Why recommend this fund to your clients?

• Diversified – The Fund will take advantage of investment opportunities across a range of asset classes.
• Sector: IMA Cautious Managed – The Fund is a relatively low-risk vehicle with an emphasis on downside protection.
• Benchmark Unconstrained – The Fund will be active in its asset allocation and stock selection seeking out investments that are attractive on a total return basis.
• Invests in the core themes of the environment, human welfare and sustainability, thereby making a positive contribution to society.

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A closer look at the Fund

Fund aims

The Fund invests in companies with products or services that benefit the core themes of environment, human welfare and sustainability. Companies leading their industries in environmental, social and governance (ESG) performance, as assessed by our ESG analysts, are also included in the investable universe, thereby creating a portfolio of investments that make a positive contribution to society.

The Fund aims to provide first-quartile performance over a rolling three-year period measured against the IMA Cautious Managed sector. Over any one-year period the Trust performance should not be below median.

The Fund is able to shift its asset allocation according to market conditions in order to seek out attractive return opportunities and limit downside risks.

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What does the Fund invest in?

Cautious Managed Funds can invest in a range of assets with the maximum equity exposure restricted to 60% of the fund and with at least 30% invested in fixed interest and cash. There is no specific requirement to hold a minimum percentage of non-UK equity within the equity limits. Assets must be at least 50% in Sterling/Euro and equities are deemed to include convertibles.

Who's it suited to

The Fund may be suitable for investors looking for:

• an active asset allocation product with total-return approach looking to limit downside risk
• a fund with long-term capital growth objective achieved through a diversified fund with a mix of asset classes across Global markets
• the opportunity to ensure that their money helps to make a positive contribution to society through improving human welfare and the environment.

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Investment philosophy

Our investment philosophy and style is best described as follows:

• Focused - The portfolio will typically have between 70-100 holdings.
• Long-term - Investment holding periods of three to four years.
• Stockpicking - Securities are selected that offer attractive total
  return prospects.
• Responsible - Embedded environmental, social and governance
  (ESG) analysis provides a broader perspective and represents the
  views of our customers in the investment process.

At the security level our investment approach is structured to consider companies at three levels to identify mis-priced opportunities.

• Investment Themes – The increasingly short-term nature of the investment industry, evidenced by declining stock-holding periods, results in long-term opportunities being overlooked. We have therefore adopted a long-term investment philosophy and evaluate the effect of long-term investment themes. Examples include emerging market growth opportunities, demographic influences over supply and demand factors, and the environmental impact of human activity.
• Industry Trends – The increasingly narrow focus of most investors has resulted in us broadening the scope of inputs beyond traditional investment research to identify wider industry trends or linkages between industries.
• Company Specific – We believe that the market can inefficiently discount company specific events such as management change. Therefore we devote a large amount of analytical resource to changing company situations.

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Asset allocation

The Fund's asset allocation will be positioned to take best advantage of market conditions. When the outlook for corporate profitability is deteriorating the Fund will seek the security of lower risk assets such as cash and government securities. When we expect profitability and risk appetite to improve or remain strong the Fund will have a natural bias towards equalities and corporate bonds. The Fund will seek diversification by investing across a broad range of industries, but industry allocation will be driven by the bottom-up selection process. Asset allocation will be subject to the constraints imposed in the investment mandate.

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Industry breakdown

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Top 10 holdings

(as at 30/06/10)

	% of Fund
Smiths Group	2.6
Treasury 6.25% Stk 2010	2.4
First State Investments	2.1
Barclays Bank	2
Impax Environmental Markets	1.8
Vodafone Group	1.8
Lloyds Banking Group	1.8
Shire	1.8
GEC UK Funding 5.875 Gtd Snr 2020	1.8
Apple Inc	1.8

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Credit ratings breakdown (as at 30/06/10)

Credit rating	% of Fund
FTSE 100	24.9
FTSE 250	10
SMALLCAP	5.3
Overseas Equities	16
UK Corporate Bonds	24.4
Overseas Corp Bonds	13.3
Gilts	2.4
Cash	3.8

2 Stock profiles

1. Linde AG

Linde AG is a German Industrial gases and engineering company with a strong presence in Emerging Markets. Their products are used to improve the efficiency of energy extraction and for the benefit of human wellbeing in the healthcare sector.

