Fund Objective

The Fund's investment objective is to provide capital growth and income.

View on Past Performance

In what has already been an extraordinary year the third quarter of 2008 was an unprecedented period for financial markets. Globally, government intervention was required to support financial institutions who were finding it increasingly difficult to access liquidity.The impact of these major events has been felt across the full spectrum of financial instruments; predictably, risk assets have fallen as investors shun all but the safest of securities. The demand for Treasury bills has seen prices rise sharply following the collapse of Lehman Brothers. Yield curves have steepened on high demand for short-dated government bonds.Duration was maintained at a broadly neutral level to the benchmark for much of the quarter. A core position throughout has been mortgage backed securities including Fannie Mae and Freddie Mac. So far, the government bail-out of these institutions in early September has been positive for such securities.The portfolio's yield curve strategy was neutral throughout the period. A key example was a relative value position that exploited the differential between the US and European bond markets. Towards the end of the quarter duration was added in 10 year Japanese Government Bonds which look attractive on a valuation basis providing strong positive carry at lower risk.

Future Expectations

Our outlook is positive for bond markets, but much is already priced into the market. In the short term we will look for more attractive levels to build duration into the portfolio. The key long term strategy remains to increase the allocation to the corporate sector where valuations are increasingly attractive.However, given the continued slowdown in growth and our expectation of a significant rise in default rates we anticipate better levels at which to build this position and remain patient and disciplined in the interim.

Fund Details