Richard House, Threadneedle’s Emerging Market Local Fund Manager, comments on the current market conditions and the fund’s first quarter performance following launch:

Market background

“We have seen a consistent theme across the Emerging Markets (EM) world over the past six months, namely negative inflation surprises driven largely by food and energy shocks and this has continued throughout March. Indeed, a number of central banks have raised interest rates to stem this inflationary pressure, in particular Hungary and Poland.

“Generally, local bond markets have continued to underperform FX - the JPM GBI-EM Global Diversified index lost 89bp in US dollar terms during March. Whilst on the other hand, EM FX has continued to perform well returning a positive 132bp in USD terms (JPM ELMI+) over the same period.”

Performance and commentary

“During March, the fund return was broadly flat in US dollar terms, slightly underperforming its composite benchmark.*

“A main strategic theme for the fund has been to underweight those countries with large funding needs, measured by a country’s basic balance (current account surplus/deficit plus foreign direct investment). Negative basic balances imply that a country needs to rely on foreign capital to finance its deficit, and given the current liquidity crisis affecting global markets, financing such deficits is going to prove to be increasingly difficult. With diminished access to foreign sources of capital, demand for foreign currency in the FX market will grow, in turn leading to a weakening of domestic currency.”

Market outlook

“We continue to be concerned about headline inflation across most of the EM world. Commodity prices, most notably soft commodities and energy, continue to rise. Negative inflation surprises are therefore likely to continue. As a result, we will continue to hold our underweight duration position and overweight FX position.

“However, we believe that at some point EM local markets will start to react to the lower growth outlook as opposed to the current inflation shock, essentially following what is now happening in developed bond markets. In this environment bonds will start to post significant gains. In particular, we will focus on those bond markets where we believe the tightening cycle to be at/or close to an end, particularly Poland and Colombia.

“We expect the currencies of high deficit countries to continue underperforming those currencies with low or no financing needs.”

- ENDS -

For further comment please contact:
Jessica Lord, UK PR Manager +44 (0)20 7464 5047
Anne-Sophie Brieussel, Senior PR Executive +44 (0)20 7464 5964

Notes to Editors

Source: Standard & Poor's, offshore universe, as at 31.03.08. Net performance calculation allows for 1.5% annual management charge, bid to bid, in fund currency, gross income reinvested. *31 January 2008.

Disclaimer:
Issued by Threadneedle Investment Services Limited (TISL), registered in England and Wales, no. 3701768, 60 St Mary Axe, London EC3A 8JQ. Threadneedle Asset Management Limited (TAML) is responsible for asset management for TISL. Both TISL and TAML are authorised and regulated in the UK by the Financial Services Authority. Threadneedle is a brand name, and both the Threadneedle name and logo are trademarks or registered trademarks of the Threadneedle group of companies.
The research and analysis included in this document has been produced by Threadneedle for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice.
References in this document to any fund do not constitute an offer or invitation to subscribe to shares in such a fund.
Emerging Markets are generally less well regulated than their established counterparts. Funds investing in these markets are more susceptible to fluctuations. As such, they are aimed at the more experienced investor.
Past performance is not a guide to future returns. The value of investments is not guaranteed and may fall as well as rise, and may be affected by exchange rate fluctuations. This means that an investor may not get back the original investment. The dealing price may include a dilution adjustment where the fund experiences large inflows and outflows of investment. Further details are available in the Prospectus.