virtual collapse in market liquidity and multiple failures in the global banking sector caused the difference ("spread") between corporate and government bond yields to increase sharply.Yield spreads in the sterling investment grade bond market increased to record highs while, in high yield markets, spreads tested levels not seen since the ending of the dot-com bubble. We invested in attractively priced new bond issues from Centrica and Imperial Tobacco during September, before selling our positions profi tably later in the month.Elsewhere, we closed the Fund's short positions in Rentokil Initial (after disappointing results) and Tate & Lyle (after the losing of a patent case in the US) in the process crystallising good gains. We sold also the Fund's position in Washington Mutual, prior to federal regulators taking control of the bank in late September, and started a new position in attractively valued HSBC bonds.During this period of unprecedented volatility and poor liquidity, we have been working closely with our third-party administrators to ensure that the bonds in the portfolio are accurately valued. Clearly, our decision to raise the Fund's exposure to investment grade fi nancials during the summer has proven premature and this has damaged performance, particularly during September.

Future Expectations

However, high levels of investor risk aversion and a lack of market liquidity have conspired to depress corporate bond valuations to extremely low levels. Unlike equities, corporate bonds will - provided the borrower doesn't default - deliver fi xed returns if held to maturity. While we remain cautious and very conservatively positioned in the industrials and consumer cyclical sectors, we believe that there is now scope for very attractive returns from the asset class over the medium term.Moreover, we now see interest rates coming down over the next few months, which should provide further support for corporate bonds.

Fund Details