Fund Objective

The objective of the Income Fund is primarily to provide investors with income.

View on Past Performance

During the period under review the bid price of the distribution units rose by 2.45%.The UK's relatively high level of interest rates and the lack of an inflation threat gave the Bank of England scope to cut rates. It did so at the end of the review period, reducing the base rate by 0.25% to 4.50%. This was the first change in rates since August 2004.As discussed above, the economic backdrop has generally provided support for corporate bonds, leading us to be strategically positive towards the asset class overall. We began the review period with overweight positions in lower rated bonds, i.e. the single A and triple B rating bands. Within this, our favoured sectors were financials and telecommunications.Based on our strategy and analysis, the Fund's performance is largely attributable to rating band and industrial sector selection. Throughout much of the period, the Fund was biased towards signle A which provided some positive attribution. The Fund's underweight interest rate risk position did prove slightly negative for performance however.

Future Expectations

The Bank of England cut interest rates in early August in light of mouning evidence that UK consumption has slowed. This data had promted investors to price into the market at least 0.50% of rate cuts by year end. While the economy is slowing, it does so form high levels and we thing that the chance of multiple rate cuts remains limited.We continue to believe that UK consumption will keep growing, albeit at a slower pace. Evidence of a higher savings rate is emerging as house price inflation cools, but there is as yet no clear sign of a collapse in consumer confidence. Employment remains high, wage growth is steady, inflation is low and government spending is high. The UK is far from recession.In terms of the corporate outlook, while the economic background remains relatively supportive, valuation in the corporate bond market is not compelling, and some of the longstanding supports to the market are beginning to look more fragile. As a result, we are gradually moving the prortfolio to a more defensive stance.

Fund Details