Aberdeen European High Yield Bond Fund

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1 Aberdeen European High Yield Bond Fund (previously Aberdeen High Yield Bond Fund) Annual short report for the year ended 31 July 2016 Investment objective and policy The investment objective is to provide an attractive level of income with the opportunity for some longterm capital return. The Fund will be primarily invested in non-investment grade Debt and debt related securities issued by companies, governments, government related bodies and supranational institutions that are domiciled in the UK or a European Country and/or non-investment grade Debt and debt related securities issued by companies which conduct a significant proportion of their business activities in the UK or a European Country which, in the investment advisor s opinion, are likely to produce a high yield. The Fund investments may be of any credit quality and may include securities not paying interest currently and securities in default following purchase. The Fund may also invest in other transferable securities, money market instruments, cash, near cash, deposits, shares in collective investment schemes (including other funds managed by the Investment Adviser or its affiliates). Derivatives may be used for efficient portfolio management and hedging purposes. Under normal circumstances, the Fund may hold up to 10% of its net assets in cash or near cash assets. However, the Fund may from time to time adopt temporary defensive positions in response to adverse political, economic or bond market events in which case up to 100% of the Fund s net assets may be held in cash or near cash assets including short term Debt and debt related securities listed and traded on an eligible market or OTC market. Performance review For the year ended 31 July 2016, the value of Aberdeen European High Yield Bond Fund - A Accumulation Shares increased by 3.68% compared with an increase of 4.58% in the benchmark, the Merrill Lynch European Currency High Yield Constrained (Hedged GBP 100%) Index Source: Lipper, BofA Merrill Lynch, Basis: total return, NAV to NAV, net of annual charges, UK Net income reinvested, GBP. Please remember that past performance is not a guide to future returns. The price of shares and the revenue from them may fall as well as rise. Investors may not get back the amount originally invested. Market review The start of the reporting period was particularly volatile across markets. European high yield felt the force of risk-off sentiment following macroeconomic events late last summer, despite some positive economic data in Europe. This led to European Central Bank (ECB) chief, Mario Draghi, state that quantitative easing may continue beyond September 2016 citing subdued inflation and the strengthening euro in his reasoning.

2 Towards the end of the calendar year, the focus was once again on the US Federal Reserve as they raised interest rates for the first time in almost a decade. Markets reacted calmly, with European high yield largely unaffected. Economic data was generally mixed over the period. Inflation remains relatively subdued despite concerted efforts from the ECB. Draghi introduced the new Corporate Sector Purchase Programme in March which took markets slightly by surprise. Purchases will now be conducted on both the primary and secondary market, while a minimum credit rating of BBB- applies and maturities are to be between 6 months and 30 years. Issuers established in the euro area are eligible for the programme, even if the ultimate parent company is not based in the euro area. The programme has already helped drive a flattening of core European curves as long dated maturities outperformed shorter maturities. Money market forward rates had continued to price in a likelihood of around 60% for a 0.10% cut by early Global financial markets were highly volatile in the latter stages of the reporting period. This is largely a result of the UK s decision to leave the European Union (EU) which markets had not priced in. Sterling fell nearly 12% against the US dollar to a thirty year low of in the final days of June, while core government bond markets rallied aggressively after generally underperforming in the build up to 23 June. The sustained improvement in oil and wider commodity prices has helped provide some respite but, in the short to medium term at least, we expect there to be a negative growth shock in Britain following the vote. A weaker sterling should help cushion some of the adverse effects, although we foresee this weakness spilling over into the EU and the rest of the world. Elsewhere, the Greek Parliament narrowly passed further austerity measures (including rises in VAT and fuel duty) unlocking a further 11 billion of bailout funds. Italy s troubled banks have also come under intense pressure over the period leading to speculation that Matteo Renzi, the Italian prime minister, may defy EU rules and pump billions of euros into its banking system if required. European high-yield has shown remarkable resilience since the Brexit vote. This is largely thanks to accommodative central bank policies which remain the primary drivers of global financial markets. Indeed, we have spreads narrow and they are now tighter for euro-denominated high yield than they were before the vote. Portfolio review The Fund performed well over the last twelve months, benefitting from good stock selection, a positive sector allocation and an overweight position in sterling denominated high yield, which materially outperformed euro denominated high yield over the period. The relatively short fund duration of 3.2 years compared against 3.8 years for the benchmark also reduced the volatility profile of the Fund relative to the market. We achieve this duration strategy by being overweight short maturity bonds as well as by being overweight single B s. In an environment of record low yielding, and in many instances negative yielding, government bonds in Europe as well as continually subdued default rates we believe this strategy remains an appropriate one for the long term risk adjusted benefit of the Fund. As at 2 Aberdeen European High Yield Bond Fund

