Why recommend this Fund to your clients?

• An uninterrupted history of attractive income since launch in 2003.
• A low level of capital volatility relative to many similar funds.
• A combination of an active interest rate strategy and conservative credit management.
• A relatively low-risk vehicle that can take advantage of value in the corporate bond market.

Performance of £1000 invested over 5 years

Value to latest month end, total return, bid to bid price, Net income re-invested.
Past performance is not a guide to future performance and the value of this investment can go down as well as up. This is not a guaranteed investment and you may get back less than you have put in.

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Cumulative Performance (% change to 30/09/11)

	1 year	3 years	5 years*	Since launch (29/9/03)
Fund	-2.6	15.5	4.8	20.9
Sector median	-0.7	23.4	9.8	25.6
Quartile ranking	3rd	4th	4th	4th

Percentage Growth to latest month end, total return, bid to bid price, Net income re-invested.

Discrete Performance (% change)

	30/09/10 - 30/09/11	30/09/09 - 30/09/10	30/09/08 - 30/09/09	30/09/07 - 30/09/08	30/09/06 - 30/09/07
Fund	-2.6	12.0	6.0	-6.2	-3.3
Sector median	-0.7	12.0	10.8	-6.7	-2.5

Percentage Growth for discrete 1 year periods, bid to bid price, Net income re-invested.

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A closer look at the Fund

What does the Fund invest in?

The fund invests primarily in Sterling denominated, investment grade, fixed interest securities but also has the ability to invest in non-Sterling denominated bonds as appropriate.

At least 50% of the trust's assets must be invested in bonds rated Single-A or above.

Bond derivatives (representing up to 10% of the Fund's value) may be used for the purpose of efficient portfolio management.

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Who it's suited to

The Fund may be suitable for investors looking for:

• a relatively low-risk investment with the potential to outperform returns on cash over the medium term
• a regular income from a long-term investment
• portfolio diversification away from other asset classes
• a fund that will consider social responsibility as part of its overall investment process.

Investment philosophy

Our investment philosophy and style is best described as follows:

Focused - The portfolio will typically have between 60-100 holdings consisting of at least 50 different issuers.

Long-term - Typical investment horizon of three to four years

Top-down - Asset allocation, duration, yield curve and sector.

Stock selection - Driven by strong fundamental analysis

Responsible - Embedded environmental, social and governance (ESG) analysis provides a broader perspective and represents the views of our customers in the investment process.

The overall investment philosophy is to allocate capital between a broad range of investment grade corporate bonds and gilts to provide an attractive and stable income whilst, at the same time, seeking to preserve that capital over the medium term. The fund does not mechanically buy yield but analyses the longer term cash flow dynamics of the relevant bonds to determine the sustainability of interest payments over time.

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Credit rating breakdown 30/09/11

Credit rating	%
AAA	2.2
AA	5.6
A	50.4
BBB	41.3
NR	0.5

Top 10 holdings 30/09/11

	% of fund
Santander UK PLC (GBP 11.500, 4-Jan-2017 )	3.4
Eastbourne Water Co (5.658%, 30/09/2019)	3.3
Tesco Plc (5.801%, 13/10/2040)	2.67
Barclays Bank Plc (10.0%, 21/05/2021)	2.7
Imperial Tobacco Finance Plc (9.0%, 17/02/2022)	2.5
Telereal Securitisation (7.098%, 10/12/2033)	2.2
Barclays Bank Plc (6.75%, 16/01/2023)	1.9
Njord Gas Infrastructure As (5.241%, 30/09/2027)	1.9
Glencore International AG (6.5%, 27/02/2019)	1.9
BNP Paribas (5.945%, Perpetual)	1.9
Total	24.63

Top 10 issuer exposure 30/09/11

	% of fund
Barclays Bank PLC	5.4
Santander UK	4.4
HSBC Finance Corp	4.1
LLOYDS BANKING GROUP PLC	4.0
BAA PLC	3.4
Eastbourne water CO	3.3
General Electric	3.0
Tesco PLC	2.7
AVIVA Plc	2.7
Citigroup Inc	2.6
Total	35.6

Sector Breakdown (as at 30/09/11)

Maturity breakdown (as at 30/09/11)

Asset Allocation

The team adopts a top-down approach to asset allocation, duration, yield curve and sector positioning whilst utilising a team of in-house investment analysts to adopt a bottom-up approach to industry and issuer selection within the preferred sectors.