2. Impax Environmental Markets

Impax Environmental Markets is an investment trust which is included in the Alternatives section of the portfolio. The Fund will invest in technology based systems, products or services in environmental markets, particularly those of alternative energy and energy efficiency, water treatment and pollution control and waste technology and resource management.

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Strategy and outlook

Over the last three months the UK equity market has fallen by 11.8%. In contrast the benchmark basket of UK Government Debt (Gilts) produced a positive return of around 4.0%. Markets have continued to remain concerned that recent softness in a number of US economic data points, coupled with the public debt problems in Europe, may result in the global economy experiencing a double dip recession. We believe that these concerns are overplayed and the emergence of Asian economies should result in a sustainable economic recovery, all be it somewhat muted.

Over the period since launch last year the portfolio benefited from its strategy of focusing on equities and corporate bonds and having a low exposure to UK sovereign debt (Gilts) and cash. During April some risk was removed form the portfolio with partial sales in Aggreko, Standard Chartered and Johnson Matthey, whilst cash levels were raised. In hindsight more risk should have been removed given the sharp reversal in risk appetite experienced over the second quarter, but we are confident that equities will regain their leadership over the next twelve months. The Trust declined by 3.7% over the three-month period to the end of June, placing it in the 2nd quartile of the IMA Cautious Managed sector. Since Launch the Trust has advanced by 12.7% compared to the median performance of the IMA Cautious Managed sector of 11.3%.

Over the three month period the equities held in the portfolio performed well relative to the broader equity market. The specialist chemical company, Victrex, moved higher and Spice recouped all of its previous losses following the announcement of private equity interest in the company. The Trust benefited from being under-weight in the Mining and Energy sectors; areas which pulled back sharply. The avoidance of BP shares in particular was a strong positive influence.

Within the fixed income element of the Trust the lack of exposure to UK gilts was a significant drag to performance. Corporate bonds in the Trust did produce small positive returns, but were hampered by a widening of corporate credit spreads against gilts.

During the quarter Tesco was sold completely from the Trust with some monies switched into the European pharmaceutical company Novartis. Croda was added to the portfolio in June. This chemicals company manufactures products for the consumer and industrial sectors from natural, renewable sources. Within the corporate bond space Friends Provident was added to the portfolio as we like what the management of Resolution Ltd (the parent company) are doing to generate value and the risk/reward profile for the bonds looks compelling.

The Trust has got off to a good start and it remains our view that it is well placed to perform in future, combining top-down asset allocation with effective security selection within the equity and fixed income areas.

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Investment process overview

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Fund manager and investment team

Years in industry	21
Years at The Co-operative Asset Management	21

Linda is Head of External Funds and is a key member of the asset allocation team; Linda has had portfolio management responsibilities since 1993 and in 2003 was appointed Head of North American Equities. In 2006 Linda expanded her experience to cover a broad range of asset classes including UK and overseas equity, bonds, property and alternatives. She has had responsibility for The Co-operative Asset Management's multi-manager funds since their launch in April 2006.

Linda joined The Co-operative Asset Management in 1989 as a research analyst for the fixed income team before moving to the overseas equity team in 1991. She has a B.A. (Hons) in Economics from Manchester University and is an Associate member of CFA UK.

Linda draws on the expertise of over 50 investment professionals at The Co-operative Asset Management, all based in Manchester including:

• equities, fixed income and ESG (environmental, social and governance) analysts dedicated to researching companies
• fund managers focused on stock selection and constructing diversified portfolios which balance performance with risk and volatility
• operations and other experts supporting the investment process
• risk analysts, responsible for ensuring appropriate risk is taken within the portfolio.

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Fund facts

Manager name & location	Linda Desforges, Manchester
Fund type	Unit trust
Launch date	24/07/09
Index/benchmark	IMA Cautious Managed
Sector	Cautious Managed
No. holdings (as at 30/06/10)	85
Fund size (as at 30/06/10)	£79 million
Distribution dates	March, June, September, December
Sedol code	B3PXJV8

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How to invest

The Sustainable Diversified Trust is available to investment professionals through a number of platforms including Cofunds, Fidelity and Hargreaves Lansdown:

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