Aberdeen Life Bond Fund

July 2010

Market review

• News flow in the UK was dominated by the General Election and ongoing concerns about Euro area debt problems. The Bank of England left the base rate unchanged at 0.5% during the quarter and maintained the asset purchase target at £200bn. However, the minutes from the meeting in June highlighted the first split in voting since February 2009, with Andrew Sentance in favour of a 0.25% increase, based on inflation resilience in the UK and signs of global recovery. UK gilts benefited from the general weakness and volatility in peripheral Eurozone sovereign bond markets. As a result, five and ten year maturities fell by 0.65% and 0.58% respectively, while thirty year maturities fell by 0.36%. Sterling credit underperformed government bonds, with spreads widening by 0.38% to end the quarter at 1.95% over gilts, despite companies generally reporting improved performance. Sovereign debt concerns overshadowed credit fundamentals.

Fund review

• The fund underperformed over the quarter. Within interest rates, a short duration position and our yield curve flattening positions detracted value. Security selection within credit also detracted value. We remain overweight credit risk relative to government bonds, which hurt performance as credit underperformed. We exited our position in US mortgages and trimmed down our financial holdings over the period.

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