In attempting to consistently produce an attractive income whilst protecting capital values over time, the fund will seek to exploit valuation anomalies in both the interest rate and credit markets.

In times of economic prosperity, credit market gains will likely offset weakness in government bond markets and vice versa. Our aim is to anticipate these conditions and position the fund accordingly and pre-emptively.

Fund Manager Strategy

The tragic events in Japan dominated market attention through much of March. The initial market reaction of selling equities and buying high quality government bonds was reversed as the situation in Japan stabilised, leaving most government bond yields higher over the month. In Europe, the dominant trend of the year has been a clear decoupling of Greece, Ireland and Portugal from Spain.

In the UK, Gilt yields rose in the month with the 10-year benchmark closing at 3.69%. With rising inflation and a fragile economy, the members of the Bank of England’s interest rate committee have a difficult decision to make and all eyes will be on the 1st quarter GDP figures released at the end of April. Economists remain divided about how soon rates will rise and by how much. We continue to expect rates to remain on hold into the second half of this year.

Corporate bond markets have remained well supported despite the ongoing geopolitical uncertainty. The financial sector has performed especially well of late and some of the undervaluation versus non-financials has been unwound. We expect this trend to continue over the medium-term but are conscious that such a move is unlikely to be straightforward. For this reason, the fund has reduced its overweight position in subordinated financials and increased the average credit quality of its holdings. The arrival of some attractively priced, AAA-rated covered bond issuance in the sterling market has facilitated such a move over recent weeks.

Following a sustained period of positive capital appreciation for corporate bonds, as they recovered in the aftermath of the financial crisis, current market valuations make further significant gains unlikely. However, through careful credit selection and timely sector rotation it will remain possible, in our opinion, to produce a relatively attractive income from investing in corporate bonds.

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Investment process summary

Initial screening:

• the key investment universe, from which the majority of new investments are selected, is the iBoxx Sterling Bond Index
• the fund also has the ability to invest in non-sterling denominated bonds.

Duration:

• the fund's duration decisions are driven by the team's top-down market forecasts and consistency is maintained with other, in-house portfolios whenever practicable.

Asset allocation:

• broad sector allocation is guided by the team's macro view, combining analysis of economic variables with key thematic trends and changes in the regulatory environment
• at the industry level the fund manager incorporates the bottom-up views of the research teams into the preferred top-down sector split.

Stock selection:

• once our industry views have been derived, our investment and ESG research analysts undertake ongoing, detailed analysis of the relevant corporate issuers
• from within the resultant, acceptable universe of issuers, the fund manager identifies the most attractive instrument-level opportunities available on a risk-reward basis.

Portfolio construction:

• by taking advantage of the mispricing of bonds in both the primary and secondary markets the fund manager attempts to maintain a balanced and diversified portfolio with the aim of consistently outperforming both the benchmark and peer group over a rolling 12-month period
• given the skewed nature of returns in the cash credit market, the overriding aim of the portfolio construction process is to avoid losers rather than pick winners.

Risk management:

• instrument default risk is assessed prior to any initial investment.
• event risk and fluctuations in market conditions are monitored on an ongoing basis to assess their likely impact on the default probabilities of all issuers held in the portfolio.
• risk is assessed across the fund in aggregate by considering the rating, sector and maturity profile of the portfolio.

