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Aviva Funds European Corporate Bond Fund Fund News Aviva Funds International (Luxembourg) Aviva Funds European Corporate Bond Fund News Aviva European Corporate Bond comment - Jun 06 Tuesday, 29 August 2006 Fund Manager Comment Market Review The start of June saw a continuation of turbulence in financial markets, as investors worried that rising inflationary pressure in the US would cause the US Federal Reserve to raise interest rates more aggressively than anticipated - an outcome that would slow the pace of global economic growth. This greater sense of uncertainty led to risk aversion trades out of equities and lower-rated debt into the relative safety of AAA-rated government bonds. The rally in high quality government debt proved unsustainable though as cheaper equity and high yield corporate bond valuations encouraged renewed buying of these asset classes. In addition, fears over inflation subsided as Ben Bernanke (the Fed Reserve chairman) downplayed the risks it presented the economy. From this point on, government bond prices steadily fell as investors awaited the confirmation of higher interest rates from the US Federal Reserve and the European Central Bank. The decline in government bond prices had a much greater impact on investment grade debt than it did on high yield given the strong degree of correlation between the two former asset classes. This created the anomalous situation whereby high yield outperformed investment grade debt despite the general rise in risk aversion amongst investors. Fund Review We maintained our strategy of underweighting high yield relative to investment grade. While this served the fund well when market volatility was at its height, it meant the fund missed out on the rally in risk assets towards the month-end when risk appetite recovered. In terms of fund activity, we reduced the fund's exposure to Vodafone. We believe current management strategy lacks focus which, alongside poor results, has increased the possibility that valuations of Vodafone's bonds will cheapen rather than strengthen in the short-term. We also sold out of debt in Yell Group (directories), as we think the company could become the takeover target of private equity capital. As a defensive measure against higher interest rates in Europe, we bought a floating rate note from the Greek mobile company, Tim Hellas Telecommunications. The mobile sector was the source of another one of our trades. We bought debt in the Italian mobile company, Wind. Caught up in the tide of risk aversion trades, the price of debt from this high yield issuer was pushed to what we considered were oversold levels. Given the strength of the underlying business, we increased exposure to the company, benefiting from the subsequent return in risk appetite. Elsewhere we also participated in two new issues: one from the Portuguese utility company, EDP and the other from the Italian finance group, Generali Finance. Outlook We intend to continue the fund's defensive stance. Although firms are making healthy profits at the current point in time, the steady rise in interest rates is cutting into the profitability of some of the most leveraged issuers in the market. When the first high yield default occurs, this is likely to lead to a reappraisal of risk, which should put downward pressure on the prices of lower-rated corporate debt.   Aviva European Corporate Bond comment - Jan 06 Wednesday, 15 February 2006 Fund Manager Comment Market Review Corporate debt performed strongly over the quarter. With companies continuing to make healthy profits and default rates low, investors have been happy to extend their credit risk by buying lower-rated, and higher-yielding, securities. Performance for investment grade bonds also benefited from a fall in government bond yields. Although the European Central Bank raised interest rates by a quarter point to 2.25%, senior policy makers were quick to note that it did not signal the start of a series of interest rate rises. This triggered a rally in European government debt, which was compounded by speculation that the Federal Reserve was nearing the end of its rate tightening cycle in the US. Fund Review In this environment, the fund underperformed its benchmark by 0.3%. This reflected the defensive stance of the portfolio during a period in which lower-rated credit outperformed higher quality bonds. Concerned at the increasing expense of corporate bonds, we had sought to protect the fund's value against any future market weakness by increasing its exposure to less price-sensitive government and high-quality corporate bonds. In keeping with this defensive theme, we continued to build up the fund's holding in financial bonds, buying debt in companies such as RBS, Morgan Stanley, and the HBOS. We also cut exposure to the Dutch telephone company, KPN, after the Dutch government relinquished its golden share in the company. This has left it a target for private equity groups, which typically finance their purchases through issuance of new debt. Outlook We intend to maintain our cautious investment stance. Stock selection will remain focused on buying debt in high-quality businesses with the potential to grow profits.   Aviva European Corporate Bond comment - Dec 05 Wednesday, 4 January 2006 Fund Manager Comment Market Review Lower rated corporate debt outperformed high grade corporate debt during the month, as the hunt for yield continued to drive position taking. Returns on investment grade debt suffered from the growing likelihood of monetary tightening by the European Central Bank (ECB). With headline inflation reaching 2.5% and the economy continuing to strengthen, rhetoric from ECB policymakers grew more hawkish in tone. Although monetary policy stayed on hold in November, it was widely assumed that December would bring an interest rate hike of 0.25%. In addition, euro corporate bond prices also came under pressure from the largest increase in new supply since June - the Italian mobile operator, Wind, was responsible for almost Ç825 million in new issuance alone. Against this background, the Aviva Euro Corporate Bond Fund marginally underperformed its peer group sector average by 0.04%. This was largely due to the defensive positioning of the fund during a period when high yield outperformed investment grade. Fund Review In terms of fund activity, we bought debt in General Motors Acceptance Corp (GMAC) - the finance arm of the troubled automobile group, General Motors. General Motors is currently trying to sell a majority stakeholding in the company. As GMAC still remains highly profitable and its assets are ringfenced against its parent company's liabilities, we believe there is a strong likelihood that it will be bought by a highly-rated US financial institution - action that would lift GMAC's credit rating from high yield to investment grade. We also participated in a new seven year euro deal from Vodafone. Although the company downgraded its expectations for future earnings, we still think it will generate sufficient profits growth to more than cover its interest payments. We also participated in the new deal from Wind. Not only does the company occupy a leading position in the Italian mobile market but it also enjoys an attractive margin on its business. Elsewhere in the telecoms sector, we sold out of part of our holding in Telefonica. Since Telefonica announced its ú17.7 billion takeover bid for the UK mobile operator, O2, we have grown concerned over the amount of debt the company will have to issue to finance its acquisition. Our decision to reduce exposure to the German medical group, Fresenius was linked to this issue of new supply. Following its takeover of the German hospital group, Helios Kliniken, the company is expected to finance its purchase by issuing new bonds early next year. Outlook We intend to maintain our cautious investment stance in the belief that bond valuations are likely to cheapen from their current levels in the medium-term. This has led us to focus on holding higher quality debt at the expense of bonds in more cyclical sectors of the economy, such as consumer retail. With this scenario in mind, we do not intend increasing the fund's allocation to high yield. Stock selection in high yield will remain focused on buying debt in high-quality businesses with the potential to grow profits.   Aviva European Corporate Bond comment - Nov 05 Friday, 9 December 2005 Fund Manager Comment Market Review Inflation overshadowed global bond markets. At a time when economic growth is already strong, rising price pressures increased the possibility that the Federal Reserve might have to adopt a more aggressive monetary policy. A similar picture emerged in Europe and Japan, with central banks in these areas poised to raise interest rates. Corporate profitability will not only decline in an environment of higher interest rates but the support the asset class has received from excess global liquidity is also set to diminish. Growing investor focus on these factors led to a repricing of risk, contributing to downward pressure on corporate debt prices during the month. Fund Review Within the fund, we bought debt in Tim Hellas - the Greek telecommunications company. Not only does the company occupy the number three position in the Greek mobile phone market but lack of competition means its profit margins remain relatively high. Elsewhere in the telecom sector we implemented yield curve flattening positions (switching out of medium-dated debt into a mix of shorter- and longer-dated bonds) in the debt of France Telecom and Telecom Italia. This stemmed from our belief that valuations of eurozone government bonds have reached oversold levels, raising the possibility of a counter rally that would lead to a flattening of the yield curve. We also shortened fund duration (reducing the sensitivity of the fund to changes in bond yields) through the sale of long-dated debt in Deutsche Telekom and in the utility company, Veolia. With valuations of auto bonds having cheapened up considerably, we felt the time was opportune to buy debt in Ford, Daimler Chrysler and General Motors Acceptance Corp (GMAC). Although we remain negative on the outlook for General Motors (GM) given the scale of its healthcare and pension liabilities, we were happy to buy debt in its finance division, GMAC. Not only are the assets of this part of GMs business ringfenced from the group's wider problems, but there is scope for GMAC's credit ratings to improve if GM decides to sell a majority stake in the company; any improvement in credit quality implies a price rise for debt in GMAC. Outlook We intend to maintain our cautious investment stance in the belief that bond valuations are likely to cheapen from their current levels in the medium-term. This has led us to focus on holding higher quality debt at the expense of bonds in more cyclical sectors of the economy, such as consumer retail. With this scenario in mind, we do not intend increasing the fund's asset allocation to high yield. Stock selection in high yield will remain focused on buying debt in high-quality businesses with the potential to grow profits.   