Advocacy Fund. About Advocacy Fund. Performance Returns. Advocacy Commentary. December Quarter 2015

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1 December Quarter 2015 Advocacy Fund About Advocacy Fund The Fund seeks to actively engage directly with companies to pursue improved sustainability outcomes and corporate behaviour in line with the Australian Ethical Charter. The Fund invests in the Australian Ethical Diversified Shares Fund. Performance Returns % year 2 years 3 years 5 years Since Inception months months (pa) (pa) (pa) (pa) (pa) Fund (Retail)* Benchmark~ Relative Performance Fund (Wholesale)^ n/a 16.5 Benchmark~ n/a 15.6 Relative Performance n/a +0.9 Alternative benchmarks S&P/ASX 200 Industrials n/a S&P/ASX n/a MSCI Global Climate n/a MSCI World n/a * Inception Date (Retail): 18 February 2010 ^ Inception Date (Wholesale): 13 January 2012 ~ Benchmark was changed from S&P ASX 200 to melded benchmark 75% S&P ASX 200 Industrials and 25% MSCI Global Climate from 29 Aug Composite benchmark is calculated by linking two index series. Past performance is not an indicator of future performance. Advocacy Commentary Big four Australian banks and the climate: The end of year reporting and AGM season for the four big Australian banks brought with it greater openness about their lending to climate-sensitive sectors, as well as some encouraging new commitments to align their businesses with a 2 -degree world. Around this time US investment manager Boston Common Asset Management published its report examining management of climate-related risk and opportunity by 61 of the world s largest banks. australianethical.com.au 1

2 Advocacy Commentary (continued) The report pulls together the results of Boston Common's 18-month research program, in which Australian Ethical led the engagement with the four Australian banks. Perhaps surprisingly, the report shows strong performance from Australian banks relative to international peers. We think ethical Australian investors and customers as well as some hardcampaigning NGOs can claim considerable credit for the progress that the banks have made. We used the Advocacy Fund s nominal shareholding in ANZ to support a shareholder resolution calling for an improved response to global warming. More needs to be done by the banks. They need to continue to enhance their carbon monitoring and reporting, and move beyond disclosure to making tangible changes to the way they lend and invest. They need to give clear commitments to align their businesses to an economic and societal path, which limits warming to a safe level. They need to implement that commitment in a transparent and measurable way. Australian Ethical and the Advocacy Fund will continue to exercise their influence to encourage this. COP21 agreement in Paris: Our CEO, Phil Vernon, was in Paris in December participating in meetings and forums for investors and other companies to advocate for decisive climate action. We were encouraged by the COP21 agreement reached, but we recognise that it is now up to all of us to align our behaviours in particular our day-to-day financial and purchasing decisions with a 1.5-degree world, as well as to keep the pressure on governments to implement the specific policies needed. On this front we continue to participate in two international groups targeting corporate lobbying practices which obstruct positive policy change. One outcome is an agreed statement of climate lobbying principles which we are using as a basis for engagement with companies to stop this sort of obstruction. You can read more about our thoughts on the COP21 outcome at: s/a-word-from-our-director-fresh-fromcop21. Fiduciary duty: For many years we have been frustrated by companies and investment funds claiming that they can t act to change their activities which contribute to global warming because of their legal duties. This is often offered up as a rationalisation for inaction, but it s a perspective which has deep flaws. It misunderstands fiduciary legal responsibilities. It ignores the risks posed by global warming. And it overlooks the ability of companies and investors to proactively help create conditions which will improve future societal and economic outcomes for all. We continue to advocate publicly and privately for change in these entrenched attitudes with companies and other investors. Our CEO recently challenged the status quo in industry journal Superfunds magazine, arguing that it is not the law that constrains action, but inertia and a lack of will. Our Head of Ethics Research discussed the importance of business purpose for sustainable business success at an inspiring two-day conference held in Sydney for purpose driven business. And as part of a BCorp working group (see we re exploring how changes in law or regulation can help. australianethical.com.au 2

