Diversified Shares Fund

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1 July 2015 Diversified Shares Fund About Diversified Shares Fund Rated as Investment Grade by Lonsec. Australian investments generally have a market capitalisation greater than 200th ranked stock listed on the ASX. Has outperformed its benchmark after fees since inception. Only consists of companies that have passed Australian Ethical s positive and negative screens, based on the Australian Ethical Charter. Certified by the Responsible Investment Association Australasia. Performance Returns % 1 month 3 months 1 year 3 years 5 years 10 years Since inception Fund (Retail)* Melded Benchmark~ Relative Performance Fund (Wholesale)^ n/a n/a 20.9 Melded Benchmark~ n/a n/a 22.5 Relative Performance n/a n/a Alternative benchmarks ASX 200 Industrials ASX MSCI Global Climate n/a n/a MSCI World * Inception Date (Retail): 3 November 1997 ^ Inception Date (Wholesale): 23 January 2012 ~ AEDSF melded benchmark is constructed based on strategic asset allocation. Current composition is 75% ASX 200 Industrials and 25% MSCI Global Climate. Past performance is not an indicator of future performance. australianethical.com.au 1

2 Investment Commentary The Fund underperformed its melded benchmark by 1% in July. The Australian market, proxied by the ASX200 Accumulation Index returned 4.4% in July with Industrials significantly outperforming Resources and large capitalisation companies outperforming small capitalisation companies. While the Fund benefited from strong gains in healthcare names, a rally in the large banks weighed heavily on performance. The drama playing out in Greece remained forefront of investors minds in July as the Greek government lurched from outright defiance in the face of its creditor s demands to a seemingly meek capitulation. Despite a resounding no vote in the national referendum on the country s willingness to accept further austerity, the Syriza- led government promptly acquiesced to further austerity after finding itself in a corner and in desperate need of funding. With fears of a messy Greek exit from the Eurozone temporarily allayed, markets staged a relief rally. The Chinese share market experienced its largest one- day fall in over eight years during the month. The government reacted swiftly to the volatility initiating a raft of unconventional measures to stem the decline including a ban on short selling, forced share purchases by SOE s, and direct credit support from the central bank. With anxiety already building with respect to the broader health of the Chinese economy a sharp correction in the Chinese stock market provided fuel for commodity bears adding further pressure to the already- depressed resources sector. In Australia, debate has raged about the extent to which residential property prices, Top Holdings CSL Limited 2.0% Telstra Corporation Limited 2.0% Westpac Banking Corporation 2.0% Resmed Inc 1.8% Suncorp Group Limited 1.8% QBE Insurance Group Limited 1.8% Brambles Ltd 1.7% Insurance Australia Group Limited 1.7% Medibank Private Limited 1.5% ASX Limited 1.5% particularly in Sydney and Melbourne, have breached bubble territory. Concurrently, The RBA is battling to engineer a smooth transition from the mining economy to services and manufacturing with the blunt tool kit that monetary policy provides while simultaneously seeking to avoid further stoking of the real estate bubble. To pave the way for further interest rate cuts, if deemed necessary, regulatory bodies such as APRA have begun leaning on the country s major lending institutions to curb investment lending and bolster their own capital reserves against their mortgage books. Mortgage risk weight australianethical.com.au 2

3 demands from APRA were ultimately not as onerous as expected, and the banks happily began raising interest rates on investor loans to help offset some of the return dilution as they set about recapitalising. While the major banks enjoyed a modest rally in their share prices in response, the regional banks including Bendigo and Bank of Queensland experienced far more substantial share price gains as the market speculated on the possibility they could gain some share of the residential mortgage market as the majors clamped down on investors. The healthcare sector was a standout in July contributing all three of the Fund s top performers. Blood product specialist CSL gained 14% despite a lack of specific news flow. However the company reports in US$ and the sharp drop in the A$/US$ cross rate during July was probably the primary catalyst for the share price rally. Hearing device company Cochlear also rose 14% on a combination of a broker recommendation upgrade on the back of some positive survey data, a win in a Chinese tender for supply of Cochlear implants which followed two similar wins and leverage to the depreciation of the A$ relative to the US$. Respiratory device maker Resmed gained 10% in July after reporting a strong set of fourth quarter numbers. The largest detractor from performance was medical services company Primary Health Care. Primary cut its FY15 earnings guidance after experiencing softer patient volumes across its domestic medical businesses on top of already declining productivity and a reimbursement freeze. Metal recycler Sims Metal Management followed closely behind with a share price decline of 9% as the market fretted about the demand for scrap metal and pricing. With the resource- hungry Chinese market showing signs of slowing, steel prices continuing to fall, and the cost of producing steel from virgin material, plunges in investors fears seem justified. Rounding out the bottom three was waste management company TPI. TPI s woes have been well documented so the appointment of a new CEO with no waste- management experience and no prior experience as a CEO of a publicly listed company did little to soothe nervous investors. australianethical.com.au 3

4 Our Ethical Approach Australian Ethical is a specialist ethical fund manager. By investing responsibly in well- managed ethical companies, we believe we can deliver competitive financial performance to our clients and positive change to society and the environment. Significant Performers (For the month) Best Total Return Contribution Worst Total Return Contribution CSL Limited 14.4% 0.3% Cochlear Limited 13.9% 0.2% Resmed Inc 10.0% 0.2% Primary Health Care Limited - 8.7% - 0.1% Sims Metal Management - 9.2% - 0.1% Transpacific Industries - 7.8% - 0.1% The performances are ranked based on the affect 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 4

5 Portfolio Manager Key information Responsible entity: Minimum initial investment: Distribution: APIR: Australian Ethical Investment Ltd $25,000 (wholesale)^ $1,000 (retail) Six- monthly AUG0004AU ARSN: Contribution fee: None Mason Willoughby- Thomas Mason has over 13 years experience in the financial services industry. Establishment fee: None Withdrawal fee: None Termination fee: None Performance fee: None Indirect cost ratio: 0.95% pa (wholesale) 2.50% pa (retail) Buy sell spread: % Lonsec rating: Platforms: Fund size: Objective: Investment Grade AXA North, BT Wrap, Colonial FirstWrap, Emerald, Freedom of Choice, Macquarie, Netwealth, Oasis, Spectrum (SMF) $374.1 Million To provide long- term growth through investment in listed companies on Australian and international stock exchanges that meet the Australian Ethical Charter. For more information Phone australianethical.com.au Web australianethical.com.au Structure: 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. ^ Direct investors must maintain a minimum $500,000 investment across Australian Ethical s managed funds and a minimum of $25,000 in the Diversified Share Fund. 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 5