Aviva European Corporate Bond comment - Sep 05 Monday, 14 November 2005 Fund Manager Comment Market Review The European corporate bond market performed strongly during September. This reflected the positive tone of corporate earnings and the fact that an expected increase in supply in September never materialised. Another key factor supporting prices has been the low level of government bond yields - the Germen 10 year bond yielded just 3.2% at the end of September. This has encouraged what has become known as the carry trade, with bond investors switching out of government bonds into lower-rated corporate debt so they can pick up additional yield. Despite strong investor demand, the absolute return on investment grade corporate debt was negative. This stemmed from an increase in European government bond yields, which rose on the back of stirrings of stronger economic growth in Europe and a sell-off in the US Treasury market, as it became clear that neither higher oil prices nor Hurricanes Katrina nor Rita had done much to slow the pace of the US economy. Fund Review Concerned that the current expense of corporate bond valuations was unsustainable, we focused on reducing fund risk. As part of this process, we sold 5-year dated bonds in Safeway (now part of the Morrison's group). We have become increasingly nervous of holding debt in Morrison's, as the company's troubled integration with Safeway continues to occupy management time whilst also depressing profitability. In addition, the price of the company's bonds also came under downward pressure from a threatened strike by distribution staff over job cuts. Elsewhere in the UK retail sector, we reduced our holding in the DIY chain, Focus. This followed a poor trading statement from its main competitor, B&Q, which illustrated just how much of an effect the consumer slowdown in the UK has had on retail sales. We also reduced our exposure to 5-year and 10-year bonds from the Australian telecom group, Telstra Corp. Profit margins on Telstra's fixed line business have decreased while the company is currently involved in a spat with the Australian government. Ahead of privatisation of the government's remaining 50% stake in Telstra, it is trying to force the company into making loss-making fixed line investment to remote areas of Australia. In terms of purchases, we used profits from the sale of our holding in Bayer to buy debt in the Hungarian oil and gas company, Moll. Given high oil prices and the lack of global refining capacity, we expect the company to make healthy profits in the medium-term. Outlook We intend to maintain our cautious investment stance in the belief that bond valuations are likely to cheapen from their current levels in the medium-term. This has led us to focus on holding higher quality debt at the expense of bonds in more cyclical sectors of the economy, such as consumer retail. With this scenario in mind, we do not intend increasing the fund's asset allocation to high yield. Stock selection in high yield will remain focused on buying debt in high-quality businesses with the potential to grow profits.   Aviva European Corporate Bond comment - Aug 05 Thursday, 22 September 2005 Fund Manager Comment Market Review During August lower-rated corporate bonds outperformed higher quality debt. Aside from good corporate earnings news, the corporate bond market also benefited from the decline in eurozone government bond yields. A surge in the price of oil from $61 to $69 was largely responsible for this, after many in the bond market interpreted it as a tax on economic growth. Although this fall in yields breathed renewed life into the carry trade - switching out of lower yielding instruments into higher yielding debt - concerns grew over high yield issuers' vulnerability to any sustained period of high oil prices. The other factor shadowing the corporate bond market was the issue of supply. With the new issue pipeline set to pick up in the final quarter of the year, especially from lower-rated issuers, corporate bond investors have had to walk a fine line between opting for the short-term benefits of holding high yield instruments against the risks of supply-induced weakness further out. Fund Review In terms of fund activity, we participated in a new deal from Schneider Electric (single A rated), the world's biggest maker of circuit breakers, which we funded by switching out of part of our holding in the banking group, Standard Chartered. One of the attractions of the short-dated new deal from Schneider was its relative rarity value, which contributed to risk diversification within the fund. We also took advantage of a new deal from Telstra Corp to add to our holding in telecoms, alongside purchases in France Telecom and Deutsche Telekom. Increased exposure to telecoms formed part of a wider strategy to position the fund more defensively against any future widening in spreads; the relative stability of telecom companies' cash flows means their bonds tend to outperform more cyclical sectors of the market during periods of heightened market volatility. In the high yield market, we subscribed to a new deal from the chemical company, Basell. Aside from attractive pricing, we were also impressed by the company's ability to pass on much of the rise in energy costs to the end-users of their products. Later in the month we bought more debt in Basell, this time in the secondary market by switching out of our holding in the polish vodka distributor, Central European Distribution. Although a recent purchase, it had already met our price target encouraging us to reduce the position. The fund's duration in an environment where eurozone bond yields touched new record lows proved profitable in August. Outlook Given the tight yield spreads of corporate debt, we intend to maintain the fund's defensive positioning favouring non-cyclical sectors of the corporate bond market, such as financials, telecoms and utilities. In addition, profitability at many firms is likely to weaken over the next twelve months, as global economic growth moderates. The increasingly negative environment for leveraged or high yield borrowers means we are unlikely to increase our exposure to this asset class in the medium term. Stock selection in high yield will remain focused on buying debt in high-quality businesses with the potential to grow profits.   Aviva European Corporate Bond comment - Jun 05 Friday, 29 July 2005 Fund Manager Comment Market Review Credit spreads tightened throughout June, as investors became more prepared to extend their credit risk. This reflected the stabilisation of the corporate bond market following the prolonged period of market volatility in March and April; fears that hedge funds had been badly burnt by their exposure to Ford and General Motors' (GM)debt proved overdone. Instead this sector of the market proved much more resilient than many thought with little sign of the forecast wave of redemptions. Coupled with the attraction of cheaper prices, it encouraged renewed buying from both leveraged and institutional investors. Another factor underpinning demand for corporate debt was the continued decline in government bond yields in Europe and the US, which stemmed from investors' relaxed attitude to the longer-term outlook for inflation as well as forecasts for a slowdown in economic growth in 2006.Low government bond yields increased the attraction of buying higher-yielding corporate bonds in an environment where it was difficult to identify sources of volatility in either the government or corporate bond markets. Fund Review Strategy continued to focus on positioning the fund defensively; eading us to buy bonds in low bet (less market sensitive)sectors of the market, such as financials and utilities. We also reduced the duration of our holding in the telecoms sector amid concerns that the credit curve was set to steepen. Elsewhere in the fund we closed our position in the drinks company, Allied Domecq, following its successful takeover by Pernod (another investment grade issuer).Credit spreads had widened during the takeover process after Constellation Brands, an issuer in the high yield market, made a competing bid. Once it was clear this rival bid had little chance of success, we felt the time was opportune to take profits on this position. In the high yield market, we participated in a new issue in the South African company, Food Corp. Given the domestic source of most of Food Corp's earnings, we felt the company's debt offered important diversification benefits for the fund. One profitable high yield position proved to be our holding in Debenhams, as the retailer called early its last remaining bond. Market Outlook We intend to maintain the fund's defensive positioning favouring non-cyclical sectors of the corporate bond market, such as financials and utilities, given the current expense of corporate debt. In addition, profitability at many firms is likely to decline over the next twelve months, as global economic growth slows. The increasingly negative environment for leveraged or high yield borrowers means we are unlikely to increase our exposure to this asset class in the medium term. Stock selection in high yield will remain focused on buying debt in high-quality businesses with the potential to grow profits.   