SKANDIA GLOBAL FUNDS PLC - Fidelity Investments

Skandia Global Funds plc
Annual Report and Audited Financial Statements for the year ended 31 December 2011
SKANDIA INVESTMENT GRADE CORPORATE BOND FUND
INVESTMENT ADVISER’S REPORT FOR THE YEAR ENDED 31 December 2011
Skandia Investment Grade Corporate Bond Fund – Wellington Management Company, LLP
Below is a report from the Investment Adviser of the Skandia Investment Grade Corporate Bond Fund for 2011.
The Skandia Investment Grade Corporate Bond Fund was launched on 19 March 2010 with a starting Net Asset Value per share
of USD 10.00.
Investment Adviser’s Commentary
The Skandia Investment Grade Corporate Bond Fund underperformed its primary benchmark, the Barclays Capital Global
Aggregate Corporate Bond Index. The fund recorded a total net return of 1.87%, while the benchmark index had a total return of
4.79% for the period.*
During the first quarter, corporate security selection was the primary driver of excess returns in the first quarter, with positioning in
the three industry sectors, financials, industrials and utilities, contributing positively to results.
Within financials, the allocation to banking securities contributed to excess returns as the fund‟s holdings of Lower Tier 2 securities
benefited from limited supply and the expectation that holders of European bank debt would avoid haircuts or other forms of burden
sharing. The fund‟s holdings of strategic, high-quality banks including Bank of America, Citigroup, BPCE and Danske Bank also
performed well on the back of solid earnings and favourable regulatory developments. Security selection in finance companies was
also positive, with the positions in Sallie Mae and GE Capital being the chief contributors. Underweight positions in Insurance were
a modest detractor during the quarter.
Within Industrials, the overweight positions in consumer non-cyclicals and capital goods outperformed during the period due to
improving corporate fundaments and continued positive economic data releases, particularly in the US and Germany. Specifically,
holdings within the tobacco and cement sectors contributed positively. Security selection in Communications detracted as many of
the recent top-performing media-cable and telecommunications names, such as Time Warner Cable, British Telecom, DirecTV
Holdings and News Corp, in which the fund held overweight positions, lagged the broader market.
Utilities were a key sector for positive performance, particularly in March, as Electric issuers sold off significantly after the
devastating earthquake and ensuing nuclear crises in Japan. The fund did not own Tokyo Electric Power, which operates the stricken
Fukushima Daiichi nuclear power plant and one of the largest issuers in the Japanese corporate bond market. These gains were
partially offset by adverse security selection in the natural gas sector.
In a reversal of last year‟s trend, the fund‟s overweight to US Dollar-denominated versus Euro- and Sterling-denominated corporate
bonds detracted, as US corporate bond markets lagged. Underweight positions in corporate issuers domiciled in Greece, Ireland,
Italy, Portugal and Spain also detracted value as these markets rebounded in anticipation of announcements from the EU which
should ease funding pressures on European governments and corporates alike.
Within sector allocation, the fund‟s holdings of government-related securities detracted, although the short positions in Sovereign
bonds in favour of corporate issuers contributed positively to performance as corporate credit continued to outperform governments.
The fund‟s holdings of securitized debt had a positive impact on excess returns, mainly driven by the overweight position in
commercial mortgage-backed securities (CMBS).
Gains generated through duration management were more than offset by losses from yield curve positioning. The overweight
duration position in January added value as US and European government bond yields fell as oil prices spiked following the
escalation of tensions in the Middle East and North Africa. However, the fund‟s yield curve positioning, particularly in the US,
detracted as long-dated treasuries sold off. The German bund versus Italian government bond position also detracted as European
sovereign credit concerns eased.
The Skandia Investment Grade Corporate Bond Fund underperformed its primary benchmark, the Barclays Capital Global
Aggregate Corporate Index (hedged to US Dollars), for the second calendar quarter of 2011.
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