Fund Objective

The Standard Life Investments AAA Income Fund aims to provide income by investing mainly in sterling bonds. The Fund is actively managed by our investment teams who may invest in a variety of 'AAA' credit rated assets including corporate bonds, gilts, supranationals and other bonds (e.g. government backed securities, overseas bonds and index-linked bonds) and/or money market instruments in order to take advantage of opportunities they have identified.

View on Past Performance

Gilts strengthened in February as a result of further risk aversion bought on by ongoing problems stemming from the US mortgagemarket inspired credit crisis. Newsflow concerning accounting irregularities at AIG, uncertainty over the future of so-called 'monoline' bond insurers such as AMBAC and further banking writedowns related to mortgage-backed securities weighed heavily on corporate bond markets.A surge in credit costs, similar to that which occurred in December, resulted in the US Federal Reserve providing relaxed collateral requirements for emergency borrowing. This temporarily reassured investors but did not solve the problem.The AAA Income Fund returned -0.71% over the month, compared to the sector average return of -2.01%. The Fund held up relatively well in volatile markets as structured AAA bonds held their value well, including Southern Gas Network, Telereal, and Punch Taverns. Holding Inflation-linked bonds in the portfolio also helped.We increased the duration of the fund by switching out of the 2020 gilt into the 2055 gilt. We also added to holdings of inflationlinked bonds. New cash into the Fund provided the opportunity to increase holdings in longdated bonds from the European Investment Bank.

Future Expectations

Corporate bond markets remain nervous as investors try to gauge the likelihood of further sub-prime losses and money markets remain dislocated. The emergence of possible downgrades to bond insurance companies has raised the spectre of forced selling within bond markets. Banks remain extremely cautious and liquidity is in short supply. As long as the banks continue to announce asset writedowns the credit market will remain tight.Looking further out, the market remains concerned about the potential for an economic slowdown in the US that might cause an increase in default rates, although we do not think this will be as bad as some are predicting. In this environment, AAA-rated bonds should remain in demand, and index-linked bonds are also looking more attractive. We have structured the Fund slightly long of duration, with a preference for medium-dated bonds and holdings in inflation-linked bonds.

Fund Details