AERION FUND MANAGEMENT LIMITED
STEWARDSHIP CODE DISCLOSURES

SEPTEMBER 2010

The following statement has been prepared to demonstrate Aerion Fund Management's compliance with the Stewardship Code, which was launched by the Financial Reporting Council in July 2010.

Section 1. Statement of policy on Corporate Engagement and Stewardship

Background

Aerion Fund Management Ltd is wholly owned by its sole client the National Grid UK Pension Scheme ('the Scheme'), and acts as the Scheme's Principal Investment Manager. The Trustees have delegated to Aerion the authority:

i. To exercise votes on behalf of the Trustees in accordance with the Scheme's Responsible Investment Policy, where the Trustees have adopted the voting principles recommended by the National Association of Pension Funds (NAPF), of which the Scheme is a member;

ii. To determine the circumstances in which meetings should be held with investee companies;

iii. To determine the strategy on intervention, and the circumstances in which further action should be taken, and what form that action should take, including how to vote.

Aerion manages investments directly for the Scheme and also appoints external managers in a number of asset classes, but Aerion retains the responsibility for ensuring the Trustees' Responsible Investment Policy is implemented, by voting all holdings and overseeing all engagement activity on behalf of the Scheme.

The Trustees' Responsible Investment Policy generally applies only to UK listed companies. The Trustees require Aerion to vote all UK holdings in line with their Policy, but only expect votes for overseas investments to be cast if failure to do so could adversely impact the value of the investment.

Engagement Policy

Aerion's investment process incorporates regular meetings with investee companies, ideally at 'one to one' but otherwise at group meetings, with the objective of maintaining an ongoing dialogue with their senior management. Aerion's ability to obtain company management time for such meetings is limited by the modest shareholdings held by the Scheme. The focus of these meetings is to challenge management over corporate strategy and performance, which is monitored by Aerion's investment management team with the primary aim of optimising portfolio returns on the Scheme's behalf. The meetings are also a platform for discussion of corporate governance issues, and a means of communicating to the company any concerns. Thus, Aerion's strategy is in effect to be continuously engaged with those companies in which the Scheme holds investments. The managers responsible for the UK equity portfolio review their portfolio at a weekly meeting, in conjunction with the Head of Equities, and should there be companies which require a more pro-active engagement approach, the Head of Equities will decide upon a suitable strategy. A quarterly review of engagement activity is undertaken by the Chief Executive, Head of Equities and the UK fund managers.

Aerion implements the Trustees' Corporate Governance policy by using a research and screening service provided by ISS, incorporating the voting principles adopted by the NAPF, to highlight potentially contentious issues. Aerion casts votes in respect of all UK company AGMs and EGMs. Engagement with investee companies on such contentious issues is routinely undertaken by ISS prior to publication of their research in order to seek clarification of the background to them before they distribute their recommendation.

Potential Conflicts of Interest

Aerion holds an 'in line' weighting in National Grid shares on behalf of the Scheme, and seeks guidance from the Trustees in respect of any corporate governance or other concerns. Since Aerion acts only for the Scheme, there are no other potential conflicts of interest.

Evaluating and Reporting

Aerion reports to the Trustees on a quarterly basis, including details of occasions where votes are cast against company recommendations: Aerion reports all instances of intervention resulting from corporate performance issues. Aerion has not been asked to report routinely the results of either contentious or non-contentious votes. The Trustees explicitly recognise the difficulty of evaluating the impact of their corporate governance policy and Aerion's engagement generally, and have not to date agreed with Aerion any specific evaluation methodology.

Section 2. Disclosure on the specific information listed under Principles 1, 5, 6 and 7.

Aerion manages or oversees a variety of differing equity strategies, but concentrates its engagement and stewardship activities on its UK equity investments. The following answers therefore relate to UK companies held in Aerion portfolios only.

Principle 1

Disclosures should include:

• how investee companies will be monitored.
In order for monitoring to be effective an active dialogue may, where necessary, need to be entered into with the investee company's board:

The managers monitor company announcements, selected stockbroker research and press commentary on all of the companies in which they invest in order to ensure that the investment thesis that justified the original investment remains intact. Private meetings with company executives are occasionally held at Aerion's offices or elsewhere, either with Aerion employees alone, or in conjunction with a small number of other in-house pension fund managers. Aerion's managers will also attend group meetings with companies from time to time. Such meetings usually focus on matters of corporate strategy and tactics, but if necessary, items relating to corporate governance will be aired. Should the managers conclude a more active dialogue is required, the Head of Equities will become involved.

• the strategy on intervention;

The strategy on intervention will vary on a case-by-case basis, as determined by the Head of Equities. Sometimes engagement can be conducted by Aerion alone, and on other occasions collective engagement (using the auspices of the NAPF, in particular) is more appropriate. The aim is always to ensure that the best interests of the Scheme members are protected.

• internal arrangements, including how stewardship is integrated with the wider investment process

Aerion's review of potential investments includes a subjective judgement of the suitability of corporate governance practices at the relevant company. In addition, managers will study research produced by ISS on any resolutions at General Meetings that are contrary to the NAPF principles.

• the policy on voting and the use made of, if any proxy voting or other voting advisory service, including information on how they are used;

Aerion exercises the votes on all UK holdings in line with the Trustees' Guidelines of supporting the voting principles recommended by the NAPF. Research from ISS is used to help reach an appropriate conclusion.

• the policy on considering explanations made in relation to the UK Corporate Governance Code

All explanations are considered on a case by case basis, by a manager who is familiar with the company concerned, using input from ISS. Our prejudice is normally to support the principles of the Code and to resist exceptions, as we usually believe this to be in the long term interest of Scheme members.

Principle 5

Institutional investors should disclose their policy on collective engagement

Aerion has limited resources and only a modest shareholding in most investments, and is therefore eager to participate in collective engagement if, in its managers' judgement, intervention is required. Aerion seeks to support the work of the NAPF on corporate governance and would normally expect to initiate collective engagement via the NAPF.

Principle 6

Institutional investors should seek to vote all shares held. They should not automatically support the Board

Aerion implements the Scheme's Trustees' policy of voting all UK holdings, and do not automatically support the Board.

If they have been unable to reach a satisfactory outcome through active dialogue then they should register an abstention or vote against the resolution. In both instances, it is good practice to inform the company in advance of their intention and the reasons why.

Aerion regularly abstains or votes against resolutions, and always writes to the company explaining the reasons for its decision.

Institutional investors should disclose publicly voting records and if they do not explain why.

From October 2010, Aerion will be publishing on its website, on a quarterly basis, votes cast on behalf of the Scheme.

Principle 7

Those that act as agents should regularly report to their clients details of how they have discharged their responsibilities. Such reports will be likely to comprise qualitative as well as quantitative information. The particular information reported, including the format in which details of how votes have been cast are presented, should be a matter for agreement between agents and their principals.

In its quarterly investment report for its client, Aerion provides a list of all votes cast, together with a brief commentary on abstentions and votes cast against the Board's recommendation or against NAPF policy. Aerion also provides an annual written assessment of its voting and engagement activity to the Scheme's Investment Committee.

Those that sign up to this Code should consider obtaining an independent audit opinion on their engagement and voting processes having regard to the standards in AAF 01/06 and SAS70. The existence of such assurance certification should be publicly disclosed.

It is not Aerion's current intention to seek an independent audit opinion on its engagement and voting processes.

Contact

This disclosure has been prepared by Stuart Fowler, Head of Equities at Aerion Fund Management Limited. He should be the first point of contact for anyone interested in collective engagement.
stuart.fowler@aerionfm.com
Direct Line: 020 7269 4947