Royal Borough of Kensington and Chelsea Pension Fund

LONGVIEW PARTNERS

Royal Borough of Kensington and Chelsea Pension Fund

Fourth Quarter 2012

Quarterly Update

LONGVIEW PARTNERS

2

Table of Contents

The Organisation

Past Performance

The Future

Appendix

LONGVIEW PARTNERS

3

The Organisation

LONGVIEW PARTNERS

4

Longview Partners Update – Q4 2012

Structure

– In October 2012, four additional employees of Longview Partners were awarded a Partnership position:

Marina Lund (Client Services and Business Development), Nigel Masding (Research), Luke Taylor

(Research) and Stephen Burgess (Research).

– In October 2012, in recognition of the growing maturity of the business, an Executive Committee was

established by the co-Founders. The role of the Committee is to work with the Board of Longview

Partners (Guernsey) Limited to ensure that the management structure of the organisation keeps pace

with the Firm’s development and that long-term accountability is clear.

People

– During the fourth quarter we added one Research Analyst, Alexander Philipps, to our investment team.

– Prior to joining Longview, Alexander spent 4 years working as a Research Analyst at Sloane Robinson,

focusing on Asian equities. Alexander obtained an MEng in Engineering Science from Christ Church,

Oxford.

– In keeping with the current structure, Alexander has joined the team as a generalist.

Investment Process

– There have been no changes to the investment process.

30th September 2012 – 31st December 2012

LONGVIEW PARTNERS

5

The People

Compliance (Guernsey)

Ramzi Rishani (CIO) Keith McDermott (CEO)

Alistair Graham Marina Lund

Mark Chapman Dan Langan

Alistair Graham

Jonathan Dudding

Paul Crinion

Nigel Masding

Luke Taylor

Stephen Burgess

Alexander Philipps

Trading Research Operations

Dan Langan

Sheila Tickner

Marketing / Client Services

Compliance (London)

Finance / Administration

Board of Directors - Longview Partners (Guernsey) Limited

Risk & Portfolio Analysis

Board of Directors - Longview Partners (UK) Limited

Technology

Phil Corbet

Tony Le Tissier

Mark Chapman

Murat Gunc

James Williams

Ken Campbell

Ben Welsher

Greg Wiles

Jonathan Rodley

Ed Nix

Simran Sagoo

Ben Turley

Prateek Baxi Michael Hunt

Marina Lund

Jessica Cameron

Nizam Memon

Simon Blondel

Dan Langan

Steffi Gnanamuthu

Emma Davies

Emma Turnbull

Business Risk & Development

Douce Neilson

Neil Laine

Emma Barrett

Richard Angliss

Client Services (Guernsey)

Executive Committee

Source: Longview Partners. Data as of close, 31st December 2012.

Members of Longview Partners LLP and equity owners identified in bold. These Members may be referred to as Partners.

LONGVIEW PARTNERS

Arthur Andersen

Standard Life

JPM & MBA

/Goldman

Sachs

McKinsey

Source: Longview Partners. Data as of close, 31st December 2012.

*Members of Longview Partners LLP and equity owners. These Members may be referred to as Partners. 6

Research Team

Pre-1996 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Ramzi

Rishani*

Nigel

Masding*

Alistair

Graham*

Jonathan

Dudding*

Luke

Taylor*

Paul

Crinion*

Stephen

Burgess*

Head of

Research

Research

Analyst

Research

Analyst

Research

Analyst

Research

Analyst

Research

Analyst

CIO

Sceptre Investment Management

Goldman Sachs Longview

Longview

First State Investments HSBC AM Longview

Oxford

Analytica

Scottish Widows Schroders Longview

Physical Commodity Trader Societe Generale Longview

Longview

Schroders Lancaster IM Longview Putnam Gartmore Investment Management

Alexander

Philipps

Research

Analyst Sloane Robinson

LONGVIEW PARTNERS

7

Past Performance

LONGVIEW PARTNERS

8

Portfolio Performance

Account Value 31st December 2012: £121,338,760

9th November 2010 – 31st December 2012

NB: Performance is shown gross of fees

* Annualised

Source: Longview Partners and Bloomberg using WM/Reuters FX Rates. Data as of close, 31st December 2012.

Q4

2012

1 Year to

31-Dec-12

Inception to

31-Dec-12*

The Royal Borough of Kensington and Chelsea 3.26% 18.26% 10.17%

MSCI World (GBP) TR Net 1.81% 10.74% 4.78%

Difference 1.45% 7.52% 5.38%

LONGVIEW PARTNERS

9

Top 10 Relative Contributors / Detractors – Q4 2012



Delphi Automotive 0.68% CA -0.48%

Schneider Electric 0.38% BB&T -0.42%

Bank of New York Mellon 0.35% Quest Diagnostics -0.29%

Fidelity Natl Info Services 0.31% Accenture -0.25%

SAP 0.23% Laboratory Corp of America -0.19%

TE Connectivity 0.18% Hewlett-Packard -0.19%

Sanofi 0.17% Serco -0.16%

Bayer 0.16% Covidien -0.16%

WPP 0.12% Zimmer Holdings -0.14%

Fiserv 0.12% G4S -0.11%

Contributors to and detractors from performance relative to the MSCI World (Local)(TR Net) Index, local currency terms, for the period shown.

Top 10 DetractorsTop 10 Contributors

LONGVIEW PARTNERS

10

Top 10 Absolute Contributors / Detractors – Q4 2012



Delphi Automotive 0.79% CA -0.46%

Schneider Electric 0.46% BB&T -0.30%

Bank of New York Mellon 0.45% Quest Diagnostics -0.21%

Fidelity Natl Info Services 0.43% Hewlett-Packard -0.19%

SAP 0.35% Accenture -0.14%

Sanofi 0.28% Laboratory Corp of America -0.13%

Bayer 0.27% Serco -0.12%

TE Connectivity 0.26% G4S -0.11%

Fiserv 0.22% Covidien -0.06%

WPP 0.22% Zimmer Holdings -0.04%

Absolute contributors to and detractors from performance, local currency terms, for the period shown.


LONGVIEW PARTNERS

11

Performance Attribution (Sector) – Q4 2012



Longview Index Difference Selection Allocation Total

Energy 0.00% 10.58% -10.58% 0.00% 0.58% 0.58%

Materials 0.00% 6.88% -6.88% 0.00% -0.17% -0.17%

Industrials 16.52% 10.85% 5.67% -0.64% 0.24% -0.40%

Consumer Disc. 21.78% 10.89% 10.89% -0.12% 0.51% 0.40%

Consumer Staples 0.00% 10.88% -10.88% 0.00% 0.28% 0.28%

Health Care 21.52% 10.69% 10.83% 0.03% -0.26% -0.23%

Financials 13.24% 19.77% -6.53% -0.81% -0.38% -1.18%

IT 26.94% 12.04% 14.90% 1.77% -0.87% 0.90%

Telecoms 0.00% 3.93% -3.93% 0.00% 0.30% 0.30%

Utilities 0.00% 3.49% -3.49% 0.00% 0.13% 0.13%

Total 100.00 % 100.00 % 0.00 % 0.23% 0.37% 0.60%

The Index used to calculate performance attribution is the MSCI World (Local)(TR Net). Sub-Indices are MSCI Sector Indices.

Average Weight Outperformance Source

LONGVIEW PARTNERS

12

Top 10 Relative Contributors / Detractors – Inception to Date



Japan Tobacco 1.74% Hewlett-Packard -2.49%

Accenture 1.27% Cisco Systems -0.92%

Pfizer 1.23% BB&T -0.45%

Time Warner 1.12% CA -0.41%

TJX Companies 0.95% Bank of New York Mellon -0.39%

Bayer 0.91% BMC Software -0.35%


Compass 0.87% Avnet -0.18%

Fiserv 0.86% Quest Diagnostics -0.17%

Covidien 0.85% Dun & Bradstreet -0.17%



LONGVIEW PARTNERS

13

Top 10 Absolute Contributors / Detractors – Inception to Date



Time Warner 1.91% Hewlett-Packard -2.32%

Pfizer 1.80% Cisco Systems -0.30%

Accenture 1.72% BMC Software -0.21%

Compass 1.41% BB&T -0.18%

Fiserv 1.39% Avnet -0.14%

Bayer 1.38% Dun & Bradstreet -0.07%

Japan Tobacco 1.37% Arrow Electronics -0.07%


Covidien 1.33% Engility Holdings -0.01%

Yum! Brands 1.24% Meggitt 0.00%

Absolute contributors to and detractors from performance, local currency terms, for the period shown.