Aviva European Corporate Bond comment - May 05 Tuesday, 24 May 2005 Fund Manager Comment Market Review April proved to be a challenging period for the corporate debt market, as investors continued to focus on the issue of rising US interest rates. With personal consumption set to slow, it has raised the risk of a slowdown in the US economy - still the strongest economy in the world. As a consequence, there was a marked change in risk appetite in the US and Europe, as investors shunned lower-quality debt and equities in favour of higher-quality assets. Compounding volatility in the corporate bond market was negative news from the major US car manufacturers General Motors (GM) and Ford, whose share of the North American automobile market shrank yet again. With little possibility of increasing sales in the short-term to offset heavy healthcare and pension costs, the price of their bonds weakened and the prospect of a downgrade to high yield drew ever closer. Against this market background, the fund outperformed its index largely due to the recent strategy of decreasing exposure to high yield. Fund Review We continued our policy of building a more focused portfolio. Despite the recent rise in market volatility, we expect conditions in the corporate bond market to stabilise - a factor that should support prices in the medium-term. Unable to rely on any pronounced changes in market direction as a major source of value, stock selection has become a much more important driver of fund performance. As part of this process, we sold out of bonds, such as Kingfisher and Diageo, where there was not a strong investment case for holding them. We also added to our holding in the telecoms sector, increasing our exposure to long-dated (more market-sensitive) bonds in Deutsche Telekom, as well as buying debt in British Telecom; the encouraging tone of recent earnings in the sector, coupled with industry-wide debt reduction programmes, has made this one of our favoured industry sectors. In response to the negative news from GM and Ford, we took the defensive step of switching out of medium-dated Daimler Chrysler bonds into shorter-dated bonds. Although Daimler Chrysler has managed to boost its share of the US market over the last twelve months, we felt the time was opportune to reduce the duration (market-sensitivity) of the fund's holding given the risk adverse attitude of investors to automobile debt. Fund Outlook In the current environment, we intend to maintain our bias for investment grade bonds at the expense of high yield debt. Not only do higher interest rates impact the profitability and viability of highly indebted borrowers - the typical profile of a high yield issuer - but they also signal the end of the carry trade in which investors borrowed cheaply in US dollars to invest in high yielding assets classes, such as high yield and emerging market debt. With this source of short-term money drying up and the risk premium on high yield bonds increasing, we feel the time is not yet right to increase our exposure to this asset class. As with investment grade bonds, stock selection strategy for high yield debt will remain focused on buying good quality bonds at fair valuations.   Aviva European Corporate Bond comment - Apr 05 Monday, 25 April 2005 Fund Manager Comment Market Review The rally in corporate bond markets came to an abrupt end in March. The first trigger for this reversal in fortunes came after the US Federal Reserve signalled its concern over emerging inflationary pressures in the domestic economy, raising fears it would sanction steeper interest rate hikes in the coming months. This led to a rise in US Treasury yields, which subsequently spilled over into the corporate bond market. Adding to the sense of unease amongst investors was an unexpected profits warning from General Motors, which prompted rating agency Standard & Poor's to place the company on review, describing its investment grade status as 'tenuous'. As one of the largest corporate bond issuers in the market, this led to selling of lower-rated and higher-beta bonds. Investors became increasingly risk averse and high yield bonds in particular sold off sharply, with AAA-rated issues (typically bonds issued by supranational borrowers) the best performing segment of the investment grade market in a 'flight to quality'. At the sector level, bonds issued by companies operating in cyclical industries, such as Italian auto manufacturer Fiat and Swiss engineering group ABB, bore the brunt of the selling pressure. On the domestic front, news that the European Commission had cut its 2005 growth forecast for the eurozone to 1.6% added to the gloom. Fund Review In the high yield component of the fund, a more defensive stance was adopted with trading activity focused on reducing exposure to companies in cyclical sectors. We sold the holding in UK DIY chain Focus Wickes as data releases continue to indicate that consumer spending is weakening. In a deteriorating market background for the high yield sector, we also sold bonds on a low credit rating, such as an issue from German glass packaging provider Gerresheimer. Conversely, we looked for investment opportunities in sectors with relatively stable earnings and cash flow, acquiring a holding in Chesapeake Corporation, which supplies speciality paperboard and plastic packaging to food producers and drug companies. Within the fund's investment grade component, we continue to favour financials, which we believe are a relatively safe haven with a stronger average credit quality. We have also maintained an emphasis on telecoms, which continue to reduce their debt burden and benefit from strong fixed line revenues. During March, we reduced exposure to BBB and single-A rated bonds, selling holdings in Mexican oil group Pemex, General Motors and media group Pearson, and switching into short-dated German government bonds. Market Outlook As long as high unemployment continues to depress consumer demand, the European Central Bank is unlikely to increase interest rates beyond their current level of 2%, despite concerns over credit growth. Domestic demand remains sluggish with companies continuing to look towards overseas markets for revenue growth. Against this background, we are cautious on the outlook for European high yield bonds over the coming months, as the sector still looks relatively expensive by historical standards and investor sentiment has clearly deteriorated. As a result, we intend to maintain a relatively defensive asset allocation policy with less than 50% of the portfolio invested in the high yield sector.   Aviva European Corporate Bond comment - Mar 05 Tuesday, 29 March 2005 Fund Manager Comment Market Review Corporate debt prices continued to rise during February, as investor appetite for this asset class showed little sign of abating. There were several major reasons for this: first, favourable macroeconomic conditions and second, the recent focus of many companies on repairing their balance sheets. After a year of strengthening global economic growth, many companies have enjoyed significant profits. This has allowed them to return cash to shareholders and invest without having to expand their debt. In addition, after widespread cost-cutting during the previous economic downturn, companies' balance sheets are in a relatively healthy state at this point of the business cycle. The final factor bolstering demand for this asset class has been the meagre yields available on eurozone government bonds, which has channelled yield-hungry investors towards higher-yielding but ultimately lower-quality corporate debt. Fund Review In the high yield component of the fund, trading activity centred on adding to existing positions in the chemicals and telecoms sector - two sectors of the market we expect to perform well in the year ahead. We also participated in a new deal from Mauser Beteil (plastic container manufacturer), as well as buying restructured debt in the electricity generator, British Energy. With power prices set to continue rising, the outlook for the once troubled utility company is fairly positive. Within the fund's investment grade holding, we focused on increasing our exposure to European banks at the expense of US investment banks such as Merrill Lynch and Goldman Sachs. Debt in US investment banks has performed extremely well recently, increasing the likelihood that it will underperform other segments of the financial sector in the short-term. We also expanded our holding in telecom debt, buying bonds in France Telecom and Deutsche Telekom. Ongoing deleveraging, coupled with the encouraging tone of recent results, has left scope for prices to strengthen further in this part of the market. Market Outlook Although European high yield debt looks expensive by historic standards, it is difficult to see what type of trigger could cause a sudden drop in prices. Economic growth is set to strengthen in Europe while liquidity remains ample. As long as high unemployment continues to depress consumer demand, the European Central Bank is unlikely to raise interest rates much beyond their current level of 2%. As a result, we intend to maintain our asset allocation policy of a 50/50 split between high yield and investment grade debt within the fund until we receive a clear signal that investor sentiment towards high yield debt has deteriorated.   