3 the end of June, the trailing twelve month default rate was running at 2.4% in Europe with Moody s expecting a drop to 1.9% by year end. The unexpected vote by the UK to leave the European Union has not at this time affected default expectations, particularly given the subsequent policy reaction from the European Central Bank and the Monetary Policy Committee in the UK. Outlook Continued loose monetary policy should continue to support high-yield issuers, and for this reason we don t anticipate a spike in bond defaults - a major indicator of the market s health or otherwise. Default rates are also what ultimately drive investor returns. The recent reopening of new-issuance markets helps companies gain access to longer-term debt at attractive levels. The accommodative central bank stance is underpinning a strong technical demand picture for the asset class as yield opportunities become harder to find. Consequently, we expect refinancing markets to be strong and the cost of funding for high yield companies to continue to fall, which further supports fundamentals. Not only are funding costs falling but the amount of debt coming due in the next two to three years is very manageable, explaining why market participants struggle to see material default risk in the short to medium term. Nevertheless, as yields fall so do return expectations, and as such it is worth cautioning that while we believe income returns are well protected we see limited upside opportunities at these levels. Portfolio breakdown Portfolio of investments As at 31 July 2016 % As at 31 July 2015% Corporate Bonds Derivatives Investment assets Net other assets Net assets Fund facts Interim/annual accounting dates Income payment date 31 January, 31 July Monthly on the last business day Ongoing charges figure % as at 31 July 2016 Ongoing charges figure % as at 31 July 2015 Share class A Share class I Share class Z The ongoing charges figure (OCF) is the total expenses paid by each share class in the year against its average net asset value. This includes the annual management charge, the other operating expenses and any synthetic element to incorporate the ongoing charges of any underlying collective investments. The OCF can fluctuate as underlying costs change. Where underlying costs have changed, the OCF disclosed in the Key Investor Information Document will be updated to reflect current changes. aberdeen-asset.co.uk 3

4 Distribution summary Total distribution (p) for the year to 31/07/2016 Total distribution (p) for the year to 31/07/2015 A Accumulation A Income I Accumulation I Income Z Accumulation Distributions are stated net of 20% income tax withheld. UK higher rate taxpayers not holding through an ISA may have additional income tax to pay. Non taxpayers are not entitled to a refund of income tax with held. Corporate investors may have an additional liability to corporation tax. Corporate investors may be entitled to a refund of income tax withheld to the extent that it exceeds their corporation tax liability. Performance summary Net asset value as at 31/07/2016 pence per share Net asset value as at 31/07/2015 pence per share Net asset value % change A Accumulation A Income (1.82) I Accumulation I Income (1.28) Z Accumulation Net of tax and expenses. 4 Aberdeen European High Yield Bond Fund

5 Performance record Accounting year ended Highest price pence per share Lowest price pence per share 2014 A Accumulation A Income I Accumulation I Income A Accumulation A Income I Accumulation I Income A Accumulation A Income I Accumulation I Income A Z Accumulation A Z Accumulation share class launched on 28 August aberdeen-asset.co.uk 5

6 Risk profile The Risk and Reward Indicator table demonstrates where the Fund ranks in terms of its potential risk and reward. The higher the rank the greater the potential reward but the greater the risk of losing money. It is based on past data, may change over time and may not be a reliable indication of the future risk profile of the Fund. The shaded area in the table below shows the Fund s ranking on the Risk and Reward Indicator. Typically lower rewards, lower risk Typically higher rewards, higher risk Risk and reward indicator table as at 31 July This Fund is ranked at 4 because funds of this type have experienced average rises and falls in value in the past. Please note that even the lowest risk class can lose you money and that extreme market circumstances can mean you suffer severe losses in all cases. The indicator does not take into account the following risks of investing in this Fund: Exchange rates: Investing globally can bring additional returns and diversify risk. However, currency exchange rate fluctuations may have a positive or negative impact on the value of your investment. Bonds: Bonds are affected by changes in interest rates, inflation and any decline in creditworthiness of the bond issuer. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may not be able to pay the bond income as promised or could fail to repay the capital amount used to purchase the bond. Where a bond market has a low number of buyers and/ or a high number of sellers, it may be harder to sell particular bonds at an anticipated price and/or in a timely manner. A full list of risks applicable to this Fund can be found in the Prospectus. The latest risk and reward profile can be found on the Key Investor Information Document (KIID) for this Fund which is available on the website at aberdeen-asset.co.uk. 6 Aberdeen European High Yield Bond Fund