LONGVIEW PARTNERS

14

Performance Attribution (Sector) – Inception to Date


Longview Index Difference Selection Allocation Total

Energy 0.00% 11.15% -11.15% 0.00% 0.56% 0.56%

Materials 0.54% 7.49% -6.96% 0.31% 1.57% 1.88%

Industrials 15.44% 11.09% 4.36% 0.28% -0.11% 0.17%

Consumer Disc. 19.12% 10.57% 8.55% 3.75% 1.11% 4.85%

Consumer Staples 2.64% 10.48% -7.83% 1.86% -0.70% 1.15%

Health Care 22.92% 10.08% 12.84% 0.96% 2.45% 3.41%

Financials 10.60% 19.08% -8.48% 0.16% 0.97% 1.14%

IT 28.74% 12.09% 16.65% -0.78% 0.07% -0.71%

Telecoms 0.00% 4.18% -4.18% 0.00% 0.27% 0.27%

Utilities 0.00% 3.79% -3.79% 0.00% 0.60% 0.60%

Total 100.00 % 100.00 % 0.00 % 6.54% 6.78% 13.32%




Data not annualised.

LONGVIEW PARTNERS

15

Longview’s Approach to Company Engagement

Company engagement takes the form of regular face-to-face management discussions.

Environmental, Social and Governance (ESG) factors are considered within the core of our investment process.

Our analysts have on-going dialogue with companies on factors such as finance and remuneration schemes, capital

deployment, and rationale for merger/acquisitions.

Poor performance on ESG issues would be reflected in our long-term Quality rating and would have a direct impact

on our investment decisions.

– Companies with poor performance on environmental issues are likely to be penalised financially and face

uncertainty in their long-term viability.

– Companies with poor governance are unlikely to allocate capital effectively which would cause them to destroy

shareholder value.

– Social issues (such as tobacco or defence) are often moral judgements on which we take direction from our

clients.

If we felt management was failing to act in shareholders’ interests, we would seek clarity and express our concerns.

If no improvement is made on these issues, we would sell our holding.

LONGVIEW PARTNERS

16

Voting Summary – Q4 2012

Number of Meetings: 5

Number of Management Proposals: 47


Longview voted against executive compensation on 30% of management proposals.

Rationale for votes against management include:

– Disconnect between pay and performance

– No performance-based long-term incentive awards

– Excessive cost of compensation plan

ExecutiveCompensation

Ratification ofAuditor

Company Structure

Elections to theBoard

Split by Type of Proposal

LONGVIEW PARTNERS

17

Engagement – Q4 2012

Accenture

In November 2012, Nigel Masding (Partner and Research Analyst) hosted a conference call with KC McClure, Managing Director of

Investor Relations at Accenture, at her behest, in order for us to provide our comments and views on Accenture’s executive and staff

compensation programmes. KC explained the incentive structures and associated targets, ahead of a new proposal on equity

compensation that was to be put forward to shareholders for consideration at the 2013 AGM. Nigel explained our view; that it is

important to link incentive payments to performance and that any performance targets should be set with an appropriate peer group

of companies in mind. In addition, Nigel noted that incentive programmes should be sufficiently rigorous so as to meet investor and

market expectations. Also, such schemes should be focussed on a set of metrics that will lead to shareholder valuation creation,

such as revenue growth, operating margins, free cash flow and shareholder cash returns (dividends and buybacks). Furthermore, we

explained the importance of transparency in their incentive policies, procedures and targets; a matter on which Accenture had

previously been criticised by proxy voting company, Glass Lewis.

Accenture addressed some of our transparency concerns by explaining in detail the incentive pay structures for senior staff and top

executives. Cash incentive pay for all senior staff is dependent on their ratings of three factors, which ultimately drive the Accenture

business model (value creator, people developer and business operator). Furthermore, senior employees have revenue and client

level responsibilities and are set targets for revenue and operating margins. These targets, when aggregated, will match the overall

Accenture business plan as well as the financial guidance management have provided to investors. A senior sub-set of these senior

employees are required to hold stock with value greater than six times their salaries. Top executives have three year rolling equity

incentive plans, of which 75% is dependent on achieving operating income targets and 25% on total shareholder return. The

operating income targets are consistent with the guidance provided to investors, including the revenue growth targets and modest

operating profit margin expansion. Accenture are considering extending the executive equity incentive plans and will bring a

proposal forward at their 2013 AGM.

Accenture appreciated our feedback and we will review the equity compensation proposal for their 2013 AGM once it is published. We

also intend to have another discussion with the company prior to the AGM.

LONGVIEW PARTNERS

18

The Future

LONGVIEW PARTNERS

19

Investment Challenges

Equity Markets

– Less valuation upside in some stocks that have performed well

– High levels of complacency in equity markets

US

– Debt ceiling negotiations

– Budget deficit

Europe

– Effects of austerity in Europe

– Potential for growth to continue to underperform

China

– Recent recovery in China not extending into 2013

– Continued high valuations in consumer sector

LONGVIEW PARTNERS

20

Current Portfolio Positioning

Source: Bloomberg, Longview Partners. Data as of close, 31st December 2012.

60%

21%

19%Stable

Cyclical

Both

3M Co.AccentureBank of New York MellonBayerBrenntagWPP

AONCompassCovidienFidelity Natl Info ServicesFiservL-3 CommunicationsLaboratory Corp of AmericaNorthrop GrummanOraclePfizerQuest DiagnosticsSanofiSAPSercoSESDun & BradstreetTime WarnerViacomYum! BrandsZimmer Holdings

Arrow ElectronicsAvnetBB&TCisco SystemsDelphi AutomotiveSchneider ElectricTE ConnectivityWells Fargo

LONGVIEW PARTNERS

Europe23%

North America54%

Japan4%

Emerging Markets16%

Pacific ex Japan3%

Revenue Breakdown

21 Source: Bloomberg, Longview Partners. Data as of close, 31st December 2012.

27%

73%

BayerBrenntagCompassSanofiSAPSchneider ElectricSercoSESWPP

3M Co.AccentureAONArrow ElectronicsAvnetBank of New York MellonBB&TCisco SystemsCovidienDelphi AutomotiveFidelity Natl Info ServicesFiservL-3 CommunicationsLaboratory Corp of AmericaNorthrop GrummanOraclePfizerQuest DiagnosticsTE ConnectivityDun & BradstreetTime WarnerViacomWells FargoYum! BrandsZimmer Holdings

Europe

North America


LONGVIEW PARTNERS

22 Source: Bloomberg, Longview Partners. Data as of close, 31st December 2012.

25%

15%

21%

14%

25%

Consumer Discretionary

IT

Financials

Industrials

Healthcare

CompassDelphi AutomotiveSESTime WarnerViacomWPPYum! Brands

3M Co.BrenntagL-3 CommunicationsNorthrop GrummanSchneider ElectricSercoDun & Bradstreet

BayerCovidienLaboratory Corp of AmericaPfizerQuest DiagnosticsSanofiZimmer Holdings

AONBank of New York MellonBB&TWells Fargo

AccentureArrow ElectronicsAvnetCisco SystemsFidelity Natl Info ServicesFiservOracleSAPTE Connectivity


