COIF Charity Funds - CCLA

COIF Charities Fixed Interest FundReport of the Investment Managerfor the six months ended 30 June 2006 A high-income fund for long-term capital Invested only in Sterling fixed incomestocks Gives no long-term protection for capitalagainst inflationGood asset allocation - Fund outperforms thegilt benchmark indexThe Fund performed well over the reportingperiod, outperforming the FTSE UK GovernmentAll Stocks index by 0.38%. The Fund’s strategy tohave an overweight allocation to securities withshorter maturities proved particularly beneficial.There has also been take-over speculation andbalance sheet restructuring involving securitiesheld by the Fund. In some instances bonds withstrong covenants have experienced significantspread narrowing, thereby aiding overall Fundperformance. We now consider the yieldpremium of most investment grade corporatebonds to be too small hence providing littleprospect of enhancing fund performance. Wehave therefore reduced the Fund’s corporatebond weighting and aim to make furtherdisposals. Over the first six months the Fund’stotal return (before expenses) was -1.35%.The FTSE UK Government bond short totalreturn index rose 0.87%, the medium and longtotal return indices fell by 2.08% and 3.89%respectively. Corporate bonds generally underperformedgilt-edged securities, the Barclayscorporate bond index fell by 1.88%, while theFTSE UK Government All Stocks total returnindex fell 1.73%.Over the six months to 30 June 2006 the valueof an Accumulation Unit fell by 1.49%, from462.05p to 455.17p. The value of a COIFCharities Fixed Interest Fund Income Unit fellby 4.15%, from 133.98p to 128.42p.A shift towards higher global interest ratesAt the end of December 2005 the price of the50-year gilt was £108, yielding a remarkably low3.9%; in mid-January the price had risen by over7.5%, the corresponding yield falling 35 basispoints to 3.55%. Although this fall in yieldoccurred against a background of strong globaldemand for bonds the movement within the giltmarket was extreme. The gilt market distortionwas associated with the Pension Protection Fundannouncement regarding the basis of levycalculations. Pension funds were required tosubmit details of their deficits by the end ofMarch 2006. The levy was to be based on thesize of the deficit and the fund’s credit quality,so by improving the asset liability matchingcompanies were hoping to reduce the levy ontheir pension funds. Towards the end of thereporting period, tighter monetary policyexpectations in the US, Europe and Japancaused global short term yields to rise. The Bankof England’s continued optimism that UKeconomic growth would be higher than marketforecasts added upward pressure on gilt yieldsacross all maturities. As a consequence thesharp fall in long gilt yields seen in Januaryreversed, the yield on the 50-year gilt rising to4.15% at the end of June.Distribution Rate for current periodThe rate of income distribution for the half-yearto 30 June 2006 was 3.6p per Income Unit. Onthe 30 June 2006 Income Unit price of 128.42p,and annual distribution rate of 7.2p, theannualised income yield is 5.61%. Thecorresponding gross redemption yield, which isan estimate of the total return of the Fund overthe long-term, after management expenses, is4.45%.31