Aviva European Corporate Bond comment - Feb 05 Wednesday, 23 February 2005 Fund Manager Comment Market Review Although January was a positive month for corporate debt, higher-quality investment grade debt outperformed high yield for the first time since May 2004. Against a background of stable corporate profitability and subdued government bond yields, the continuing hunt for yield caused lower-rated investment grade bonds to outperform higher-quality debt. However, in the high yield market, a default depressed appetite for bonds in that asset class. Tower Automotive (car component manufacturer) filed for bankruptcy in the US after rising raw material costs and slowing sales forced it to file another loss. In addition, the likelihood of a default by another high yield issuer, Concordia Bus (transport) increased after Standard & Poor's placed the company on negative watch. The company's inability to rein in costs and make profits from its public sector contracts were the main reason behind this. However, high yield prices soon recovered, as investors focused once again on the supportive macroeconomic environment. Economic growth is set to strengthen in Europe in the year ahead, while a mix of low inflation and subdued consumer demand should keep eurozone interest rates close to their current level of 2%. Fund Review Much of the trading activity in the fund took place in the high yield market where we bought debt in companies such as Gal Finance (distribution), Tele Columbus (cable services) and Cognis Deutschland (chemical). Not only did these bonds offer good value at the time of purchase, but they also helped diversify the fund base - an important factor given concerns over the current expense of euro high yield market. In the investment grade component of the fund, we participated in a new subordinated deal from the retail bank, Standard Chartered. One of the key attractions of this company is its significant retail presence in the emerging economies of China and India; an area likely to see significant growth in demand for banking services over coming years. Market Outlook While corporate debt looks expensive at current levels, we do not intend to make any change to our asset allocation strategy, which has a marginal bias towards high yield. In an environment of stable corporate profitability and low interest rates, it is difficult to envisage the type of shock that could cause a significant sell-off in the European corporate bond market. By reducing our exposure to high yield at this stage of the market cycle, it could have implications for the fund in terms of lower performance in the short-term.   Aviva European Corporate Bond comment - Jan 05 Tuesday, 25 January 2005 Fund Manager Comment Market Review December proved to be another good month for corporate debt. Prices continued to rise in an environment of low inflation and stable corporate profitability. In the absence of any negative catalyst, the risk appetite of investors remained strong. As a result, high yield and lower-rated investment grade bonds outperformed higher quality euro corporate debt. Another factor that provided support to European bond markets was the continuing strength of the euro against the US dollar, which led to greater demand for euro-denominated assets. The US administration's apparent reluctance to tackle the country's current account deficit was the main driver behind this currency weakness despite vocal support for a strong dollar policy. Fund Review In terms of fund activity, we participated in several new high yield deals covering industries as diverse as chemicals and advertising. After the prices of some of these bonds reached pre-agreed profit targets, we decided to sell them. Elsewhere in the high yield component of the fund, we cut back on our exposure to the European engineering firm ABB. This followed the rejection in US courts of ABB's plan to resolve all outstanding asbestos claims, which caused the price of ABB's debt to fall. If the deal had been accepted, it could have led to a debt rating upgrade to investment grade, as early as January of this year. Within the investment grade component of the fund, we added to our holding in telecom and automobile bonds. Given encouraging results and widespread deleveraging (debt reduction) in the telecom sector, we think there is scope for prices to rise higher from here. In the case of automobile debt, relatively cheap valuations spurred our decision to buy. Despite well-publicised problems of declining profitability and overproduction in the automobile industry, we felt that investor pessimism had pushed prices too low. Market Outlook The outlook for euro corporate debt remains positive given stable corporate profitability. However, one area of concern is that euro high yield prices look extremely expensive at current levels. With interest rates set to rise in Europe in the second half of this year, the ability of highly indebted companies (characteristic of high yield issuers) to service their debt is likely to decline. Before this happens, we intend to reduce our exposure to high yield debt, as well as improve the general credit quality of our holdings in this area of the market.   Aviva European Corporate Bond comment - Dec 04 Monday, 3 January 2005 Fund Manager Comment Market Review November proved to be another positive month for corporate bonds. Demand for corporate debt benefited from a supportive environment of stable corporate profitability and low inflation. Within the euro corporate bond market, high yield provided the highest returns. Low interest rates in the eurozone - currently 2% - have pushed down returns on government bonds and investment grade corporate debt, increasing the attractiveness of high yield bonds. The other key factor supporting the market was the strength of the euro, which achieved its highest level against the US dollar since the single currency was launched at the beginning of 1999. Concern over the US government's willingness to reduce its budget deficit by cutting back on its borrowing, has been the main driver behind this currency movement. Fund Review Within the investment grade portion of the fund, we bought debt in Deutsche Telekom and France Telecom. Telecoms remains one of our favoured industry sectors given ongoing deleveraging (debt reduction) within the industry and improving profitability. In the high yield component of the fund, we followed a much more activist trading strategy. During the month, we participated in four new deals, covering diverse sectors such as DIY superstores, chemicals, glass packaging and mobile telephony. Given high levels of demand for high yield debt, the price of these bonds quickly rose. Having achieved our initial profit target, we decided the time was opportune to sell the bonds. Market Outlook The medium term-term outlook for investment grade corporate bonds remains positive. The European economy is set to pick up a gear, which should translate into a period of relatively stable corporate profitability. As a result of this stronger economic growth, we expect eurozone interest rates to rise to 3.5% by the end of next year. In the longer-term, the outlook for high yield debt is less positive. At a time when many high yield companies are already struggling to cope with high energy and high material costs, any increase in the cost of servicing their debt is likely to put a further squeeze on profit margins. As a result, we intend to trim exposure to some of our less liquid high yield holdings, as well as increasing our holding in investment grade debt at the wider asset allocation level.   Aviva European Corporate Bond comment - Nov 04 Monday, 22 November 2004 Fund Manager Comment Market Review Corporate debt outperformed government bonds this month. In an environment of low equity returns, investors have targeted lower-rated investment grade bonds and high yield debt in the hunt for attractive yields. This has been facilitated by historically low interest rates in Europe and the US, which have encouraged the carry trade - borrowing cheaply in euro and US dollars to invest in higher yielding assets, such as high yield and emerging market debt. A fall in government bond yields also benefited investment grade debt, whose pricing structure is closely linked to government debt. The main driver for this came from the US where low inflation and relatively weak job growth caused Treasury yields to trend lower. Given the close correlation of financial markets, this movement in yields had an immediate impact on bond markets round the globe. Against this general background, lower-rated debt was the best performing sector of the corporate bond market. Fund Review In the investment grade component of the fund, we continued to increase the overall credit quality of our holdings. As part of this strategy, we bought debt in ING and Banco Bilabao Vizcaya (AA-rated European banks) whilst selling our holding in General Motors and Sainsbury's (both BBB-rated). The credit rating of GM and Sainsbury's debt was cut one notch from BBB to BBB- by Standard & Poor's (one of the major rating agencies) during the month amid ongoing concern over the firms' future profitability. This action increased the probability that both companies could be downgraded to high yield in the medium-term, which would trigger further price falls. Within the high yield portion of the fund, we took advantage of new deals to increase fund exposure to this asset class. Illustrating this, we bought debt in Shefenacker (a component manufacturer for the truck/car industry) and Oskar Mobil (cellular telephone company). Outlook We believe the outlook for corporate bonds remains positive and have expressed this view by continuing to bias high yield debt at an asset allocation level. We expect economic growth to pick up in Europe in the year ahead. This should ensure relatively robust corporate profitability, placing firms in a comfortable position to service their existing debt obligations.   