Fund Objective

The Standard Life Investments UK Equity Income Unconstrained Fund aims to provide income and some capital growth over the longer term by investing in UK equities.

View on Past Performance

UK equities recorded only a slight gain in February, as prospects of a US economic recession continued to cast a long shadow over global markets. Investors focused on the troubled banking sector, with news of further large writedowns by some UK banks denting already fragile investor sentiment. Among the larger banks, HBOS suffered significant weakness on news of falling profits, and this also weighed on the share prices of Lloyds TSB and Barclays.However, February was a positive month for the mining companies on the back of strong commodity prices and bid activity. BHP Billiton raised its bid price for Rio Tinto. As widely anticipated, the Bank of England cut UK interest rates by 0.25% to 5.25%, prompted by falling house prices and weakening economic data.The Fund returned 5.75% over the month, compared to its peer group average of 1.6%. We continue to hold and invest in our best ideas. This hit performance in the second half of 2007, but is now paying dividends. The strong performance of the mining sector continued, bolstered by strong commodity prices and bid activity.Vedanta Resources, Rio Tinto and Anglo American all made positive contributions to performance. Other positive influences included our holding in office management company Regus, which has shown good resilience in current market conditions. One of the main detractors from performance during February was British Airways, which was hit on worries over premium demand and the high oil price.During February, we initiated a position in BHP Billiton, given the strength of demand for nickel and copper, as well as ongoing consolidation in the industry. We funded this by selling our position in Rio Tinto given the difference in recent performance and valuation. We reduced our holding in British Airways given the exposure to the rising cost of fuel and which could be vulnerable to weaker premium traffic in the currently challenging economic conditions.

Future Expectations

The UK equity market is now showing signs of looking through earnings downgrades, having already priced in an extremely negative scenario on the credit crisis, consumer activity and the housing market. The key trigger for the market would be the resolution of the credit crisis, the return of merger and acquisition activity and further monetary policy easing.Even in the absence of these triggers, the market remains supported by an extremely low valuation in terms of earnings, dividend and free cashflow. The market also remains underpinned by strength in the resources sector, with industrial and mining companies continuing to perform well.

Fund Details