Fund manager and investment team

Danny Fox, Fund manager

Years in industry	18
Years at The Co-operative Asset Management	2

Danny joined Co-operative Asset Management in March 2009.

Danny began his career in fund management in 1993 after graduating with a BSc. Honours in Business, Finance & Economics from the University of East Anglia. After eight years at Sun Alliance (later to become RSA) Investment Management, where he managed a selection of government and corporate bond funds, he moved on to Rothschild Asset Management in early 2002 to specialise in managing corporate bond portfolios. Following the acquisition of Rothschild Asset Management by Insight Investment, in early 2003, Danny took on responsibilities for the company's range of retail and income bond funds, which he managed until late 2008. He is an associate of CFA (UK).

Danny is part of an experienced team of fixed income fund managers. The team draws on the expertise of over 50 investment professionals at The Co-operative Asset Management, all based in Manchester, including:

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Why choose the Corporate Bond Income Trust from
Co-operative Asset Management?

The fund management activities of The Co-operative Financial Services (part of The Co-operative Group) are undertaken by The Co-operative Asset Management. The Co-operative is a household name in the UK offering a wide range of services to consumers including financial services such as insurance, banking and mortgages plus food, pharmacy and travel.

The Co-operative Group has over 12 million customers, of who over 290,000 are investors in our unit trust range, amounting to over £2 billion of assets under management.

Our distinctive approach is reflected in a number of unique investment credentials. We are the only fund manager to:

• apply a common core approach to responsible investment across all the funds we manage
• apply analysis and active engagement across all the funds we manage
• feed valuable business insights gained from our engagement process back in to company analysis performed for investment purposes.

The Co-operative Asset Management was also the first UK investor to publish its Company AGM voting record on its website in 2002, a practice now increasingly adopted by fund management groups offering SRI.

In advocating The Co-operative Asset Management to clients, advisers should remember that they are recommending:

• Britain's most ethical brand, The Co-operative Group*
• a responsible investment approach which fully integrates financial and ESG criteria in stock selection
• an investment process characterised by clear and informed views on why companies are undervalued and offer good long-term prospects
• an investment resource comprising experienced and committed individuals working to deliver out-performance while effecting positive change in the companies they invest in.

In advocating the fund to clients, advisers should remember that:

• adding bond investments to an all-stock portfolio generally lowers the risk of your client's overall portfolio.
• fixed income investments are a necessary component of a well diversified portfolio
• historically, bonds have returned more than cash investments, and exhibited less volatility than stocks
• the return on bonds has often offset the negative return on stocks during periods of market downturn.

*An independent consumer survey carried out in 2007 and 2008 found that The Co-operative was the most ethical brand in Britain for both years. The Co-operative Group (including The Co-operative Bank) was ranked number one for 2007 and 2008 with Body Shop and Marks and Spencers ranking second and third respectively. The GFK NOP Ethics Brand Survey was conducted in the US, UK, France, Germany and Spain amongst 5000 individuals in total. The study found that consumers are increasingly choosing to buy brands which they believe to be ethical, with many willing to pay a premium for an “ethical guarantee” (GFK NOP Press Releases 2007 & 2008).

Fund facts

Manager name	Danny Fox
Fund type	Unit Trust
Launch date	29th September 2003
Index/benchmark	Markit iBoxx Sterling Corporate Bond Index
Sector	UK Corporate Bond
No of holdings	86
Fund size as at 30/06/11	£400 million
Distribution yield	5.10%
Underlying yield	4.70%
Distribution frequency	Monthly
Distribution dates	Monthly on the 17th
Prices	co-operativeassetmanagement.co.uk or The Financial Times
Sedol Code	3358342
Lipper ID	60088476

The Co-operative Financial Services has signed up to the internationally recognised UN Principles for Responsible Investment. They reflect the increasing relevance of environmental, social and corporate governance issues to investment practices and in signing the Principles, the organisation publicly commits to adopting and implementing them.

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