Aviva European Corporate Bond comment - Oct 04 Monday, 1 November 2004 Fund Manager Comment Market Review Over the month, European high yield debt outperformed investment grade bonds. The high yield market continued to draw support from a mix of robust corporate profitability, improving credit quality and measured monetary tightening around the globe. As a result, the average yield on the Merrill Lynch Euro High Constrained Index reached its lowest point (6.9%) since the index began tracking bonds back in 1998. One shadow hanging over the European corporate bond market was the rising price of oil; sustained price rises tend to slow economic grow and push up the price of inflation. Up to now, the impact of higher oil prices has been largely concentrated to a few sectors of the high yield market, oil refiners and intensive energy users. However, the longer prices stay at these levels the greater the impact it will have on leveraged companies with relatively narrow profit margins. Fund Review In terms of fund strategy, we maintained our bias for high yield bonds, as we expect this asset class to continue outperforming investment grade debt in the medium-term. In the high yield sector, we participated in a number of new deals buying Grohe (building & construction) and Culligan Finance. Our holding period for these bonds was relatively short, as they reached the price target we had set them after just one day. We also generated profits for the fund by selling our holding in Kamps (bakery and foodstuffs). Kamps is set to issue new debt to fund a programme of investment, which will dilute the price of bonds already in issuance. We also benefited from the calling of Marconi's US high yield bonds. We bought these earlier in the year on a euro-hedged basis when the UK company was going through a period of restructuring. Given the recent rise in the price of steel, we decided to purchase debt in the Anglo-Dutch steel maker, Corus. Trading activity in the investment grade sector was more restrained. We participated in a new 10-year deal from BAA (airport management) while selling out of our position in Sainsbury's. As profitability at the UK food retailer continues to decline, there has been no let up in speculation over a possible leveraged buy out. Market Outlook The outlook for lower-rated debt remains good. The only possible negative factors are the price of oil and new issuance. Although oil is trading close to US$50 dollars a barrel, we expect the price to fall back to US$30 by the end of 2005. With bond yields skirting extremely low levels, significant new corporate issuance has been scheduled for the fourth quarter. However, while investor appetite for higher risk assets remains relatively high, this should be easily digested.   Aviva European Corporate Bond comment - Sep 04 Friday, 17 September 2004 Fund Manager Comment Market Review During August, high yield once again outperformed investment grade debt. However, broad market returns disguised differences in performance between the credit rating tiers. Investment grade bonds rated AA-BBB outperformed BB high yield bonds. This stemmed from the longer average duration (the weighted average term of cashflows) of investment grade bonds during a period of falling government bond yields. The deceleration of economic growth in the US triggered a global rise in government bond prices - a factor that benefited more price sensitive long-dated bonds. Bonds rated BB and below were the best performing sector of the corporate bond market. This reflected investors' continuing appetite for risk in a relatively benign economic environment; inflation is low while global economic growth continues to expand albeit at a slower pace. Furthermore, investor expectations for interest rate hikes in the US have also changed. Until economic growth in the US starts to pick up, the US Federal Reserve is likely to feel little pressure to quicken the pace of interest rate hikes. As long as this remains the case, it should continue to bolster demand for higher risk fixed income assets such as high yield and emerging market debt. Fund Review The major activity to take place during the month was a restructuring of the investment grade component of the Fund. We reduced the overall duration of our holding whilst increasing our exposure to more mainstream European issuers. This was largely at the expense of UK companies issuing in the euro market. Illustrating this, we bought debt in Banco Santander and Carrefour, the French retail group. In the high yield sector of the fund, we continued to diversify the Fund base buying debt in companies whose main focus of activity ranged from chemical production to music. Elsewhere, we reduced our holding in US$-denominated high yield selling Legrand (French producer of electric products) in favour of the euro market, as well as taking profits on our holding in the eyewear company, Safilo. We had bought debt in this company earlier in the year when many high yield investors were a lot more pessimistic on the company's business prospects. We disagreed with this initial analysis and subsequently benefited from the pick-up in growth in the important US eyewear market. In terms of overall asset allocation for the Fund, we continue to favour high yield at the expense of investment grade debt. Market Outlook Although the prospect of monetary tightening in the US has diminished in importance as a market driver, we are becoming more concerned at the high price of oil and commodities. If there's no fall back in prices it is likely to squeeze profit margins at a time when companies are unable to pass these costs on to consumers. While investment grade issuers are in a better position to withstand these pressures, high yield issuers are in a more vulnerable position. Furthermore, an expected ÿ4 billion in new issuance in the fourth quarter will also weigh on prices of high yield debt. As a result, we are likely to move to a more neutral asset allocation strategy in the medium-term, while reducing exposure to some of the less liquid stocks we hold.   Aviva European Corporate Bond comment - Aug 04 Tuesday, 14 September 2004 Fund Manager Comment Market Review Although the euro investment grade market continued to benefit from a mixture of low interest rates and rising corporate profitability, the issue of regulatory reform for the UK life insurance sector soured sentiment towards sterling debt. Under reform proposals, life insurers offering with profits policies (significant holders of corporate debt) will have to set aside capital against possible price movements in their assets. For corporate debt, the amount of risk capital to be set aside will be based on a calculation that takes into account the bond's credit spread (or risk premium) and its credit rating. As this will increase the cost of holding longer-dated and lower-rated bonds, it has contributed to a decrease in demand for long-dated sterling BBB-rated bonds over the last 6 months. High yield outperformed investment grade bonds once again, as unattractive yields on higher quality corporate debt boosted the appeal of high yield paper. Fund Review Within the investment grade component of the Fund, we sold our holding in Marks & Spencer. Although Phillip Green's takeover attempt failed, we felt that the company's management was likely to switch its focus to shareholders - a factor that could affect the company's credit rating in the longer-term. We also cut back exposure to our holding in Punch Taverns. In an environment where investors are reluctant to hold long-dated BBB bonds, prices have been pushed even lower on structured bonds, which have relatively stable credit ratings. As structured bonds are secured on cashflows (leases in the case of Punch Taverns) any fundamental improvement in the outlook for the company or its finances, will have little effect on the rating of the structured deal. Furthermore, the possibility of a future smoking ban in pubs provided another reason to sell the bond. In the high yield sector, the main activity to take place was the sale of our holding in the light truck and car manufacturer, Teksid Aluminium. Following poor results speculation mounted that the company may have its credit rating cut by Moody's (one of the major rating agencies), which would exacerbate downward price pressure on its bonds. Market Outlook The outlook for corporate debt remains relatively benign. Eurozone interest rates are unlikely to rise in the short-term while higher profitability should place firms in a better position to meet their debt obligations.   Aviva European Corporate Bond comment - Jul 04 Wednesday, 11 August 2004 Fund Manager Comment Market Review During June, prices of European high yield debt rallied, as investor appetite for higher risk assets resumed. This about-turn in sentiment was largely due to investors' changing expectations for US monetary policy. At the start of the month, concerns over rising inflation led to speculation that the US Federal Reserve might raise interest rates as high as 0.5%. Alan Greenspan (chairman of the Federal Reserve) quelled these fears though after he announced that interest rates were likely to rise at a "measured" pace. With a 0.25% rise in interest rates now a more likely outcome, a lot of the uncertainty that had surrounded this decision evaporated, benefiting higher risk assets such as high yield. The other factor supporting the market was a drop in issuance; a glut of new supply in May had put the prices of high yield bonds under pressure. In contrast to the high yield market, prices for European investment grade bonds barely changed over the month. Fund Review In terms of activity, we continued to diversify the fund's base increasing our exposure to a range of industries. Two of the holdings we decided to sell were Bombardier (engineering) and Mark's and Spencer. The price of Bombardier's debt has fallen recently following poor first quarter results and growing pressure on its customer base in the US. This fuelled speculation in the corporate bond market that Bombardier's debt could be downgraded from BBB- to high yield. We also sold out of our holding in Marks and Spencer. The board of Marks and Spencer is involved in a takeover battle with the UK retailer, Phillip Green. As Phillip Green has traditionally used debt to finance his acquisitions it caused the prices of Marks and Spencer's bonds to fall. Elsewhere, we benefited from a tender offer for our holding in the German construction company, Grohe and from a rise in the price of Safilo's debt (eyewear company). The price of Safilo's debt has risen since the start of the year, as sales for their eyewear products have picked up in the all important North American market. Fund Outlook The outlook for corporate debt remains relatively benign. European interest rates are unlikely to rise in the short-term while higher profitability should place firms in a better position to meet their debt obligations.   