LONGVIEW PARTNERS

4.5

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5.1

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5.8

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6.7

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Free Cash Flow Yield


LONGVIEW PARTNERS

7.1

%

7.6

% 10.7

%

11.5

%

11.7

%

12.5

%

13.3

%

13.5

%

14.2

%

15.1

%

15.3

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15.5

%

16.7

%

17.2

%

17.3

%

17.8

%

17.9

%

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%

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%

28.2

%

30.8

% 34.2

%

34.5

%

35.3

%

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%

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%

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%

42.6

%

51.9

%

52.0

% 56.8

%

59.9

%

60.0

%

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20%

30%

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24

Upside to Price Targets


LONGVIEW PARTNERS

25

Current Holdings


Funda- FCF

Name Sector Price Target Upside Quality mentals Value Yield P/E 12 P/E 13

3M Co. Industrials 92.85 106.00 14.2% 1 2 2 6.1% 14.9 13.7

Accenture IT 66.50 77.60 16.7% 2 2 2 5.1% 15.9 14.5

AON Financials 55.61 74.80 34.5% 2 2 1 8.6% 13.4 11.9

Arrow Electronics IT 38.08 57.90 52.0% 2 2 1 9.9% 9.3 9.2

Avnet IT 30.61 48.00 56.8% 2 2 1 10.2% 10.2 8.6

Bank of New York Mellon Financials 25.70 41.10 59.9% 2 2 1 8.5% 12.3 11.1

Bayer Healthcare 71.89 83.00 15.5% 2 1 2 7.4% 13.2 12.1

BB&T Financials 29.11 35.70 22.6% 2 2 1 8.2% 10.8 10.2

Brenntag Industrials 99.43 107.00 7.6% 2 2 2 6.8% 15.3 14.0

Cisco Systems IT 19.65 33.30 69.5% 2 2 1 8.7% 10.3 9.6

Compass Consumer Discretionary 7.25 8.10 11.7% 1 2 2 5.5% 16.1 14.6

Covidien Healthcare 57.74 68.10 17.9% 2 2 2 6.7% 13.1 11.9

Delphi Automotive Consumer Discretionary 38.25 58.10 51.9% 2 2 1 7.3% 10.4 9.1

Fidelity Natl Info Services IT 34.81 46.70 34.2% 1 2 1 8.6% 14.0 12.6

Fiserv IT 79.03 88.10 11.5% 1 2 2 6.9% 15.6 13.9

L-3 Communications Industrials 76.62 92.40 20.6% 2 2 2 10.6% 9.8 9.6

Laboratory Corp of America Healthcare 86.62 102.00 17.8% 1 2 2 7.2% 12.6 12.1

Northrop Grumman Industrials 67.58 74.80 10.7% 2 2 2 10.4% 9.3 9.9

Oracle IT 33.32 53.30 60.0% 1 2 1 7.7% 12.7 11.7

Pfizer Healthcare 25.08 29.40 17.2% 2 2 2 9.6% 11.7 11.1

Quest Diagnostics Healthcare 58.27 76.20 30.8% 1 2 1 7.7% 13.1 12.1

Sanofi Healthcare 71.39 82.30 15.3% 2 2 2 9.0% 11.8 11.6

SAP IT 60.69 71.20 17.3% 1 2 2 5.1% 20.1 17.3

Schneider Electric Industrials 54.83 61.70 12.5% 2 2 2 7.3% 14.7 13.6

Serco Industrials 5.35 7.24 35.3% 1 2 1 5.8% 13.4 12.5

SES Consumer Discretionary 21.71 24.60 13.3% 1 2 2 7.0% 15.0 14.5

TE Connectivity IT 37.12 47.60 28.2% 2 2 1 8.8% 12.1 10.8

Dun & Bradstreet Industrials 78.65 109.00 38.6% 2 2 1 6.7% 11.7 10.4

Time Warner Consumer Discretionary 47.83 54.30 13.5% 2 2 2 6.9% 15.3 13.5

Viacom Consumer Discretionary 52.74 75.20 42.6% 2 2 1 7.7% 11.6 10.1

Wells Fargo Financials 34.18 48.70 42.5% 2 2 1 10.2% 10.4 9.6

WPP Consumer Discretionary 8.88 9.51 7.1% 2 2 3 9.2% 12.7 11.8

Yum! Brands Consumer Discretionary 66.40 93.50 40.8% 1 1 1 4.5% 20.6 18.2

Zimmer Holdings Healthcare 66.66 76.70 15.1% 2 2 2 7.4% 12.8 11.8

Average: 7.6% 13.4 12.3

LONGVIEW PARTNERS

26

Appendix

LONGVIEW PARTNERS

Key Risk Drivers of Portfolio

Data as of 31st December 2012.

This material is for your private information, and we are not soliciting any action based upon it. Opinions expressed are our current opinion as of the date appearing on this

material only.

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3M Co. 1/2 1/2 1/2 1/2 1/2

Accenture 1/2 1/2 1 1/2 1/2

AON 1/2 1/2

Arrow Electronics 1 1/2 1/2 1/2 1/2 1/2 1

Avnet 1 1/2 1/2 1/2 1/2 1/2 1

Bank of New York Mellon 1 1/2 1 1/2 1 1/2

Bayer 1/2 1/2 1/2 1/2 1/2 1/2

BB&T 1 1 1/2 1 1 1/2

Brenntag 1/2 1

Cisco Systems 1 1/2 1/2 1/2 1

Compass 1/2 1 1/2 1/2

Covidien 1/2 1/2 1/2

Delphi Automotive 1 1/2 1/2 1

Dun & Bradstreet 1/2 1

Fidelity Natl Info Services

Fiserv

L-3 Communications 1/2 1

Laboratory Corp of America 1

Northrop Grumman 1/2 1

Oracle 1/2 1/2 1/2 1/2

Pfizer 1/2 1/2 1/2

Quest Diagnostics 1

Sanofi 1/2 1/2 1/2

SAP 1/2 1/2 1/2

Schneider Electric 1 1 1/2 1

Serco 1/2 1/2 1/2 1/2

SES 1/2 1/2 1

TE Connectivity 1 1 1/2 1/2 1/2 1/2

Time Warner 1/2 1/2

Viacom 1/2 1/2

Wells Fargo 1 1 1/2 1 1/2 1/2

WPP 1/2 1/2 1 1/2 1/2

Yum! Brands 1/2 1/2 1/2 1/2 1/2

Zimmer Holdings 1/2 1/2 1

Weighted Exposure 33% 16% 12% 1% 5% 11% 7% 4% 0% 2% 3% 20% 10% 8% 0% 0% 16% 16% 9% 3% 15% 5% 7% 16% 8%

Macro Economic Commodities Currencies Geo-PoliticalEnd Market Risk

27

LONGVIEW PARTNERS

28

The Team

Keith McDermott – Co-Founder, Chief Executive Officer

Keith is a founder and shareholder of Longview Partners. Keith spent 30 years

at Goldman Sachs, initially with the Equities division where he became co-

director of the London Institutional Department. He spent his last 10 years at

Goldman Sachs with the Private Wealth Management division where he

served as a portfolio manager. Keith obtained his MBA from the Wharton

School, University of Pennsylvania and his BA from Rutgers University.

Ramzi Rishani – Co-Founder, Chief Investment Officer

Ramzi is a founder and shareholder of Longview Partners. Ramzi spent 9

years at Goldman Sachs in the Private Wealth Management division where he

served as a portfolio manager. Prior to that, he spent 3 years at JP Morgan in

New York as an Associate in Equities and Corporate Finance. Ramzi obtained

his MBA from Harvard Business School and his BSc from MIT.

LONGVIEW PARTNERS

29

The Team (continued)

Alistair Graham – Partner, Head of Research

Prior to joining Longview in 2003, Alistair worked for Schroders Investment

Management as an Associate Director. Before that, Alistair worked for

Standard Life Investments as an Investment Manager for 4 years and at

Scottish Widows Investment Partnership as a Senior Investment Manager for

4 years. Alistair obtained his BCom in Accountancy and Business Studies from

the University of Edinburgh.

Jonathan Dudding – Partner, Research Analyst

Prior to joining Longview in 2004, Jonathan spent 5 years working for Societe

General Asset Management as an equity analyst for the UK and European

teams. Before this, he was a physical commodity trader specialising in

petrochemicals for three years. Jonathan holds a BA (Hons) in Modern History

from St. John’s College, Oxford. Jonathan is a CFA Charterholder.

LONGVIEW PARTNERS

30


Paul Crinion – Partner, Research Analyst

Prior to joining Longview in 2002, Paul worked for a year at Oxford Analytica as a consultant. Paul obtained his MSci in Physics from Imperial College, London and studied Economics as a postgraduate at Magdalen College, Oxford. Paul is a CFA Charterholder.

Nigel Masding – Partner, Research Analyst

Prior to joining Longview in 2009, Nigel worked at HSBC Asset Management as a Global Equities Senior fund Manager and previously for First State Investments as a Global Equities Analyst. Before that, he was a Strategy Consultant at McKinsey and a Consulting and Audit Manager at Arthur Andersen. Nigel obtained an MA in Economics from St John’s College, Cambridge, an MBA from Warwick University and is a qualified Chartered Accountant.

LONGVIEW PARTNERS

31


Luke Taylor – Partner, Research Analyst

Before joining Longview in 2010, Luke worked as a research analyst and investment

manager at Sceptre Investment Management for 5 years, which successfully

outperformed the market over its history. Prior to joining Sceptre, Luke gained

experience working at Citigroup on the Leveraged Finance desk in London and

obtained his degree in Theoretical Physics from Imperial College London.

Stephen Burgess – Partner, Research Analyst

Prior to joining Longview in 2010, Stephen was a partner and equity analyst at

Lancaster Investment Management and previously worked at Putnam as a research

analyst. Before that he was an equity analyst at Gartmore for 8 years. Prior to joining

Gartmore Stephen was an accountant at Schroders for 2 years. Stephen obtained a

BSc in Chemistry from Durham University and is a CFA Charterholder.

LONGVIEW PARTNERS

32


Ken Campbell – Partner, Trader

Ken has been a trader at Longview since its inception. Prior to Longview, Ken

spent 4 years as an Associate and a Financial analyst at Goldman Sachs, Private

Wealth Management. Prior to that, Ken spent 2 years in currency trading at Bank

of Ireland. Ken obtained his Masters in Finance and his BCOMM from University

College Dublin.

Alexander Philipps – Research Analyst

Prior to joining Longview in 2012, Alexander spent 4 years working as a Research

Analyst at Sloane Robinson, focusing on Asian equities. Alexander obtained an MEng

in Engineering Science from Christ Church, Oxford.

LONGVIEW PARTNERS

33


Marina Lund – Partner, Investment Product Specialist

Prior to joining Longview Marina was Managing Director at Tribeca Global Management,

a member of the Investment Committee and the Executive Management Committee, prior

to that she was Head of Distribution at BlueCrest Capital Management. Previously,

Marina was Head of Global and EAFE Equities at Deutsche Asset Management, a board

member of Deutsche Asset Management UK and Deutsche Asset Management

Investment Services and member of the UK Management Committee. During her years at

Deutsche Asset Management, and previously at Flemings Investment Management and

Mercury Asset Management, Marina was an equity portfolio manager within a number of

different equity markets. Marina has over twenty years experience in Institutional asset

management. Marina holds a BSc Hons in Economics from University College, London

and is also a graduate of the Foundation and Endowment Asset Management at The

London Business School.

