Semi-Annual Report Shareholder Letter

Dear Friends,

The 40th anniversary of Earth Day is a reminder of how far the world has come since 1970. From Kyoto to Copenhagen, global leaders now recognize the ecological crisis at some level. However, the gap between rhetoric and action is still too wide and requires building a bridge before the storms get worse.

The resistance to needed action is rooted in an incomplete understanding of economics. We know that unlimited growth in a finite world may eventually lead to ecosystem collapse, but the framework of our modern economic system depends upon the assumption of exactly that—unlimited growth. A better understanding of economics comes when we appreciate the common etymology of two words—economy and ecology. "Economy" is a derivation of the Greek word meaning "household management." The term "ecology" shares the "eco" derivation from household, or home. The concept of household that is embedded in our word "economy" reminds us that all of economics is ultimately personal and concrete, not an abstraction. O ur economic household must operate within the limits of the ecosystem.

Portfolio 21's investment thesis is that ecological limits will increasingly affect businesses, and those that are proactively planning and adapting will benefit at the expense of those who deny or delay. Through our study of economics and ecology we strive to manage an investment portfolio with attractive characteristics in an increasingly resource-constrained world. We seek companies that meet our environmental selection criteria with respect to products and services, investments, business model, leadership, and operations. We formed our investment thesis in 1997, developed our company selection criteria and scoring system in 1998, and launched Portfolio 21 on September 30, 1999. Since then, we have essentially been proving this thesis through the implementation of our investment strategy. One of the most fascinating aspects of investment management is balancing the tension between a long-term outlook with the immediacy of the markets and the need to make decisions. Ultimately, no matter how much time and effort we spend to develop theories and perspectives on the future, we must make a decision in the moment to buy or sell a particular stock at a particular price. This is what separates investment managers from commentators, op-ed writers, and academics.

The subject of ecological limits lends itself well to long-term thinking accompanied by modeling, projections, and scenarios. However, in managing the Fund, we need to be sure we are combining these long-term perspectives with a pragmatic orientation. After all, it is our job to provide competitive returns to our investors.

There are several practices that have been effective as we balance our long-term thesis against today's markets.

1. Evaluation and Scoring

Every company that is selected for investment in Portfolio 21 is evaluated extensively using company materials, third party research services, direct dialog with the company, and material from various non-governmental organizations and others. Our proprietary system allows us to quantify each aspect of the research with a numerical score. It is not surprising that no company receives a perfect score. Rather, we have set a "hurdle" score as well as a "gray area" in which we may or may not accept a company. The mechanics are less important than the concept. By virtue of the fact that we have to score every company, we are forced to examine the real activities of the company—not what they might choose to do in the future or be forced to do, but what they are actually doing now.

2. Key Questions

Several years ago, we recognized that the proliferation of sustainability reporting and corporate social responsibility, while welcomed, carries with it the tendency for companies to self-select the information they share with the public. This can sometimes mean that a company may ignore its most significant impacts while focusing on symbolic or marginal activities. As an internal discipline, we always begin our evaluations with an industry overview in which we ask the question, "What should this company be doing?" When we look at what the company is actually doing, it is in relation to our framework. In this way, we set priorities and weightings of information rather than accepting the company's presentation (which may be biased to enhance the company's image).

3. Global Perspective

We had initially planned to launch a U.S. equity fund, but we quickly discovered that there were not enough U.S. companies that met our criteria. Portfolio 21 was launched as a global fund and this has been advantageous for many reasons. In terms of our discipline and the ability to balance long-term thinking with immediate decision making, it has been invaluable that a global perspective has been mandated by virtue of our original decision. Rather than being an additional consideration, a worldwide perspective is part of our daily routine.

We can't ignore what is happening on a daily basis because part of our job is to take advantage of market opportunities and to avoid the pitfalls of overly exuberant or depressed prices. However, at the same time, it is imperative that we remain focused on the long term, knowing that ultimately economics and ecology must converge.

All of us at Portfolio 21 really enjoy hearing from our shareholders. Please drop us a line if you have a moment. Our address is welcome@portfolio21.com. If you are not already receiving our quarterly newsletter, please feel free to sign up.

Leslie Christian, Co-founder and Carsten Henningsen, Co-founder

See Portfolio 21's complete standardized performance. Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling 877.351.4115. Performance data quoted does not reflect the 2.0% redemption fee on shares held less than 60 days. If reflected, total returns would be reduced.

Past performance does not guarantee future results. Portfolio 21 invests in foreign securities, which are subject to the risks of currency fluctuations, political and economic instability and differences in accounting methods. Investing in foreign securities is riskier than investing in domestic securities. The Fund invests in smaller companies, which involve additional risks such as limited liquidity and greater volatility. The Fund's environmental policy could cause it to make or avoid investments that could result in the portfolio under-performing similar funds that do not have an environmental policy. There are no assurances that the fund will achieve its objective and/or strategy. Please refer to the prospectus for more complete information including risks, fees and expenses.

The information above represents the opinions of Portfolio 21 Investments, is subject to change, and any forecasts made cannot be guaranteed.

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