Fixed Interest Trust - January 2012 update

The Euro-zone debt crisis continued to drive credit market volatility during December, with ongoing economic uncertainty highlighting safe-havens such as gilts. Though yield spreads continued to oscillate intra-month in response to mixed economic data and the authorities’ efforts to stem the debt crisis, corporate bond prices generally ended the month higher, supported by firmer gilt, bund and US treasury bond markets.

The portfolio’s performance was supported by our relatively large holdings in gilts, which performed strongly. We made selected additions to our holdings in the energy sector, participating in well-priced new issues, including 10-year dollar-denominated deals in Abu Dhabi power firm TAQA and satellite services company Eutelsat, as well as a sterling-denominated issue from Brazilian petroleum company Petrobras. Elsewhere, ahead of the Christmas trading lull, we took advantage of technically driven year-end selling in the secondary market to acquire a Lower Tier 2 2025 issue from HBOS, part of the Lloyds banking group. Elsewhere, we acquired new exposure to a 2025 holding in Czech energy group CEZ at a level we deemed attractive.

The portfolio retains an overall defensive stance, with a bias in favour of gilts over credit. We favour insurers over banks, while we retain a cautious stance towards non-financials, notably in consumer services where we believe companies remain vulnerable to tighter consumer finances, and telecoms, where we see further scope for margins to be squeezed.