Aberdeen Global - Hozam Plaza

Select Euro High Yield BondFor the year ended 30 September 2012Name changeOn 1 December 2011, the Fund changed its name from AberdeenGlobal - Euro High Yield Bond Fund to Aberdeen Global - SelectEuro High Yield Bond Fund.PerformanceFor the year ended 30 September 2012, the value of the SelectEuro High Yield Bond – A Accumulation shares increased by 25.08%compared to an increase of 26.88% in the benchmark, the JP MorganEuro High Yield Index.Source: JP Morgan, Lipper, Basis: total return, NAV to NAV, net of annual charges, gross incomereinvested, EUR.Manager’s reviewThe high yield market has rallied dramatically over the periodunder review. At the start of the period, the high yield market wasdiscounting the breakup of the Eurozone, the likelihood of which hasbeen considerably reduced since the European Central Bank (ECB), thelender of last resort for sovereign countries, implemented its long termrefinancing programme(LTRO). This programme has enabled banks toaccess cheap funding for the next three years.A combination of balance sheet deleveraging by the banking sectorand austerity measures announced by various governments has seena decline in the macroeconomic outlook for Europe, however, robustgrowth elsewhere in the world has been positive.The excess liquidity and shortage of capital for banks has seenthe traditional form of lending to companies replaced with bondborrowings in the investment grade and high yield sectors. Companyresults have generally been in line with our expectations and cashlevels remain high, reflecting the lesson learnt from 2008 whencompanies relied heavily on bank funding.Portfolio reviewWe remain selective in our take up of new issues but have purchased12 new names during the period under review. At the end of the fourthquarter we started to reduce some of our financial bank exposure andreduce our weighting in CCC bonds. As the macro outlook for 2013deteriorates and global growth becomes more subdued, coupled withthe recent spread compression, we have started to reduce some risk inthe Fund. This follows the positive performance from some lower ratedbonds in the last quarter as investors were convinced with ECBPresident Draghi’s comments.Some of the bonds we hold in the Fund were tendered early ascompanies took the opportunity to refinance given the strength ofthe new issuance market. We sold down some of our bonds whichreached our yield target as they offered little capital upside.OutlookThe high-yield market has gone from being oversold a year ago to asituation where the yield on the Euro High Yield index has droppedbelow 7%. On a spread basis, the market remains wider thanits historical average, however government bond yields are athistorical lows and at unsustainable levels over the longer term.We are witnessing investors realising that the income levels availablein high yield products are attractive relative to government bonds andinvestment grade bonds. The asset class over the last ten years hasmatured considerably and produced a good income stream over thistime period. Investors are starting to appreciate this more and more ina period of low inflation, low interest rates and a weak growth outlookfor Europe.Over the period under review, European default levels have stoodat 2.6%. This figure is well below historical levels and is forecastedby Moody’s to remain low for the foreseeable future. There is anexpectation that more companies will be downgraded frominvestment grade to high yield as rating agencies are expectedto downgrade more sovereigns.The technical picture of the high-yield market has been enhancedby large fund inflows - when monitored for retail funds this figurestands at €2.3billion to the end of September 2012.New issuance has reached €27.3 billion. A large percentage of the dealtaking place in the BB rated section of the market and a lack of CCCpaper highlights the risk averse nature of investors given the uncertainmacroeconomic outlook for 2013.152 Aberdeen Global - Select Euro High Yield Bond