Unit Trusts Marks & Spencer Ethical Fund Interim Manager’s Report March 2011 (unaudited) Contents Page(s) Manager’s Investment Report 2-4 Portfolio Statement 5-7 Net Asset Value per Unit & Comparative Table 8 Total Expense Ratio 9 Authorised Status 9 Certification of Financial Statements by Directors of the Manager 9 Statement of Total Return 10 Statement of Change in Net Assets attributable to Unitholders 10 Balance Sheet 11 Marks & Spencer Ethical Fund Manager, Registrar, Directors of the Manager Trustee Dealing, Administration Kenneth Culley (Chairman), State Street Trustees Limited and Marketing Christine Haslam 525 Ferry Road Marks and Spencer Unit (resigned February 2011), Edinburgh EH5 2AW Trust Management Limited Colin Kersley (Chief Executive), Authorised and regulated by Authorised and regulated Phillip Scott, the Financial Services Authority by the Financial Services Paul Shingler, Auditors Authority Justin Turner KPMG Audit Plc Investor Helpline: (appointed July 2010), Saltire Court 0808 005 55 55 or Steve Conley 20 Castle Terrace +44 1244 688632 if calling (appointed December 2010), Edinburgh EH1 2EG from abroad. Crawford Prentice Lines are open 8am to 8pm (appointed March 2011), Monday to Friday, 9am to 5pm David Wells on Saturdays and 10am to 4pm (Non-Exective Director) bank holidays. (Closed on (resigned October 2010) Sundays, Christmas Day, Boxing Day and New Year’s Investment Adviser Day). Please be aware that HSBC Global Asset opening hours may be Management (UK) Limited restricted over the Christmas 78 St James’s Street period. Please contact us for London SW1A 1EJ details. Calls recorded. HSBC Global Asset Head Office and Management (UK) Limited Registered Office: directly manage a proportion of Kings Meadow the fund and subdelegate the Chester CH99 9FB remaining fund management to Registered in England the following specialist adviser: No. 2253009 Jupiter Asset Management Limited 1 Grosvenor Place London SW1X 7JJ The above-listed investment advisers are authorised and regulated by the Financial Services Authority PAGE 1 Manage r’s Investment Report This section gives you an opportunity to see whether we have made any changes to the objectives we give our investment managers. If no change has occurred it reiterates the objectives laid down for the manager. Our Objectives and Methods We develop a close working partnership with our investment advisers, and their performance is The Fund’s objective is to provide investors regularly monitored by the HSBC Group with long-term capital growth by investing in Investment Committee. predominantly UK companies that meet the social, environmental and ethical criteria defined The percentage of the Fund allocated to each in the Investment Policy. investment adviser and in uninvested cash as at 31 March 2011 are shown below. The Investment Policy is to invest in companies HSBC Global Asset Management that make a positive contribution to the (UK) Limited 61.3 % community or environment and avoid investing in companies that have a poor environmental Jupiter Asset Management Limited 36.8 % record and companies that are primarily involved Cash 1.9 % in the following activities: armaments, gambling, the fur trade, tobacco and pornography. Review of the period to The Fund will also avoid investing in companies 31 March 2011 that conduct or commission animal testing for Economic and Market Review cosmetic or toiletry purposes or make use of child labour. During the last quarter of 2010, economic data was generally encouraging, with the US in The Fund may use derivative instruments particular seeing accelerating growth. Central (options, futures and contracts for difference) banks in the developed world maintained very and forward transactions in a currency for the loose monetary policies and the US resumed its purpose of efficient portfolio management. quantitative easing programme. Meanwhile, in These instruments can therefore be used to China, fears of rising inflation led to the first of a reduce risk, reduce costs, or generate additional series of rate rises. Sovereign debt worries capital or income with no, or low levels, of risk. re-emerged in Europe, this time centred on Ireland. Towards the end of November, the EU, Percentage Growth 31/03/06 to 31/03/07 to 31/03/08 to 31/03/09 to 31/03/10 to 31/03/07 31/03/08 31/03/09 31/03/10 31/03/11 N/A -13.7% -31.2% 42.7% 8.3% This information relates to the past, and past performance is not a reliable indicator of future results. All the above figures are on a bid to bid basis, net income reinvested. The performance figures exclude the initial charge of the Fund. Source: Lipper Hindsight. PAGE 2 supported by the IMF and the UK, signed off an this was mainly attributed to the adverse weather €85bn bailout package for Ireland to support the conditions. Stockmarkets were surprisingly country’s banks and public finances. This led to resilient over the period, and generally continued fears of contagion to other European countries, in their upward trend. particular