Aviva European Corporate Bond comment - Apr 04 Friday, 4 June 2004 Fund Manager Comment Market Review Against a background of rising government bond yields, investment grade debt underperformed high yield bonds. A substantial pick-up in US employment caused Treasury yields to jump higher, as it brought forward the date of future monetary tightening there. Given the close correlation between international bond markets, this movement was replicated globally. Although spreads on sterling investment grade debt tightened, it was still insufficient to offset the move in gilt yields. High yield was relatively unaffected by the shadow of monetary tightening, as strengthening economic growth remained the core focus of investors. Yield also continued to outweigh arguments of safety, with lower-rated debt outperforming BB bonds (the highest possible credit quality within high yield). Fund Review Fund performance benefited from an overweight holding in high yield. However, we became worried that the size of this position had become too large. As a result, we used cash inflows into the Fund to increase our exposure to investment grade debt, buying companies such as Kingfisher and Marks & Spencer. Within the high yield sector, we continued to look for value, participating in five new sterling and euro deals. These deals covered a broad range of industry types from multimedia to telecommunications. Outlook We intend to maintain our preference for high yield debt over investment grade bonds. This is based on our outlook for stronger global economic growth, which should continue to buoy demand for lower-rated debt. As issuers in the high yield sector tend to be start-ups or highly-geared, their ability to service debt improves as demand picks up. Moreover, high coupons make this asset class less sensitive to changes in interest rates, which are expected to rise in both the UK and the US this year.   Aviva European Corporate Bond comment - Mar 04 Wednesday, 19 May 2004 Fund Manager Comment Market Review Although March witnessed the terrorist attack in Madrid, increasing tensions in the Middle East and a consequent flight to the safety of government bonds, investors' risk appetite revived, encouraged by stronger equity markets. As a consequence, European high yield bonds outperformed both European government bonds and investment grade corporate bonds over the month. Within the investment grade spectrum, reviving risk appetite meant sectors and credit tranches perceived as higher beta - BBB rated bonds, telecoms and autos - performed well. Some interest in long dated bonds returned in March, as investors perceived value in this area of the yield curve. In high yield, issuance was good over the month, with telecoms companies to the fore. March saw the reappearance in the high yield market of telecoms company NTL, with further issuance in the pipeline from other once-familiar high yield telecoms names. Fund Review Turning to Fund activity, March was a relatively quiet month, during which we maintained the Fund's high yield bias. In terms of activity, we bought a new issue from B rated Irish packaging company, Clondalkin, with an attractive coupon of 8%. Fund outlook We intend to maintain the Fund's bias towards high yield debt at the expense of investment grade bonds. This is based on our outlook for improving economic growth in Europe, which should continue to buoy demand for lower-rated corporate bonds.   Aviva European Corporate Bond comment - Feb 04 Wednesday, 24 March 2004 Fund Manager Comment Market Review Over the month, investment grade debt outperformed high yield. Institutional investors in the US started to take profits on their European holdings. In addition, US mutual fund flows were negative, exacerbating market weakness. The other factor to impact high yield debt was volatility amongst Brazilian bonds, which slipped across to other high yield markets. Fund Review February was a relatively quiet month, during which we maintained the Fund's high yield bias. In terms of activity, we took profits on our holding in SGL Carbon (Luxembourg-based chemicals company) after having bought the debt the previous month at new issue. After having seen the price rise and with no strong convictions on the company, we felt the time was opportune to close our position. Elsewhere we took profits on our holding in the US broadcaster (Clear Channel Communications). This was part of a rationalisation exercise, aimed at reducing our exposure to non-euro denominated holdings. We also participated in a Ç150 million new deal from Esselte (the Swedish office supplies company), enabling us to increase our exposure to the high yield market at attractive levels. Fund outlook We intend to maintain our preference for high yield debt over investment grade bonds. This is based on our outlook for stronger economic growth in Europe, which should continue to buoy demand for lower-rated corporate paper.   Aviva European Corporate Bond comment - Jan 04 Monday, 8 March 2004 Fund Manager Comment Market Review During January, performance for high yield and investment grade debt diverged. While high yield debt continued to benefit from strong institutional demand, the expense of many investment grade stocks triggered a sell-off in that sector. This was primarily led by hedge funds and investment banks, which saw little advantage in holding onto stocks at these levels. Within the European high yield sector a number of new issues came to market. Amongst the largest were Inmarsat, a UK satellite telecommunications firm, which raised $375 in new debt and SGL Carbon, a Luxembourg-based chemicals company, which issued EUR270 million in 8-year paper. Fund Review Within the high yield sector, we participated in the deals from Inmarsat and SGL Carbon, as well as a smaller sterling deal, from the UK commercial services firm, Iron Mountain. Elsewhere we took profits on part of our holding in BSN, a glass packaging manufacturer. With the price of these bonds reaching increasingly expensive levels, we felt the time was opportune to reduce our holding. We also trimmed our holdings in Nalco, a US chemical company. Nalco's management decided to take out equity from the company and disburse it amongst existing shareholders. As this effectively increased the company's debt burden, we became uncomfortable with the risk of holding such low-rated debt (CCC). In the investment grade component of the Fund, we participated in the new deal from France Telecom. Deleveraging has reduced the amount of outstanding debt, while a recent right issue has soothed concerns about the company's ability to service its short-term commitments. Fund outlook We intend to maintain our preference for high yield debt over investment grade bonds. This is based on our outlook for stronger economic growth in Europe, which should continue to buoy demand for lower-rated corporate paper   Aviva European Corporate Bond comment - Dec 03 Tuesday, 27 January 2004 Fund Manager Comment Market Outlook Over the month, high yield corporate debt once again outperformed investment grade bonds. This was largely driven by the underlying improvement in the global economy. Although the European economy continues to battle against a mix of weak domestic demand and an appreciating currency, expectations have increased that stronger growth in the US should filter through to Europe. This has helped pushed up demand for higher yielding assets, whose prices have benefited from the global cyclical upturn. Within the investment grade sector, accommodative monetary policy has also underpinned the market. Emollient noises from the European Central Bank and the Federal Reserve have anchored expectations of higher interest rates, helping to stabilise eurozone bond yields. Fund Review In terms of Fund activity, we maintained our bias towards high yield debt. Within the high yield sector, we participated in two new European issues: Vendex (general retailer) and TVN (Polish broadcaster). These deals were attractively priced and we regarded both companies as well managed with good business plans in place. In addition, we opened a small (euro hedged) position in US dollar bonds in Marconi - the troubled telecommunications equipment manufacturer. Marconi has been through a major recapitalisation recently and, as part of this process, has begun to buy back some of its debt. Believing that this programme still has further to run, we opened a small position in the company's debt. In the investment grade sector, we participated in a new deal from Fortis (financial services provider) - a profitable well managed company with good risk controls. Outlook In the current economic environment, we intend to continue to favour high yield over investment grade debt. Next year, we believe high yield supply should increase, as firms increase their investment. While this may have a negative short-term impact on the capital value of some of our holdings, it is also likely to create pricing opportunities in a market, which has become increasingly expensive.   