Mark Chapman – Partner, Fixed Income Research and Trading

Prior to joining Longview in 2002, Mark obtained his MA in Maths from Queens’

College, Cambridge.

LONGVIEW PARTNERS

34

© 2013 Longview Partners (Guernsey) Limited. All Rights Reserved.

This material is for your private information, and we are not soliciting any action based upon it. You

may not distribute this document, in whole or in part, without our express written permission. This

report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any

jurisdiction where such an offer or solicitation would be illegal. The material is based upon information

that we consider reliable, but we do not represent that it is accurate or complete and it should not be

relied upon as such. Opinions expressed are our current opinion as of the date this information has

been provided to you. Whilst we endeavour to update on a reasonable basis the information discussed

in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so.

Longview specifically disclaims liability for any losses, damages (incidental, consequential or

otherwise) that may arise from use or reliance on any information contained herein by you or any other

party for any reason.

Q4 2012

Global Equity

The Royal Borough of Kensington and Chelsea Pension Fund

Q4 Year to Date 1 Year 3 Year Inception to Date

Portfolio 3.26 % 18.26 % 18.26 % N.A. 10.17 %

Global Equity Index 1.81 % 10.74 % 10.74 % N.A. 4.78 %

Difference 1.45 % 7.52 % 7.52 % N.A. 5.38 %

Portfolio Value : £121,338,760

Inception Date : 9 November 2010

As of 31 December 2012

Global Equity Index is MSCI World (GBP)(TR Net). Figures are shown gross of fees. Periods longer than one year are annualised.

Portfolio Performance

Contribution to Relative Performance

Equity Performance 0.60 %

Currency Effect 0.96 %

Cash Effect -0.10 %

Total 1.45 %

Figures are shown gross of fees.

Benchmark is MSCI World (GBP)(TR Net)

Q4 2012

Portfolio Performance Breakdown

Market ReviewDuring the fourth quarter, the MSCI World rose +2.9% in local currency terms. Japan was the standout market in the quarter, with the Topix rising +16.7% in Yen terms. MSCI Europe rose +5.1%, with emerging markets showing similar returns. The weakest return was from the US where the S&P fell -0.6%. Looking back at 2012 as a whole, markets made generally steady progress throughout the year, with the MSCI Europe and S&P 500 up +15.6% and +15.2% respectively. During the fourth quarter, the Japanese equity market rallied strongly in local terms (up +16.7%), however in Dollar terms the return was a more modest +5.7%.

In the US, news in the quarter was dominated by the “Fiscal Cliff” whilst Quantitative Easing (QE) efforts continued. We have not commented much on the “Fiscal Cliff” previously for the following three reasons; firstly, as ever, our focus is on investing in companies where macro outcomes do not have a significant impact on the business and where our ownership is not based on macroeconomic predictions; secondly, we believed the “Fiscal Cliff” to be less likely to occur than some other investors may have; and thirdly, the US has passed sequestration laws many times in the past, but they have never actually enacted sequestration. Estimates of a 3-4% fiscal drag also appear somewhat exaggerated, to our mind, as 2012 has already experienced a 1% fiscal drag and reasonable estimates suggest a further drag of around 1.5% in 2013. This drag may well be offset by a drop in uncertainty which will allow businesses to make strategic and investment decisions. Finally, common sense says that even if a deal was not signed by the 31st of December, a US budget agreement would have to have been put in place.

In the end, the American Taxpayer Relief Act 2012, a sort of “half-deal”, was agreed and voted upon on the 31st December 2012. President Obama signed the Act into law on the 2nd of January 2013 and thus the “Fiscal Cliff” was averted. Taxes were raised modestly for the richest Americans and the temporary 2% cut in payroll tax, for most Americans, was allowed to expire. The majority of other tax cuts, enacted by President George W Bush, were made permanent. This deal is expected to save around $600bn over the next 10 years, including expected savings of $150bn in 2013. However, when considering the 2012 budget deficit of over $1trn, this does not make much of a dent, but it is a start.

In signing the Act, sequestration was pushed out to 1st March 2013 to allow negotiations surrounding spending cuts and the debt ceiling, which the US is expected to imminently hit, to continue. Again common sense suggests that the US will get the bare minimum done to ward off problems for the moment. This could be a deal that increases the total 10 year budget reduction to around $2trn. However, by signing the tax deal first, securing an agreement may have been made more difficult. For us, the main concern is whether any industries will be specifically or unexpectedly affected, as it is uncertainty that poses the largest threat. We already expect and have factored in to our forecasts, large cuts to the defence budget.

As of Q4 2012 In addition, during the quarter, the Federal Reserve announced that QE will continue until unemployment is at least 6.5% and inflation is projected to be no more than +2.5%. Previously, the Fed had suggested that QE would last until at least 2015; however at current rates of job growth, we should reach 6.5% unemployment in mid-2014. Either way, the Fed is speaking more explicitly about an end to QE in a scenario of economic growth. Although we have never really put much weight on Fed announcements, what is surprising is that some investors seem to think QE is indefinite. We believe it is only indefinite as long as the economy is weak. Already the US has gone through a considerable period of negative real interest rates. This is not a normal situation and as the economy returns to normal, or even a “New Normal” of slower growth, so should the interest rate environment.

Looking at market performance, the other large macroeconomic focus during the quarter was Japan. Earlier in the year, we had been sceptical that changes would occur in Japan. However, the new Prime Minister, Shinzo Abe, won a landslide election victory in December and is promising change. Although we are not economists and therefore, don’t like to make economic predictions, to focus on the facts: Government debt in Japan is 240% of GDP (net government debt is 135%), population growth is negative and the population is aging, the budget deficit is 9% of GDP and over 50% of government revenues, and VAT is planned to increase from 5% to 10% over the next 3 years.

From Prime Minister Abe’s election campaign, we know that he wants the Bank of Japan to raise its inflation target to +2.0% from +1.0% and increase government spending to stimulate the economy. Specifically, he supports unlimited QE until inflation hits +2.0%. The supposedly “independent” Central Bank appears to be conducive to his thoughts and is expected to announce a +2.0% inflation target in January 2013. However, the current inflation target has failed to halt deflation. Abe is also expected to announce a stimulus package, equivalent to around +2.0% of GDP in January 2013. There is also some debate on whether the VAT increase will be cancelled.

In the long run, it is hard to predict how these plans will have an impact. However, it is likely that monetary policy will be easier and that the Yen will weaken. Indeed the Yen weakened 10.0% against the US Dollar in the fourth quarter alone. With easy monetary policy and a weaker Yen, GDP growth should receive a boost and 2013 growth should outstrip that of 2012 (a recession year). A weaker Yen is clearly positive for the economy and underlying all the rhetoric of the new government, it is likely that this is the main aim of their policy.

Longer term, for sustainable improvement in Japan to occur, there needs to be additional structural reform. The implication for Japan of more deficit spending, in a country with serious fiscal imbalances, is worrying. Historically, the debt has been almost completely financed by internal savings; however, with an ageing population, the country will become ever more dependent on foreigners to fund this deficit and this switch may not be easy.

It is useful to point out that within the Longview definition of ‘Quality’, companies with large transactional FX impacts and therefore, a degree of unpredictability in their businesses, do not pass our process. On a daily basis, many Japanese equities are moving 2.0% to 3.0% in price in reaction

Market Review and Outlook

to tiny exchange rate movements. As we do not believe we can predict future exchange rates in Japan, attractive as it may be to invest based on a forecast of a lower Yen, this is something that our investment process will not allow us to do. The returns for being correct can be large, but so will the risks of being wrong.

In the rest of the world there was much less activity and for once things were quieter in the Eurozone. Agreement was reached that the ECB would regulate the 200 largest banks in Europe, perhaps indicating another step along the path of full Euro integration. This agreement was also necessary for the Euro 500bn European Stability Mechanism (ESM) rescue fund to be put in place. To some extent, these are just further steps along an already previously agreed path. During the quarter, Spain applied to the ESM for aid for its banks.

Fourth Quarter economic data showed some signs of improvement, especially in the US and China. US car sales continued to improve, hitting a total of 15m by the end of the year. The economy continued to add around 150,000 jobs a month, with unemployment falling to 7.8% and the CPI remained subdued at 2.0%. Housing, in particular, continued to improve ending the year with housing starts at a 861,000 rate, having been close to 500,000 a couple of years ago. China appeared to modestly accelerate from the slow levels seen in the summer. The Chinese manufacturing PMI rose back over 50 and export growth accelerated back into the teens in December. The government has modestly eased monetary policy and it seems to be showing in some economic acceleration. Electricity consumption which had slowed to 2.9% growth in September accelerated to 7.6% in December. Curiously, despite wide variations in underlying metrics, such as truck traffic and electricity consumption, GDP growth hardly varied through the year. It looks as if the Chinese economy was considerably weaker in the summer, than the reported 7.4% GDP growth, and that Q4 growth is likely to be similar but will come with a much higher level of actual economic activity. Europe continued to be weak with the manufacturing PMI ending the quarter at 46, denoting a contraction in growth, and unemployment rising to 11.7%, a record high. GDP data indicated that both Europe and Japan ended Q3 back in recession.