Spain and Portugal, and there were threats of further downgrades from the rating Portfolio Review agencies. Despite this, global equity markets In HSBC Global Asset Management’s part of the performed very strongly in the final quarter of the Fund, sector allocation was positive, largely due year, as economic data improved and investor to the overweight position in general financials. risk appetite returned. Company results generally The Fund’s performance was helped by shares in met expectations and the rally was led by cyclical food producers and life insurance whereas stock sectors, particularly basic industries and selection in the oil & gas producers made a negative resources, while financial stocks were also strong. contribution. The main positive contributors were Premier Foods, Schroders and John Wood The beginning of 2011 was more volatile, and the Group. The main negative contributors were the markets were driven by non-economic events. zero holdings in Royal Dutch Shell, Anglo The year began with unrest in the Middle East, American and Rio Tinto. The Fund does not hold where protests spread across the region, leading these stocks due to investment constraints. to the resignation of President Mubarak in Egypt and turmoil in Libya. Apart from political In Jupiter’s part of the Fund the majority of the uncertainty, fears about disruption to energy relative underperformance also came from the supplies led to record oil prices. In March, a huge zero holding in the strongly performing BHP earthquake and tsunami devastated the north Billiton, Anglo American, Rio Tinto and east coast of Japan, causing widespread loss of AstraZeneca. The overweight position in Bunzl life and economic disruption. There was also also had a negative impact on performance. continuing uncertainty in the Eurozone about the Positive contribution since the start of 2011 came debt levels of the peripheral nations and this led from the overweight positions in BG Group, to the collapse of the Portuguese government Morgan Crucible Company and Ricardo. During and the start of negotiations for a possible bailout the period under review a new investment was of the country by the EU. Elsewhere, the focus made in Compass Group, where good growth was on rising inflation, leading the European prospects are expected, while elsewhere profit Central Bank to signal a rate rise in April, and was taken in Vodafone Group, GlaxoSmithKline many emerging nations to raise rates, most and HSBC Holdings following strong notably China. In the UK, the Bank of England performance. kept interest rates unchanged at 0.5%, although The largest purchases in the period were in March three members of the Monetary Policy Compass Group and Tullow Oil in Jupiter’s Committee voted to increase rates. Inflation portfolio and Fresnillo and Tullow Oil in HSBC remained a concern, as CPI inflation was 4.4% in Global Asset Management’s portfolio. The largest February, well above the Bank of England’s sales were Xstrata plc and Croda for Jupiter and target. UK GDP growth unexpectedly moved into Croda International plc and Xstrata plc for HSBC. negative territory in the fourth quarter of 2010, but PAGE 3 Outlook The UK corporate sector remains in good shape with modest increases in sales and rising cash flows. Many companies have increased dividends, reduced debt or are investing in developing their business. We expect that returns for share owners will continue to be positive in 2011 with continued modest sales growth and cash flow gains from operational gearing, and lower finance costs resulting from debt being repaid and existing bonds being refinanced at lower yields. Analysts are expecting good earnings growth in 2011 and 2012. Inflation has risen and has a mixed impact with some companies that have commodity inputs facing cost pressures. The investment advisers in the period under review were: HSBC Global Asset Management (UK) Limited HSBC invest in companies with attractive valuations in the FTSE® 350 index (excluding investment trusts) which have passed the environmental, social and ethical criteria of the Fund. Jupiter Asset Management Limited Jupiter invest in ‘good governance’ companies that are actively managing their environmental and social impacts and in companies providing solutions to clean energy, waste management, water management, sustainable living, green transport and environmental services. FTSE ® is a trademark of the London Stock Exchange plc and The Financial Times Limited and is used by FTSE ® International Limited (FTSE ®) under licence. The FTSE ® indices are calculated by FTSE ® and all rights in and to these indices vest in FTSE ® and its licensors. FTSE ® does not sponsor, endorse or promote our products. PAGE 4 Portfolio Statement This section details all the different companies in which the Fund invests, by sector. It also shows the number of shares held, the percentage each company represents of the Fund as a whole and the value of those shares at the end of the period (shown under bid value).