When the US sneezes, the rest of the world catches a cold. August's economic data certainly confirmed the old refrain, as second quarter GDP recorded negative in Germany and flat in the UK. Statistical misery was mirrored throughout the retail and housing sectors, as Europe heads towards a potential recession. Ironically, the U.S. had its strongest quarter since the banking crisis began, with GDP reported +3.3%, largely due to exports.The currency markets reacted rationally, with a Dollar rally reflecting superior US growth, export demand and the prospect of higher interest rates in 2009. European bond yields fell as investors started to discount a recession in 2009 while credit spreads widened accordingly. The Merrill Lynch European High Yield index (BB-B) returned +1.0%, with consumer cyclicals the weak spot. Investment grade financials continued to struggle as wholesale funding dried up and refinancing risks grew.The tightening of ECB liquidity facilities may present a challenge to European banks, some which have become quite reliant on the funding window. The 'over reliant' institutions may include certain Irish and Spanish institutions, which have packaged-up mortgage backed securities specifically in order to use central bank facilities. A similar problem may be brewing in the UK, where the Bank of England stated that its Special Liquidity Scheme will not be extended beyond October 2008.The Fund returned 0.6% in August, compared to 0.4% available on T-bills. Since inception, this is now the best performing bond fund in the UK Other Bond Peer Group (Source: Morningstar 5th April 2006 to 27th August 2008).At month end, the Fund's notional exposure to BBB and high yield bonds1 remained 65% of NAV. The portfolio holdings have interest rate duration of just 1.3 years and a gross yield to maturity of 8.3%. We highlight below the five largest issuers1 in the Fund, to demonstrate our investment approach.
181.50p