Financials were the stand out performers in Q4. The modest rise in interest rates is likely to be positive for net interest margins. In addition, a better economy, improved stock markets and less sovereign issues all helped. In particular, investment banks did well with results rebounding from disappointing levels in the first half. Other cyclical sectors such as Industrials, Materials and Consumer Discretionary also performed well. On the negative side, we saw the less economically sensitive and bond sensitive sectors such as Utilities and Telecom underperform. Energy was also weak, unusually in a period of better economic data, as oil prices fell. This may be caused by the increasing supply of oil out of the US, where prospects for shale oil appear to be changing the supply/demand dynamics.

In the corporate space, poor performance of the world’s largest stock, Apple, must be mentioned. After excitement peaked with the launch of the iPhone 5, it appears that they are losing share to Android devices and their premium pricing policy may be at risk. In one of the larger deals recently, Softbank offered to buy 70% of Sprint for $20bn. This then allowed Sprint to offer to buy their 4G

partner Clearwire for $2.2bn. Poor earnings results were seen in the Telecom sector where Vodafone and KPN guided down earnings and cellular bandwidth costs weighed on the business. This resulted in KPN cancelling their dividend, clearly a negative for those who are invested in the stock for income.

In general, after disappointments earlier in the year, Industrial company earnings were in line. On the other hand, results in the Consumer Discretionary sector were under pressure. Many companies appear to be in structural decline, due to the encroachment of the internet. Disappointing numbers from the likes of Best Buy, JC Penney and Metro, as a result of a weak economy, simply reflect their increasingly uncompetitive business model. Finally, we saw earnings warnings from the utilities EON and RWE in Germany, as electricity demand had started to fall in Western countries even before the economic crisis. There are also structural changes about. For example, in the US, the banning of incandescent light bulbs alone is expected to reduce overall electricity consumption by 3% and solar panels are approaching cost competitiveness with fossil fuelled generation. The net result of this is overcapacity in the production of electricity, which is leading to falling prices. In addition, it does not look as if electricity consumption is likely to grow materially in the future in developed countries as greater efficiency offsets any growth in demand. As would be expected if new investment in capacity is not required, returns in this industry are likely to fall below cost of capital levels.


Equity OutlookWith solid double digit returns, 2012 was a strong performance year for both Longview and the markets in general. After such a year and with valuations rising, going forward we would expect returns to be more conservative, although still positive. Once we are able to move past the US budget negotiations and Europe continues to be able to successfully negotiate the on-going sovereign risks that the region faces, then equities will be able to make progress as valuations remain reasonable, particularly in relations to other asset classes, even if they are not as cheap as they were 12 months ago. Longer term structural issues remain in developed economies, but politicians seem to be doing whatever is necessary to put these worries off for another few years. A question for asset allocators , however not for us, is: with historically low bond yields, will discount rates used to value equities fall or will the Equity Risk Premium (ERP) remain high?

We continue to believe that the real Quality of the businesses we own is less recognised by the market and these businesses will do well, irrespective of the on-going economic environment. It seems that this has been our refrain for some time and to some extent it always will be. However, recently when the question has been asked by our clients of “what next?” the response has been that until the business environment changes, our portfolio of stocks is likely to remain similar to its current form. It is usually dislocations in the world at large that allows us to buy high Quality businesses when they are misunderstood and therefore mispriced. It is possible that we are reaching this point. For some time we have been negative on Industrial and Financial stocks as we had believed them likely to disappoint the market (Fundamentals 3) due to high expectations or a misunderstanding of how the current economic environment might affect the business. However, as expectations have been lowered and the economic outlook has improved along with a bottoming of interest rates, the appeal of these businesses is increasing, which means the Fundamental rating may improve and make these companies more interesting.

Currently, our work is focussed on analysing high Quality Industrial companies where business has been weak and expectations now appear achievable. We are also looking increasingly at some Financials, particularly banks, where returns are structurally high but being masked by the effects of unusually low interest rates. Offsetting this is the risk that recent low rates continue to hurt businesses more than analysts realise in 2013, but the longer term trend is for these businesses to improve rather than deteriorate. With some of our more defensive stocks approaching their price targets, it would look as if over the next couple of quarters we might see a number of these replaced by more economically sensitive stocks. However, as ever, this adjustment will be based purely on our bottom-up research rather than for any macroeconomic reasons. It is simply that some stocks we own are now within 10% of our price targets and some economically sensitive stocks that we have been tracking for a long time have had sizeable profits warnings and thus the lowered expectations have made them much more interesting to us.

Contributors To Performance The following stocks contributed to performance during the fourth quarter: Delphi Automotive, TE Connectivity, Bank of New York Mellon, and Fidelity Natl Info Services. Delphi Automotive, a leading supplier of auto parts to the Original Equipment Manufacturers (OEMs), performed particularly well following the announcement of its inclusion in the S&P 500, and continued improvement in US auto sales volumes. TE Connectivity also benefited from the improvement in US auto sales and from a general market switch into more cyclical companies towards the end of the quarter. Bank of New York Mellon also posted strong gains in line with the rest of the financial sector, as the yield on medium and long-term treasuries increased; implying that interest income should increase once again. Fidelity National Information Services rebounded following a period of subdued performance in the third quarter, as well as unexpected positive news regarding a current client who has reversed a decision to terminate their entire relationship, which had been announced previously.

Detractors From Performance The following stocks detracted from performance in the fourth quarter: Accenture, BB&T, Quest Diagnostics, and Laboratory Corp of America. Accenture reported modestly disappointing revenues for its most recent quarter, as customers held back from more discretionary short-term consulting projects, particularly in Europe and Asia. However, bookings of longer-term contracts remain strong, implying that revenue growth should improve over the coming quarters. US bank, BB&T, was weak having reported Q3 numbers that missed market expectations and issued a Q4 Net Interest Margin guidance that was also below expectations. However, we remain comfortable with our long-term forecasts. Laboratory company, Quest Diagnostics has seen some weakness in revenue growth, which has led us to lower our numbers although we believe that cost cutting should offset any decline in revenue growth. Similar to Quest Diagnostics, Laboratory Corp of America has also seen weakness in revenue growth.

SummaryMarkets have done well and valuations have risen, so whilst equity returns are expected to be lower, they are likely to remain positive. Certainly, we see equities as a preferred asset class.

Structural issues remain, such as the peaking of urbanisation in China, a contracting Japanese population and a poor competitive environment for some industries, such as Telecom and Retail. However, considerably lowered expectations for Industrial stocks and the likely bottoming of interest rates mean that we may to see a little more exposure to Industrials and Financials in our portfolio going forward. Even in a low growth, “New Normal” environment, growth can improve.


Buys

Viacom

Viacom is one of the largest cable networks in the US, owning TV channels such as Nickelodeon and MTV. Viacom derives a large proportion of its sales from stable affiliate fee revenue (money paid by distributors such as Comcast and DirecTV) where it has shown a consistent ability to achieve annual price increases. Viacom also derives a large proportion of its revenues from selling TV advertising slots. TV advertising has been a reasonably stable proportion of GDP over time, as it remains the most efficient way to reach a large national audience in an attractive format. The reduction in readership of newspapers and magazines has reinforced this position. Through Nickelodeon and MTV, Viacom reaches audiences that are otherwise difficult for advertisers to reach. For example, Nickelodeon’s largest competitor, The Disney Channel, does not sell advertising. Viacom produces a large amount of its own content, which helps to reduce the risk of increasing competition for content. We rate the company Quality 2, which is a reflection of its high margins, high returns, reasonably stable cash-flow and consistent returns of capital to shareholders. We currently believe that Viacom has over 40% upside to our fair value. Until recently, we had rated the company a Fundamentals 3 as poor audience ratings, particularly for Nickelodeon, resulted in Longview forecasts being below consensus. Ratings data has now stabilised and brokers have reduced their forecasts, leading us to upgrade the stock to a Fundamentals 2 rating.

As of Q4 2012 Sells

G4S

We have downgraded G4S to both Quality 3 and Fundamentals 3. Operating margins in many areas of the business have fallen this year, suggesting both a higher level of competition and lower quality business than previously, as well as an increased risk of missing earnings forecasts if these pressures continue. In particular, the government business, previously identified as one of the higher quality areas of G4S, has seen falling margins, a change in attitude towards outsourcing and revenue disappointments driven by austerity.

In the US government business, contracts have been cancelled as a money saving measure leading to falling revenues and margins. In the UK government business, the government has recently pulled back from outsourcing as many prisons as expected and there appears to be foot dragging on other outsourcing contracts. G4S has also lost a contract to run one prison. There may be speculation that this is due to reputational damage from the London Olympics, but it could also be caused by political issues and austerity, or simply poor historic contract performance. Whatever the reasons, growth and margins in the government outsourcing business are much less certain than they previously were.