Aviva European Corporate Bond comment - Nov 03 Wednesday, 10 December 2003 Fund Manager Comment Market Outlook Over the month, high yield corporate debt once again outperformed investment grade bonds. This was largely driven by the underlying improvement in the global economy. Although the European economy continues to battle against a mix of weak domestic demand and an appreciating currency, expectations have increased that stronger growth in the US should filter through to Europe. This has helped pushed up demand for higher yielding assets, whose prices have benefited from the global cyclical upturn. Within the investment grade sector, accommodative monetary policy has also underpinned the market. Emollient noises from the European Central Bank and the Federal Reserve have anchored expectations of higher interest rates, helping to stabilise eurozone bond yields. Fund Review In terms of Fund activity, we maintained our bias towards high yield debt. Within the high yield sector, we participated in two new European issues: Vendex (general retailer) and TVN (Polish broadcaster). These deals were attractively priced and we regarded both companies as well managed with good business plans in place. In addition, we opened a small (euro hedged) position in US dollar bonds in Marconi - the troubled telecommunications equipment manufacturer. Marconi has been through a major recapitalisation recently and, as part of this process, has begun to buy back some of its debt. Believing that this programme still has further to run, we opened a small position in the company's debt. In the investment grade sector, we participated in a new deal from Fortis (financial services provider) - a profitable well managed company with good risk controls. Outlook In the current economic environment, we intend to continue to favour high yield over investment grade debt. Next year, we believe high yield supply should increase, as firms increase their investment. While this may have a negative short-term impact on the capital value of some of our holdings, it is also likely to create pricing opportunities in a market, which has become increasingly expensive.   Aviva European Corporate Bond comment - Oct 03 Tuesday, 25 November 2003 Fund Manager Comment Market Outlook The rally in high yield spreads continued during the month amid a continuing flow of positive economic data from the US. Even unemployment - long the Achilles Heel of the current recovery - seemed to be finally dipping. Up to this point, the lack of job creation had raised questions over the sustainability of the US recovery. In Europe, the first stirrings of economic growth buoyed optimism that the worst of the downturn was over. The favourable macroeconomic backdrop continued to fuel demand amongst investors for cyclical assets, such as high yield and equities. In addition, the lack of issuance also underpinned the market. With the majority of corporate refinancing already completed for this year, the new issue pipeline has slowed significantly. Furthermore, sluggish merger and acquisition activity has also reduced the number of new deals. Within the European high yield market, the major stock story to grab the headlines was the dramatic price decline in Rhodia's (French chemical company) debt after a profits warning; Rhodia, a substantial issuer in the European high yield market, has approximately EUR1.8bn in bonds outstanding. Fund Review Within the fund, there was little change to strategy and the fund manager's maintained the bias towards high yield debt. The fund also participated in two new issues (Nalco and IFCO Systems), providing further diversification for the fund. Nalco, a US chemical and environmental consulting business, brought a EUR1.3bn and EUR400m deal to market. The fund participated in both issues based on the positive cashflow the company generates and on the quality of the current management team. The IFCO Systems deal was relatively smaller at EUR110m, but the fund manager's were attracted to this issue by recent changes to business strategy, which should deliver greater profitability over time. Fund performance also benefited from the fact that the fund had no exposure to Rhodia. Outlook Lower-rated debt should continue to outperform higher quality corporate paper, benefiting the funds overweight position in high yield bonds. This strategy is unlikely to change in the foreseeable future given the supportive macroeconomic environment.   Aviva European Corporate Bond comment - Sep 03 Tuesday, 21 October 2003 Fund Manager Comment Market Review During September, the high yield market powered ahead after the traditional August holiday period came to an end. This was driven by expectations of stronger economic growth and continued appetite for former distressed names. Issuance also picked up with a ÿ425 million from EMI, the music group, and a ÿ200 million deal from Fiat Avio. In addition, IFCO Systems also launched a ÿ110 million deal. This is the first European high yield company, which after having had to restructure, came back to the market with a new deal. While not uncommon in the US, this reflects the growing maturity of the European high yield market. Fund Review Within the fund, we participated in the deal from Fiat Avio. This was based on our belief that this is a well managed company, currently caught in a cyclical trough. In addition, the fact it is partially owned by the Italian government offers an element of protection to investors; it would be politically sensitive for the Italian government to let a company, such as Fiat, fail if it were to encounter financial difficulties. Elsewhere we took profits on our holding in Invenys; Invensys (industrial conglomerate and former distressed name) has been one of the sectors top performers this year. Market Outlook A flow of stronger economic data from the US has raised expectations that the European economy is on the cusp of a recovery. This should benefit higher risk and more cyclical asset classes, such as high yield and equities. In terms of Fund construction, we will continue to pursue a stock specific approach rather than following broader-based market themes.   Aviva Euopean Corporate Bond comment - June 2003 Monday, 11 August 2003 Fund Manager Comment Market Review During June the rally in corporate bonds continued. High yield bonds outperformed the investment grade sector, as investors' desire for yield continued to attract them to the sub-investment grade market. Government bond and cash yields are low by historic standards while concerns remain over the strength and longevity of the current rally in equities. Within the sub-investment grade market, "fallen angels" (former investment grade issues) continue to perform strongly. This is due to the relatively large size of these issues, which makes them more tradable over smaller high yield bonds. The European credit market also benefited from the European Central Bank's decision to cut interest rates by 0.5%, which significantly eased the cost of raising capital for companies. Fund Review Fund strategy continues to favour high yield debt over investment grade bonds. We remain cautiously optimistic on growth prospects for the European economy and expect high yield names to benefit from a gradual improvement in business conditions. Fund performance benefited from holdings in Invensys (single B-rated diversified manufacturer) and Bombardier (BBB-rated industrial conglomerate). The price of Invensys' bonds continue to benefit from debt reduction exercises, while appetite for Bombardier has increased ahead of the expected upturn in economic growth. Outlook We will continue to favour the high yield sector and intend to target those issues, which we believe offer an attractive blend of risk and return.   Privilege Euro Corporate Bond name change Monday, 30 June 2003 Official Announcement With effect from 1 July 2003, the Privilege Portfolio Euro Corporate Bond Fund changed its name to Aviva European Corporate Bond Fund.   Privilege Euro Corporate Bond comment - March 2003 Wednesday, 23 April 2003 Fund Manager Comment Market Review At the outset of the war in Iraq, equity markets rebounded sharply from their lows, with a corresponding rise in bond yields as the attractiveness of government bonds diminished on optimism of a swift resolution to the war. However, stiffer than anticipated resistance from Iraqi forces soon saw equities surrendering some of their gains and bond markets enjoyed renewed support. With the focus on the war, softer economic data releases were largely ignored but evidence would suggest that both business and consumer confidence levels have fallen. The corporate bond markets proved remarkably resilient, shrugging off much of the volatility of their government bond and equity counterparts, with spreads trading in a relatively tight range over the month. Fund Review Initially, a high level of optimism for a short and decisive war favoured the high yield holdings, which followed the fortunes of the equity market and enjoyed a strong rally. As resistance against the coalition forces grew and investors faced the possibility of a prolonged war, these gains were partially eroded, with interest returning to the investment grade market. We are unlikely to have any greater confidence in the direction of corporate bonds while the war continues. We believe that we are currently well positioned to avoid many of the risks that may arise as a result of unfavourable events in the Middle East. Consequently, the Fund's strategy was left broadly unchanged in March. Outlook Risks of a protracted conflict in Iraq and the emergence of softer economic data are clouding the immediate outlook for the market. However, our central forecast is for a gradual improvement in economic fundamentals following a favourable outcome for allied forces in Iraq. As such we continue to hold a positive outlook for the market overall in the medium to long term. Demand for the corporate bond asset class remains solid and is likely to continue to add to the positive tone in the market.   