Aberdeen Global - Hozam Plaza

Select High Yield BondFor the year ended 30 September 2012Name changeOn 1 December 2011, the Fund changed its name from AberdeenGlobal - High Yield Bond Fund to Aberdeen Global - Select HighYield Bond Fund.PerformanceFor the year ended 30 September 2012, the value of the Select HighYield Bond – D Income shares increased by 15.41% compared to anincrease of 19.42% in the benchmark, a composite index made up of30% Merrill Lynch Sterling High Yield Index and 70% of the MerrillLynch Euro High Yield Constrained Index.Source: Lipper, Basis: total return, NAV to NAV, net of annual charges, gross incomereinvested, GBP.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 of thenew issuance market. We sold downs some of our bonds which reachedour yield target as they offered little capital upside.OutlookThe high-yield market has gone from being oversold a year agoto a situation where the yield on the Euro High Yield index hasdropped below 7%. On a spread basis, the market remains widerthan its historical average, however government bond yields are athistorical lows and at unsustainable levels over the longer term. Weare witnessing investors realising that the income levels available inhigh 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 thedeal taking place in the BB rated section of the market and a lack ofCCC paper highlights the risk averse nature of investors given theuncertain macroeconomic outlook for 2013.170 Aberdeen Global - Select High Yield Bond