3 Top Holdings Investment Commentary Global equity markets recorded strong returns in the December quarter, however the numbers belied the high level of volatility in market indices through the period with most of the return coming in the last two weeks of the year. The Australian market, proxied by the S&P/ASX 200 Accumulation Index, recorded a gain of 6.5%, however the return was weighed down by the Resources component of the index which reported a loss of 9%. In contrast, the Industrials component of the index was up 9% which compared favourably with other global markets. The US S&P 500 rose 6.9%, the German DAX gained 11% and the Chinese Shanghai composite was up 16.5%. The Fund underperformed its benchmark by 1.6% largely driven by the domestic equities component. Within the domestic equities portfolio a generally strong contribution from most sectors was overcome by the Fund s underweight position in the banks. After a difficult September quarter that challenged investors mettle with the aftermath of the latest Greek crisis, prospects of a hard landing in the Chinese economy and deflation fears in the US, the December quarter began enthusiastically with global markets rebounding. Prospects for further monetary stimulus in China, the EU and Japan and the likelihood of a slower normalisation of interest rates in the US provided much needed relief for stressed markets as risk appetites returned. As the quarter wore on the primary focus for investors was the almost certainty that the US Fed would begin raising interest rates supported by some upbeat commentary on Westpac Banking Corporation 2.1% Telstra Corporation Limited 2.0% CSL Limited 1.9% Insurance Australia Group Limited 1.8% Brambles Ltd 1.7% Suncorp Group Limited 1.7% QBE Insurance Group Limited 1.7% Resmed Inc 1.5% Seek Limited 1.5% Sonic Healthcare Limited 1.4% current economic trends. As the prospect of a US rate hike loomed larger, the US$ strengthened and commodity prices weakened further, lingering concerns about the growing risks in emerging market economies gave some pause for thought and markets sold off in the lead up to the Fed s interest rate decision in mid- December. With confirmation that the US rate tightening cycle had begun, investors reacted positively to the encouraging implications for economic conditions and reassurances that the pace of tightening would be measured and gradual. In the Australian market the banking sector was a key beneficiary as market participants rushed back into the banks taking advantage of attractive yields and an apparent belief that extremely low global interest rates were likely to persist for a lot longer. With a combined index weight of more than 20%, the sharp rallies in Commonwealth Bank (+18%) and Westpac Bank (+14%) over the quarter shaved almost 3% from the relative performance of the domestic equity portfolio on their own. In combination with ANZ and National Australia Bank, the big 4 combined to reduce performance by 370bp. It is not completely clear what stoked such a rally in the banks however there are a australianethical.com.au 3

4 few theories: (i) investors taking advantage of depressed bank share prices following the correction observed in the September quarter; (ii) increased comfort with yield on the basis that loose monetary conditions and low interest rates are likely to persist for some time yet; (iii) possibly bolstered confidence in the resilience of the Australian economy with less fear about the potential for sharply higher bad debt charges; (iv) less concern about bank capital positions; (v) investors seeking safety in large, liquid investments in an increasingly volatile market. As mentioned earlier, most other sectors performed well for the Fund, with good performances from our larger overweight positions in Healthcare, IT and Utilities. Healthcare in particular was a standout performer adding 120bp to the Fund s performance. Strong gains in Sirtex, Fisher & Paykel and Cochlear helped offset ongoing weakness in Primary Healthcare. Within the IT space TechnologyOne continues to push through new highs reporting a 31% share price gain during the December quarter as investors take comfort in the company s consistent double digit earnings growth, strong cash generation and balance sheet, strategic market positioning and positive outlook. The strong performance from the Utilities sector was largely driven by powerhouse performances from our NZ based renewable energy investments Meridian Energy and Mighty River Power. With signs of stabilising electricity demand in NZ, rising wholesale power prices and good progress towards eliminating excess generation capacity the outlook for the NZ gentailers remains positive. australianethical.com.au 4

5 Our Ethical Approach Australian Ethical is a specialist ethical fund manager. By investing responsibly in wellmanaged ethical companies, we believe we can deliver both competitive financial performance to our clients and positive change to society and the environment. Significant Performers (For the quarter) Best Total Return Contribution Worst Seek Limited Slater & Gordon Ltd CSL Limited Primary Health Care Limited Westpac Sims Metal Banking Management Corporation Limited Total Return Contribution The performances are ranked based on the effect within the Fund, rather than on the percentage movement within the price. Dividends paid are taken into account. Past performance is not an indicator of future performance. Asset Allocation Sector Allocation australianethical.com.au 5

6 Key information Responsible entity: Minimum initial investment: Distribution: APIR: Australian Ethical Investment Ltd $25,000 (wholesale)^ $5,000 (retail) Six-monthly AUG00084AU ARSN: Contribution fee: Establishment fee: Withdrawal fee: Termination fee: Performance fee: Indirect cost ratio: 0.95% pa (wholesale) 2.2% pa (retail) Buy sell spread: % Platforms: Fund size: Objective: Structure: Freedom of Choice, SmartWrap, Simple Wrap and Lifetrack $66.1 Million To provide long term growth through investment in listed companies on Australian and internal stock exchanges that meet the Australian Ethical Charter. The Fund is an open ended public unit trust. A full explanation of all of the fees and costs that you may be charged for investing in the Fund is provided in the Fund s Product Disclosure Statement available from our website. For more information Phone enquiries@ australianethical.com.au Web australianethical.com.au Why invest ethically? Aligning values with investments You probably already understand the importance of having a portfolio that matches your appetite for risk, but equally, if not more important, is holding a portfolio that reflects your values. For example, if you value the provision of fair working conditions (and no child labour) then it s important to invest in funds that negatively screen out stocks on this basis. Portfolio diversification Ethical funds in particular, often invest in stocks that are not covered by many fund managers and brokers. Good for the world Your investments can help build a new low-carbon economy, fund medical and technology breakthroughs, efficient transport and more. Units in the managed funds are offered and issued by Australian Ethical Investment Ltd ABN , AFSL Our Product Disclosure Statements (PDS) and Financial Services Guide are available from our website or by phone and should be considered before making an investment decision. This information has been prepared without taking account of your individual investment objectives, financial situation or needs. Before acting on it, you should consider obtaining financial advice that is tailored to suit your personal circumstances. Australian Ethical is a registered trademark of Australian Ethical Investment Ltd. australianethical.com.au 6