Manned guarding remains a tough business, but margin pressure seems to have intensified in a weak economy with the company noting price pressure on contract renegotiations.

Overall, the Quality of the business has declined since we bought it. We can see few bright spots for the Group now. As a result, we have reduced the Quality rating to a 3.

In addition, this changed outlook also means that we expect downgrades to earnings. We also expect that there could be further change of senior management, which may create additional turbulence for the Group. Therefore, we have also reduced Fundamentals to 3.

Buys and Sells

CA

We have downgraded the Fundamentals rating of CA from 2 to 3. This follows an extended period of weakness in new product bookings, particularly in the Enterprise Solutions segment, but also due weak renewal yields on the existing booking business. Due to CA’s rateable revenue recognition, where revenues from new bookings are recognised over a 2 to 3 year period, we believe the recent bookings weakness will continue to impact reported revenues for a considerable period of time. Consensus expectations are for revenues to recover and grow next year. Our analysis suggests that revenues will actually decline next year, as a considerable amount of next year’s revenues are dependent on this year’s bookings. Declining revenues will also have a negative effect on operating margins in this fixed cost business. Thus we expect the company to disappoint on revenues and earnings. The mainframe business remains a very profitable mature business and the recent improvements in capital allocation are positives, however last year’s significant weakness in renewals and bookings are not being appropriately reflected in expectations.

Hewlett-Packard

Hewlett-Packard is a business that should fit our quality criteria. It is a stable business with significant recurring revenues, stable margins and a strong franchise. HP has strong underlying operations and is market leading in four of its main lines of business. It is the largest provider of printers and PCs, tied with IBM as the largest server business and runs the second largest IT services business in the industry.

The deterioration in HP’s IT services business caused us to downgrade our Quality rating from 2 to 3 and sell the stock. Following the acquisition of IT services business, EDS, HP increased their IT service margins significantly. However, over the last 18 months, this business has begun to deteriorate significantly and at a pace that we had not expected. As a result of both not being in a position to explain this continued deterioration in margins and our loss of faith in management’s ability to turn the division around, we have sold the stock. In addition, Lenovo, a competitor of HP, has become increasingly aggressive in the PC space.

Buys and Sells

In November 2012, Nigel Masding (Partner and Research Analyst) hosted a conference call with KC McClure, Managing Director of Investor Relations at Accenture, at her behest, in order for us to provide our comments and views on Accenture’s executive and staff compensation programmes. KC explained the incentive structures and associated targets, ahead of a new proposal on equity compensation that was to be put forward to shareholders for consideration at the 2013 AGM. Nigel explained our view that it is important to link incentive payments to performance and that any performance targets should be set with an appropriate peer group of companies in mind. In addition, Nigel noted that incentive programmes should be sufficiently rigorous so as to meet investor and market expectations. Also, such schemes should be focussed on a set of metrics that will lead to shareholder valuation creation, such as revenue growth, operating margins, free cashflow and shareholder cash returns (dividends and buybacks). Furthermore, we explained the importance of transparency in their incentive policies, procedures and targets; a matter on which Accenture had previously been criticised by proxy voting company, Glass Lewis.

Accenture addressed some of our transparency concerns by explaining in detail the incentive pay structures for senior staff and top executives. Cash incentive pay for all senior staff is dependent on their ratings of three factors, which ultimately drive the Accenture business model (value creator, people developer and business operator). Furthermore, senior employees have revenue and client level responsibilities and are set targets for revenue and operating margins. These targets, when aggregated, will match the overall Accenture business plan as well as the financial guidance management have provided to investors. A senior sub-set of these senior employees are required to hold stock with value greater than six times their salaries. Top executives have three year rolling equity incentive plans, of which 75% is dependent on achieving operating income targets and 25% on total shareholder return. The operating income targets are consistent with the guidance provided to investors, including the revenue growth targets and modest operating profit margin expansion. Accenture are considering extending the executive equity incentive plans and will bring a proposal forward at their 2013 AGM.

Accenture appreciated our feedback and we will review the equity compensation proposal for their 2013 AGM once it is published. We also intend to have another discussion with the company prior to the AGM.

As of Q4 2012

ESG Examples

PeopleDuring the fourth quarter we added one Research Analyst to our investment team. Please find Alexander's biography below.

Alexander Philipps – Research Analyst

Prior to joining Longview in 2012, Alexander spent 4 years working as a research analyst at Sloane Robinson focusing on Asian equities. Alexander obtained an MEng in Engineering Science from Christ Church, Oxford.

October 2012: Four additional Employees awarded Partnership

In October 2012 the following employees of Longview Partners were awarded a Partnership position: Marina Lund (Client Services and Business Development), Nigel Masding (Research), Luke Taylor (Research) and Stephen Burgess (Research).

October 2012: Executive Committee Established

In October 2012, in recognition of the growing maturity of the business, an Executive Committee was established by the co-Founders. The role of the Committee is to work with the Longview Partners (Guernsey) Limited Board to ensure that the management structure of the organisation keeps pace with the Firm’s development and that long-term accountability is clear. The Executive Committee consists of the following six individuals; Keith McDermott (co-Founder and CEO), Ramzi Rishani (co-Founder and CIO), Marina Lund (Partner, Client Services & Business Development), Alistair Graham (Partner, Research), Mark Chapman (Partner, Risk and Portfolio Analysis), and Dan Langan (Partner, Finance and Compliance) representing the aforementioned and related functional areas. The Executive Committee meets monthly to discuss upcoming and on-going matters arising at the firm. This is a collaborative and open forum where ideas and concerns can be brought to the table in an open and co-operative structure.

ProcessThere were no changes made to the investment process in Q4.

As of Q4 2012

People and Process

Delphi Automotive 0.68 %

Schneider Electric 0.38 %

Bank of New York Mellon 0.35 %

Fidelity Natl Info Services 0.31 %

SAP 0.23 %

TE Connectivity 0.18 %

Sanofi 0.17 %

Bayer 0.16 %

WPP 0.12 %

Fiserv 0.12 %

Top 10 Contributors Top 10 Detractors

Q4 2012

CA -0.48 %

BB&T -0.42 %

Quest Diagnostics -0.29 %

Accenture -0.25 %

Laboratory Corp of America -0.19 %

Hewlett-Packard -0.19 %

Serco -0.16 %

Covidien -0.16 %

Zimmer Holdings -0.14 %

G4S -0.11 %


Portfolio Contributors and Detractors


Sector Longview Index Difference Selection Allocation TotalEnergy 0.00 % 10.58 % -10.58 % 0.00 % 0.58 % 0.58 %

Materials 0.00 % 6.88 % -6.88 % 0.00 % -0.17 % -0.17 %

Industrials 16.52 % 10.85 % 5.67 % -0.64 % 0.24 % -0.40 %

Consumer Discretionary 21.78 % 10.89 % 10.89 % -0.12 % 0.51 % 0.40 %

Consumer Staples 0.00 % 10.88 % -10.88 % 0.00 % 0.28 % 0.28 %

Healthcare 21.52 % 10.69 % 10.83 % 0.03 % -0.26 % -0.23 %

Financials 13.24 % 19.77 % -6.53 % -0.81 % -0.38 % -1.18 %

IT 26.94 % 12.04 % 14.90 % 1.77 % -0.87 % 0.90 %

Telecoms 0.00 % 3.93 % -3.93 % 0.00 % 0.30 % 0.30 %

Utilities 0.00 % 3.49 % -3.49 % 0.00 % 0.13 % 0.13 %

Total 100.00 % 100.00 % 0.00 % 0.23 % 0.37 % 0.60 %

Q4 2012


Performance Attribution

Delphi Automotive 4.01 %

Sanofi 3.82 %

Fidelity Natl Info Services 3.74 %

Bayer 3.72 %

SAP 3.67 %

Yum! Brands 3.64 %

Time Warner 3.49 %

Bank of New York Mellon 3.46 %

WPP 3.36 %

Accenture 3.32 %

Top 10 HoldingsRegional Asset Allocation


Asset Allocation & Holdings

Equity Sector Weights vs Index Equity Country Weights vs Index


Sector and Geographic Allocation vs Index

PORTFOLIO SUMMARY

The Royal Borough of Kensington and ChelseaPension Fund - 3136

December 31, 2012

Reporting Currency: Pound Sterling

Currency FX Rate Cash and Equivalent Equities Fixed Income Forwards Other Total

Euro 1.2329 249,128 22,558,873 0 0 0 22,808,000

Pound Sterling 1.0000 2,777,633 9,590,893 0 0 0 12,368,525

US Dollar 1.6255 853,187 85,309,047 0 0 0 86,162,234

Total 3,879,947 117,458,813 0 0 0 121,338,760

Euro 1.2329 0.2% 18.6% 0.0% 0.0% 0.0% 18.8%

Pound Sterling 1.0000 2.3% 7.9% 0.0% 0.0% 0.0% 10.2%

US Dollar 1.6255 0.7% 70.3% 0.0% 0.0% 0.0% 71.0%

Total 3.2% 96.8% 0.0% 0.0% 0.0% 100.0%

PORTFOLIO VALUATION


December 31, 2012


Cost Current Local Base P/L P/L P/L Total Base

Country Ccy Description Quantity Price Price Value Value Local Base % % Accrual

Cash and Equivalent

Europe EUR EUR Cash Account 307,158 1.2385 1.2329 307,158 249,128 1,125 0.45 0.21 0