PP Euro Corporate Bond comment - October 2002 Tuesday, 26 November 2002 Fund Manager Comment Market Review An unsettled macroeconomic climate coupled with ongoing pessimism in global equity markets and compounded by the fears of the forthcoming confrontation with Iraq, set the stage for another challenging month for credit investors. Investor activity was characterised by a declining risk appetite as evident in the underperformance of credit over government bonds and the return to the safety of lower risk bearing triple-A rated credits. The high yield market experienced negative returns in September as it's close correlation with the struggling equity markets continued to weigh it down. However, with the markets reaching new lows for the year and early signs that earnings may recover, valuations are looking increasingly attractive. Notwithstanding the negative factors, demand for credit has been sufficiently strong to maintain positive absolute returns. This asset class remains an attractive alternative investment because of the higher yields available over their sovereign counterparts and of course in avoiding the sharp capital depreciation that continues to be inflicted on global equity markets. Fund Review Within the Fund, broad sector themes were little changed over the month with no real catalyst to shift the outlook for the market in general. Given the difficult nature of the market, it comes as no surprise that the lower risk structured and sovereign & supranational sectors outperformed in September, as investors looked to achieve tighter risk control. The Fund does not have exposure to these AAA rated credits. Telecoms managed to continue their steady advance by displaying another month of returns in excess of most other sectors. The non-manufacturing sector was the best performer amongst broad industrials as the economic weakness continues to impact hard on the manufacturers. Outlook The fund managers central forecast remains that of a gradual recovery in global economic fundamentals, which should be supportive of their positive view on credit markets going forward. Signs are emerging that indicate a more stable rating environment, with the ratio of credit rating downgrades relative to upgrades slowing. Added to this, the default rate, which indicates the number of companies that are unable to service their debt obligations, appears to have peaked. Government bond yields have fallen to historic lows and investors are likely to look to capitalise on the higher yields available in the credit market once sustainable signs of a recovery appear.   PP EU Corporate Bond comment - September 2002 Friday, 18 October 2002 Fund Manager Comment Market Review An unsettled macroeconomic climate coupled with ongoing pessimism in global equity markets and compounded by the fears of the forthcoming confrontation with Iraq, set the stage for another challenging month for credit investors. Investor activity was characterised by a declining risk appetite as evident in the underperformance of credit over government bonds and the return to the safety of lower risk bearing triple-A rated credits. The high yield market experienced negative returns in September as it's close correlation with the struggling equity markets continued to weigh it down. However, with the markets reaching new lows for the year and early signs that earnings may recover, valuations are looking increasingly attractive. Notwithstanding the negative factors, demand for credit has been sufficiently strong to maintain positive absolute returns. This asset class remains an attractive alternative investment because of the higher yields available over their sovereign counterparts and of course in avoiding the sharp capital depreciation that continues to be inflicted on global equity markets. Fund Review Within the Fund, broad sector themes were little changed over the month with no real catalyst to shift the outlook for the market in general. Given the difficult nature of the market, it comes as no surprise that the lower risk structured and sovereign & supranational sectors outperformed in September, as investors looked to achieve tighter risk control. The Fund does not have exposure to these AAA rated credits. Telecoms managed to continue their steady advance by displaying another month of returns in excess of most other sectors. The non-manufacturing sector was the best performer amongst broad industrials as the economic weakness continues to impact hard on the manufacturers. Outlook Our central forecast remains that of a gradual recovery in global economic fundamentals, which should be supportive of our positive view on credit markets going forward. Signs are emerging that indicate a more stable rating environment, with the ratio of credit rating downgrades relative to upgrades slowing. Added to this, the default rate, which indicates the number of companies that are unable to service their debt obligations, appears to have peaked. Government bond yields have fallen to historic lows and investors are likely to look to capitalise on the higher yields available in the credit market once sustainable signs of a recovery appear.   PP Euro Corporate Bond comment - August 2002 Thursday, 19 September 2002 Fund Manager Comment Equity markets rebounded off of the lows that were reached in July and are showing signs of bottoming. The vast majority of corporate earnings reports are coming in at or above market expectations, which is helping to soothe damaged investor sentiment. The August 14th deadline for the management sign-off on company accounts passed without any significant surprises, adding to a greater sense of ease among investors. Credit markets were revitalised by the overall improvement in conditions, enjoying positive absolute returns and outperforming government bonds for the first time in a number of months. Spreads tightened marginally across the broad market as A-rated credits outperformed the other areas of the investment grade credit rating spectrum. High yield markets maintained their correlation with equities and enjoyed some relief from recent sell-off as the equity markets displayed signs of stabilising. Levels of volatility remain high however and new entrants to the market continue to come by way of additional fallen angels (previously investment grade issues) while the supply pipeline remains dry. Fund Review The Fund's performance in August reflects the improved investor sentiment that accompanied a more stable performance from global equity markets. The well-diversified holdings allowed the Fund to enjoy the broad sector gains that characterised the credit market over the month. Once again sector views were broadly unchanged, with the Fund's more defensive approach in recent months ensuring no large positions have been taken in any sector. The Fund continued to benefit from the ongoing rebound in the telecoms sector, which we believe remains attractive despite recent gains. The defensive qualities of utilities remain attractive in the uncertain climate but another month of spectacular gains has made them increasingly expensive. Other broad sectors that remain in favour include financials and industrials. Outlook The central forecast remains for a gradual economic recovery, although the risks of a double-dip recession are acknowledged to have increased more recently. Market conditions are likely to remain unpredictable in the short term but the overall outlook remains positive on a medium to long term basis. Reduced market liquidity coupled with the shadow of further corporate scandal continues to necessitate stringent focus on stock selection and the well-diversified holdings, with few large positions, have reduced the Fund's vulnerability to any surprises.   PP Euro Corporate Bond comment - July 2002 Thursday, 5 September 2002 Fund Manager Comment Despite the softer data of recent economic data, we believe that a gradual US economic recovery will remain on track. We expect growth to receive a boost from business investment as corporate profits respond to improved productivity and to also benefit from the current administration's expansionary fiscal policy. The risk of a double-dip recession remains but we believe that this will only transpire in the wake of some external event, such as heightened political unrest in the Middle East. In the near term the Treasury market is likely to continue take its lead from the depressed equity markets as corporate earnings continue to cause concern. The uncertainties surrounding economic fundamentals have delayed expectations for interest rate hikes and this should provide further support for yields. However, in the longer term the fund managers believe that the economic backdrop is supportive of the recovery story and they therefore forecast yields to trend higher in coming months. A weaker month for high yield corporate bonds was the key factor behind the softer absolute returns experienced by the Fund over the month. On a sector basis, we continue to favour financials that, with the exception of insurer sub-sector, have maintained their stable composure under these difficult conditions. The telecom sector enjoyed a reversal of fortune in July, rebounding strongly and the Fund benefited from exposure to some of the higher quality names within that sector. Other sectors that remain in favour include the consumer and industrials. Despite some contradictory data releases in recent weeks, we continue to forecast an economic recovery albeit at a more gradual pace. Against this backdrop our outlook for the credit market remains positive in the long term. Technical factors continue to underpin demand but poor sentiment is likely to dominate activity in near term, leading to a volatile and uncertain market environment.

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