Fund Objective

To achieve capital growth and income primarily through investment in index-linked gilts.

View on Past Performance

The second quarter has seen a surge in volatility in government bonds, particularly in the UK, as investors have switched attention from slowing growth and financial market stresses to fears that an oil price shock like that of the 1970s would cause inflation to accelerate and raise interest rates.The market had moved from pricing in interest rate cuts to anticipating interest rate rises. By the end of the period, the volatility driven by the rapid rise in government bond yields resulted in the fund underperforming. At the end of March we expected a gloomier UK economic outlook.Amidst the continued market volatility, we reduced the fund's market exposure as part of our risk management procedures, bringing duration (interest rate exposure) to neutral and closing yield curve strategies (which favour short-dated bonds over long dated bonds).In addition, we made an allocation to inflation-linked US treasuries, hedged back into sterling to benefit from an anticipated rise in demand for inflation protected bonds, making a positive contribution to performance.

Future Expectations

The outlook for the UK economy remains weak. Inflation is expected to increase in the near-term, but over the longer term slower economic growth should help keep inflation under control. However, there is a risk that employees demand higher wages as prices rise, and inflation becomes more entrenched.We believe that the Bank of England will remain vigilant towards inflation, but is reluctant to raise interest rates while the economy remains under pressure. We remain neutral duration and keep a careful eye for evidence of a shift in the balance between growth and inflation.

Fund Details