Threadneedle Investment Strategy: March 2008

Bonds - Initial fears of rising inflation, amid higher food and oil prices, were more than offset by clear evidence that the US economy was slowing rapidly and that the Federal Reserve would be forced to cut interest rates again. Although our duration positions were moderated during the month, we started to add again near the month-end.We continue to favour strategies that will work well if the Bank of England cuts interest rates and the ECB starts to do so. Credit markets remain under pressure and spreads for both nvestment grade and high yield continue to widen.We prefer the prospects for the former and believe that the default rates implied by current spreads are unlikely to be realised. The fundamentals for emerging market bonds remain supportive, notably the continuing strength of commodity prices.

Equities

We remain overweight in UK equities and prefer growth companies with good earnings visibility and strong balance sheets.We continue to be underweight in areas exposed to the domestic economy such as retail and leisure.

For Asia, once we see greater certainty over the trajectory of US growth and interest rates, investors are likely to refocus on the positive fundamentals for the region, namely the relative resilience of economic growth and corporate earnings combined with healthy domestic liquidity.

In Japan, the third quarter earnings season has ended and we have revised down our forecast for earnings growth to 10% for the fiscal year ending March 2008. The stronger yen has proved a headwind given Japan’s high percentage of earnings from exports. However, for the year to March 2009 we have revised up our estimate for earnings growth to 4%.

European equities appear to be settling into a trading range, albeit that this is likely to be characterised by ongoing volatility as markets react to economic data releases and corporate news. Overall, we believe that earnings growth in Europe will be flat this year, which we feel is consistent with our forecasts for economic growth.

We remain underweight in US equities and retain a negative view on the domestic economy.We are currently forecasting earnings growth of 3% for 2008.

Within Latin America, the Brazilian economy should continue to gain from the strength of global commodity markets.

Additionally, Mexico is benefiting from the high oil price, while the impact of US economic weakness is being mitigated through higher investment in infrastructure.

Property

We retain an underweight position in property.We expect the slowdown in investment activity to continue, along with an element of pricing correction. However, the resultant effects on total return should be cushioned by income returns and healthy rental growth. A return to more orderly credit markets, combined with a cut in UK base rates, would prove beneficial, in that this could strengthen liquidity in the market.