United Kingdom GBP GBP Cash Account 2,777,633 1.0000 1.0000 2,777,633 2,777,633 0 0.00 2.29 0

United States USD USD Cash Account 1,370,278 1.6225 1.6255 1,370,278 842,989 -1,575 -0.19 0.69 0

United States USD USD Dividends Due 16,578 1.6048 1.6255 16,578 10,199 -132 -1.28 0.01 0

Total Cash and Equivalent 3,879,947 -582 3.20 0

Equities

Germany EUR Bayer AG 77,477 55.25 71.89 5,569,822 4,517,535 1,289,023 829,364 22.49 3.72 0

Germany EUR Brenntag AG 23,890 69.21 99.43 2,375,383 1,926,610 722,061 521,979 37.16 1.59 0

Germany EUR SAP AG 90,500 47.99 60.69 5,492,445 4,454,777 1,149,358 877,198 24.52 3.67 0

France EUR Sanofi 80,000 53.19 71.39 5,711,200 4,632,203 1,455,664 908,714 24.40 3.82 0

France EUR Schneider Electric SA 76,080 52.64 54.83 4,171,466 3,383,366 166,776 -72,830 -2.11 2.79 0

Luxembourg EUR SES - FDR 207,016 18.20 21.71 4,493,282 3,644,382 725,591 406,249 12.55 3.00 0

United Kingdom GBP Compass Group plc 532,129 5.43 7.25 3,857,935 3,857,935 971,135 971,135 33.64 3.18 0

United Kingdom GBP Serco Group plc 309,076 5.70 5.35 1,653,557 1,653,557 -109,258 -109,258 -6.20 1.36 0

United Kingdom GBP WPP plc 459,392 7.50 8.88 4,079,401 4,079,401 636,258 636,258 18.48 3.36 0

United States USD 3M Co. 64,700 87.19 92.85 6,007,395 3,695,721 366,014 179,238 5.10 3.05 0

United States USD Accenture PLC - Cl A 98,600 45.30 66.50 6,556,900 4,033,774 2,090,320 1,262,083 45.53 3.32 0

United States USD AON plc 117,500 45.47 55.61 6,534,175 4,019,794 1,191,933 576,616 16.75 3.31 0

United States USD Arrow Electronics Inc 37,100 41.06 38.08 1,412,768 869,128 -110,729 -91,110 -9.49 0.72 0

United States USD Avnet Inc. 43,704 35.49 30.61 1,337,779 822,996 -213,206 -143,468 -14.84 0.68 0

United States USD Bank of New York Mellon Corp. 265,600 26.43 25.70 6,825,920 4,199,274 -194,543 -164,327 -3.77 3.46 0

United States USD BB&T Corporation 217,790 30.53 29.11 6,339,867 3,900,256 -309,000 -335,571 -7.92 3.21 0

United States USD Cisco Systems, Inc. 313,300 22.17 19.65 6,156,157 3,787,239 -790,427 -508,428 -11.84 3.12 0

United States USD Covidien PLC 100,300 43.50 57.74 5,791,322 3,562,794 1,428,272 855,348 31.59 2.94 0

United States USD Delphi Automotive plc 206,800 30.17 38.25 7,910,100 4,866,257 1,670,065 951,815 24.32 4.01 0

United States USD Fidelity National Info. Svs. Inc 212,100 27.53 34.81 7,383,201 4,542,111 1,543,214 910,291 25.06 3.74 0

United States USD Fiserv Inc. 82,200 55.62 79.03 6,496,266 3,996,472 1,924,302 1,159,387 40.87 3.29 0

United States USD L-3 Communications Holdings, Inc. 62,800 70.14 76.62 4,811,736 2,960,157 407,049 230,545 8.45 2.44 0

United States USD Laboratory Corp of America Hldgs 42,500 82.89 86.62 3,681,350 2,264,749 158,525 78,696 3.60 1.87 0

United States USD Northrop Grumman Corporation 64,300 61.57 67.58 4,345,394 2,673,266 386,690 188,298 7.58 2.20 0

United States USD Oracle Corporation 171,700 28.74 33.32 5,721,044 3,519,560 786,386 457,407 14.94 2.90 0

PORTFOLIO VALUATION


December 31, 2012


Cost Current Local Base P/L P/L P/L Total Base

Country Ccy Description Quantity Price Price Value Value Local Base % % Accrual

United States USD Pfizer Inc. 236,400 16.99 25.08 5,928,747 3,647,337 1,912,311 1,154,978 46.34 3.01 0

United States USD Quest Diagnostics, Inc. 77,600 57.26 58.27 4,521,752 2,781,761 78,318 13,425 0.48 2.29 0

United States USD TE Connectivity Ltd. 146,500 32.88 37.12 5,438,080 3,345,481 621,160 356,390 11.92 2.76 0

United States USD The Dun & Bradstreet Corporation 37,340 83.16 78.65 2,936,791 1,806,700 -168,266 -152,003 -7.76 1.49 0

United States USD Time Warner Inc. 143,800 30.69 47.83 6,877,954 4,231,285 2,465,184 1,518,902 56.00 3.49 0

United States USD Viacom Inc. - Class B 118,900 52.80 52.74 6,270,786 3,857,758 -7,105 -40,928 -1.05 3.18 0

United States USD Wells Fargo & Company 177,700 29.91 34.18 6,073,786 3,736,565 758,590 477,241 14.64 3.08 0

United States USD Yum! Brands Inc 108,000 50.66 66.40 7,171,200 4,411,689 1,699,920 1,016,541 29.94 3.64 0

United States USD Zimmer Holdings Inc. 92,100 57.46 66.66 6,139,386 3,776,922 847,719 535,029 16.50 3.11 0

Total Equities 117,458,813 15,455,208 96.80 0

TOTAL PORTFOLIO 121,338,760 15,454,625 0

SECURITY TRANSACTIONS


From 10-01-12 To 12-31-12


Trade Settlement Trans- Local Local Local Reporting Reporting

Date Date action Quantity Security Description FX Rate Unit Price Amount Accrual Amount Accrual

Euro

12-06-12 12-10-12 Sell 1,800 Brenntag AG 1.2382 102.35 184,223.25 148,787.77

12-07-12 12-11-12 Sell 700 Brenntag AG 1.2392 102.10 71,467.64 57,673.76

12-11-12 12-13-12 Sell 600 Brenntag AG 1.2389 102.15 61,287.93 49,471.05

Pound Sterling

11-15-12 11-20-12 Sell 20,000 G4S plc 1.0000 2.45 49,063.29 49,063.29

11-16-12 11-21-12 Sell 11,000 G4S plc 1.0000 2.45 26,899.79 26,899.79

11-19-12 11-22-12 Sell 81,000 G4S plc 1.0000 2.41 195,346.74 195,346.74

11-20-12 11-23-12 Sell 35,000 G4S plc 1.0000 2.42 84,845.54 84,845.54

11-21-12 11-26-12 Sell 115,000 G4S plc 1.0000 2.43 279,191.58 279,191.58

11-22-12 11-27-12 Sell 21,000 G4S plc 1.0000 2.45 51,492.18 51,492.18

11-23-12 11-28-12 Sell 48,000 G4S plc 1.0000 2.47 118,510.78 118,510.78

11-26-12 11-29-12 Sell 38,000 G4S plc 1.0000 2.45 93,112.92 93,112.92

11-27-12 11-30-12 Sell 68,000 G4S plc 1.0000 2.45 166,423.27 166,423.27

11-28-12 12-03-12 Sell 64,000 G4S plc 1.0000 2.45 156,922.66 156,922.66

11-29-12 12-04-12 Sell 40,000 G4S plc 1.0000 2.48 99,338.77 99,338.77

11-30-12 12-05-12 Sell 35,000 G4S plc 1.0000 2.48 86,669.80 86,669.80

12-03-12 12-06-12 Sell 32,200 G4S plc 1.0000 2.48 79,861.07 79,861.07

12-04-12 12-07-12 Sell 19,500 G4S plc 1.0000 2.49 48,570.92 48,570.92

12-05-12 12-10-12 Sell 18,410 G4S plc 1.0000 2.50 46,011.11 46,011.11

US Dollar

10-08-12 10-11-12 Sell 12,000 Hewlett-Packard Company 1.6026 14.55 174,648.88 108,978.46