7 Other information Consumers rights and protections, including any derived from EU legislation, are currently unaffected by the result of the UK referendum to leave the European Union, and will remain unchanged unless and until the UK Government changes the applicable legislation. Name Change On 28 August 2015 the name of the Fund changed from Aberdeen High Yield Bond Fund to Aberdeen European High Yield Bond. What if I have a complaint? If you need to complain about any aspect of our service, you should write to the Complaints Team, Aberdeen Fund Managers Limited, 10 Queen s Terrace, Aberdeen, AB10 1YG, who will initiate our formal complaints procedure. If you prefer, you may call the Complaints Team on or complaints@aberdeen-asset.com in the first instance. A leaflet detailing our complaints procedure is available on request. If the complaint is not resolved by us to your satisfaction then you may take your complaint to the Financial Ombudsman Service. In order to contact the Financial Ombudsman Service or obtain details of the compensation scheme you should write to The Financial Ombudsman Service, Exchange Tower, London, E14 9SR or telephone or Literature and Fund information Our website contains a wealth of information on our funds and investment approach, including Key Investor Information Documents (KIIDs) for all of the funds available for investment. We also publish Supplementary Information Documents (SIDs), Application Forms, Fund Lists and Terms and Conditions. You can invest online and access fund performance and pricing information. Please visit: aberdeen-asset.co.uk Alternatively please contact our Customer Services Team on: Tel: customer.services@aberdeen-asset.com Report and accounts Copies of the annual and half-yearly long form report and accounts for this Fund are available free of charge on request to Aberdeen Fund Managers Limited. Aberdeen European High Yield Bond is a sub-fund of Aberdeen Investment Funds ICVC, an openended investment company ( OEIC ) authorised under the Financial Services and Markets Act aberdeen-asset.co.uk 7

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11 Appointments Authorised Corporate Director Aberdeen Fund Managers Limited Head Office 10 Queen s Terrace Aberdeen AB10 1YG Registered Office Bow Bells House 1 Bread Street London EC4M 9HH Depositary BNP Paribas Securities Services London Branch 10 Harewood Avenue London NW1 6AA Contact us Phone (Lines are open 9:00am to 5:00pm, Mondays to Fridays, excluding bank holidays) Dealing Customer Services Broker Desk Post All enquiries Aberdeen Fund Managers Limited, PO Box 9029, Chelmsford, CM99 2WJ For more information on Aberdeen Asset Management PLC and our product range please visit aberdeen-asset.com Auditors KPMG LLP 15 Canada Square London E14 5GL Registrar International Financial Data Services (UK) Limited IFDS House St. Nicholas Lane Basildon Essex SS16 5FS (the register of shareholders can be inspected at this address) Cert no. SA-COC-1605

12 The above document is strictly for information purposes only and should not be considered as an offer, investment recommendation or solicitation, to deal in any of the investments or funds mentioned herein and does not constitute investment research as defined under EU Directive 2003/125/EC. Aberdeen Asset Managers Limited ( Aberdeen ) does not warrant the accuracy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions in such information and materials. Any research or analysis used in the preparation of this document has been procured by Aberdeen for its own use and may have been acted on for its own purpose. The results thus obtained are made available only coincidentally and the information is not guaranteed as to its accuracy. Some of the information in this document may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make their own assessment of the relevance, accuracy and adequacy of the information contained in this document and make such independent investigations, as they may consider necessary or appropriate for the purpose of such assessment. Any opinion or estimate contained in this document is made on a general basis and is not to be relied on by the reader as advice. Neither Aberdeen nor any of its employees, associated group companies or agents have given any consideration to nor have they or any of them made any investigation of the investment objectives, financial situation or particular need of the reader, any specific person or group of persons. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document. Aberdeen reserves the right to make changes and corrections to any information in this document at any time, without notice. Issued by Aberdeen Fund Managers Limited, authorised and regulated by the Financial Conduct Authority in the United Kingdom. A member of the Aberdeen Asset Management group of Companies /16