Fund Objective

The Fund will be managed with the aim of achieving a positive investment return in excess of LIBOR across the market cycle.

View on Past Performance

Turbulence in global financial markets has continued, exacerbated by the collapse of Bear Stearns and the subsequent US Federal Reserve assisted rescue by JP Morgan. There were other interacting factors, such as the weak US dollar driving oil and commodity prices even higher and weaker US domestic data. The Fed acknowledged the worsening economic outlook but cited elevated inflation indicators which heightened investors' concerns over stagflation.Liquidity conditions were already tight on fears that hedge funds were facing difficulties meeting additional margin calls, but confidence collapsed on the Bear Stearns news.Three-month US Treasury Billsfell to 0.39%, the lowest since 1954. The Fed's response was both rapid and innovative with new measures aimed at reducing the risk that another regulated financial institution could fail.These initiatives, together with the revised offer for Bear Stearns and moves to increase transparency from several prominent US investment banks, triggered a change in sentiment. Investors have regained some confidence. Risk aversion had delivered further sharp falls in government bond yields but these were partially unwound into month end. The EMU Aggregates underperformed as the ECB's latest communiqué gave no hint that they would consider cutting rates anytime soon.In credit, financials performed better but utilities outperformed and in high yield there has been a general reduction in risk premium. Emerging bond markets have underperformed the developed markets, although there was considerable dispersion of returns largely dependent on inflation and whether their central banks would tighten monetary policy.Equity markets also rallied from their lows with the best performance coming from insurance and retail, whereas the sectors most affected by tighter credit conditions (telecoms, technology and industrial goods) underperformed.

Future Expectations

We have continued to take a conservative approach, having reduced the risk profile of the fund at the start of the year. But we feel that, with recent announcements from investment banks, we have now seen the worst of the sub-prime write downs. The Fed and global central banks have shown determination in restoring order to financial markets by injecting huge amounts of liquidity and sovereign wealth funds have been lending their support to the investment banks.Certainly the Fed will remain accommodative and we believe that with their latest policy initiatives we are now starting to see a return of confidence. Our base case is still for the US to avoid a recession, given the level of both monetary and fiscal stimulus, but we are also looking for a correction in the overbought US treasury market which would benefit the riskier fixed income asset classes.

Fund Details