10-16-12 10-19-12 Buy 4,000 BB&T Corporation 1.6101 31.76 127,026.92 78,893.81



11-08-12 11-14-12 Sell 8,000 CA, Inc. 1.5970 22.18 177,472.02 111,128.38


11-09-12 11-15-12 Sell 10,000 CA, Inc. 1.5910 22.23 222,258.01 139,697.05



From 10-01-12 To 12-31-12




11-12-12 11-15-12 Sell 4,000 CA, Inc. 1.5868 22.11 88,428.02 55,727.26


11-13-12 11-16-12 Sell 10,000 CA, Inc. 1.5891 22.17 221,726.03 139,529.31




11-14-12 11-19-12 Sell 4,000 CA, Inc. 1.5848 22.02 88,064.42 55,568.16


11-15-12 11-20-12 Sell 7,000 CA, Inc. 1.5872 21.81 152,702.27 96,208.59

11-16-12 11-21-12 Sell 4,000 CA, Inc. 1.5846 21.68 86,715.65 54,724.00

11-19-12 11-23-12 Sell 6,000 CA, Inc. 1.5913 21.91 131,475.05 82,621.16

11-20-12 11-26-12 Sell 8,000 CA, Inc. 1.5914 21.94 175,553.66 110,313.98

11-21-12 11-27-12 Sell 2,000 CA, Inc. 1.5934 21.88 43,768.82 27,468.82

11-23-12 11-28-12 Sell 1,000 CA, Inc. 1.6012 22.05 22,049.61 13,770.68

11-26-12 11-29-12 Sell 5,000 CA, Inc. 1.6024 22.05 110,227.53 68,789.02

11-27-12 11-30-12 Sell 4,000 CA, Inc. 1.6028 22.08 88,302.02 55,092.35

11-28-12 12-03-12 Buy 3,240 Viacom Inc. - Class B 1.5984 50.75 164,428.06 102,870.41


11-28-12 12-03-12 Sell 7,000 CA, Inc. 1.5984 22.13 154,917.03 96,920.06



11-29-12 12-04-12 Sell 3,000 CA, Inc. 1.6037 22.25 66,746.10 41,620.07


11-30-12 12-05-12 Sell 4,000 CA, Inc. 1.6027 22.11 88,432.02 55,176.90


12-03-12 12-06-12 Sell 2,000 CA, Inc. 1.6097 21.86 43,724.82 27,163.33




12-04-12 12-07-12 Sell 8,000 CA, Inc. 1.6106 22.12 176,952.83 109,867.65


12-05-12 12-10-12 Sell 2,000 CA, Inc. 1.6092 22.04 44,084.21 27,395.11


12-06-12 12-11-12 Sell 8,000 CA, Inc. 1.6080 22.00 175,984.05 109,442.82



From 10-01-12 To 12-31-12





12-07-12 12-12-12 Sell 4,000 CA, Inc. 1.6020 21.94 87,758.83 54,780.79



12-10-12 12-13-12 Sell 6,000 CA, Inc. 1.6075 22.04 132,236.63 82,262.29


12-11-12 12-14-12 Sell 4,000 CA, Inc. 1.6104 22.15 88,616.41 55,027.58


12-12-12 12-17-12 Sell 3,000 CA, Inc. 1.6116 21.99 65,960.72 40,928.72

12-13-12 12-18-12 Sell 14,000 CA, Inc. 1.6135 22.00 308,064.49 190,929.34


12-13-12 12-18-12 Buy 29,700 Viacom Inc. - Class B 1.6135 53.50 1,588,950.00 984,784.63


12-14-12 12-19-12 Sell 28,600 CA, Inc. 1.6120 21.83 624,455.55 387,379.37



12-17-12 12-20-12 Sell 30,100 CA, Inc. 1.6199 21.89 658,919.37 406,765.46


12-18-12 12-21-12 Sell 30,400 CA, Inc. 1.6247 22.41 681,270.00 419,320.49

12-19-12 12-24-12 Sell 17,700 CA, Inc. 1.6270 22.32 395,127.71 242,856.61

INCOME


From 10-01-12 Through 12-31-12


Local Currency Rep. Currency

Gross Withholding Net Net

Ex-Date Pay-Date Security FX Rate Amount Tax Amount Amount

Cash and Equivalent

Pound Sterling

10-02-12 10-02-12 GBP Cash Account 1.0000 197.80 0.00 197.80 197.80

11-02-12 11-02-12 GBP Cash Account 1.0000 266.23 0.00 266.23 266.23

12-04-12 12-04-12 GBP Cash Account 1.0000 348.25 0.00 348.25 348.25

Total Pound Sterling 812.28 0.00 812.28 812.28

US Dollar

10-02-12 10-02-12 USD Cash Account 1.6138 0.06 0.00 0.06 0.04

10-02-12 10-02-12 USD Cash Account 1.6138 5.96 0.00 5.96 3.69

11-02-12 11-02-12 USD Cash Account 1.6040 43.86 0.00 43.86 27.34

12-04-12 12-04-12 USD Cash Account 1.6106 67.12 0.00 67.12 41.67

Total US Dollar 117.00 0.00 117.00 72.75

Total Cash and Equivalent 885.03

Equities

Pound Sterling

10-10-12 11-12-12 WPP plc 1.0000 40,426.50 0.00 40,426.50 40,426.50

Total Pound Sterling 40,426.50 0.00 40,426.50 40,426.50

US Dollar

10-02-12 10-24-12 Cisco Systems, Inc. 1.6138 43,862.00 0.00 43,862.00 27,179.33

10-03-12 11-01-12 BB&T Corporation 1.6072 32,758.00 0.00 32,758.00 20,382.03

10-09-12 11-05-12 Covidien PLC 1.5999 26,078.00 0.00 26,078.00 16,299.77

10-10-12 11-15-12 Accenture PLC - Cl A 1.6020 79,866.00 0.00 79,866.00 49,853.93

10-10-12 11-02-12 Oracle Corporation 1.6020 10,302.00 0.00 10,302.00 6,430.71

10-10-12 11-02-12 Yum! Brands Inc 1.6020 36,180.00 0.00 36,180.00 22,584.27

10-25-12 11-06-12 Bank of New York Mellon Corp. 1.6141 34,528.00 0.00 34,528.00 21,391.49

10-31-12 11-15-12 AON plc 1.6111 18,506.25 0.00 18,506.25 11,486.72

11-07-12 12-04-12 Pfizer Inc. 1.5987 52,008.00 0.00 52,008.00 32,531.43

INCOME


From 10-01-12 Through 12-31-12


Local Currency Rep. Currency

Gross Withholding Net Net

Ex-Date Pay-Date Security FX Rate Amount Tax Amount Amount

11-07-12 12-01-12 Wells Fargo & Company 1.5987 39,094.00 0.00 39,094.00 24,453.62

11-15-12 12-17-12 L-3 Communications Holdings, Inc. 1.5872 31,400.00 0.00 31,400.00 19,783.27

11-16-12 12-11-12 CA, Inc. 1.5846 50,450.00 0.00 50,450.00 31,837.69

11-20-12 12-12-12 3M Co. 1.5914 38,173.00 0.00 38,173.00 23,987.06

11-21-12 12-12-12 Northrop Grumman Corporation 1.5934 35,365.00 0.00 35,365.00 22,194.68

11-26-12 12-13-12 The Dun & Bradstreet Corporation 1.6024 14,189.20 0.00 14,189.20 8,854.97

11-27-12 12-19-12 Cisco Systems, Inc. 1.6028 43,862.00 0.00 43,862.00 27,365.86

11-28-12 12-14-12 TE Connectivity Ltd. 1.5984 30,765.00 10,767.75 19,997.25 12,510.79

11-28-12 12-15-12 Time Warner Inc. 1.5984 37,388.00 0.00 37,388.00 23,390.89

11-28-12 12-14-12 TE Connectivity Ltd. 1.5984 30,765.00 0.00 30,765.00 19,247.37

11-28-12 12-14-12 TE Connectivity Ltd. 1.5984 -30,765.00 -10,767.75 -19,997.25 -12,510.79

12-12-12 12-27-12 Covidien PLC 1.6116 26,078.00 0.00 26,078.00 16,181.43

12-12-12 12-28-12 Fidelity National Info. Svs. Inc 1.6116 42,420.00 0.00 42,420.00 26,321.67




12-12-12 12-31-12 Viacom Inc. - Class B 1.6116 15,812.50 0.00 15,812.50 9,811.68

12-24-12 01-25-13 Zimmer Holdings Inc. 1.6122 16,578.00 0.00 16,578.00 10,282.84

Total US Dollar 786,568.95 0.00 786,568.95 491,029.91

Total Equities 531,456.41

NET INCOME 532,341.44

CURRENCY TRANSACTIONS


From 10-01-12 To 12-31-12

Trade Settlement Currency Settlement Settlement

Date Date Transaction Traded Amount Currency Amount FX Rate

12-14-12 12-18-12 Buy USD 818,471.51 GBP 508,051.84 1.6110

12-17-12 12-19-12 Buy USD 12,920.80 EUR 9,821.00 1.3156

CONTRIBUTIONS/WITHDRAWALS


From 10-01-12 To 12-31-12


Trade Settle Local Local Reporting Reporting

Date Date Quantity Security Description FX Rate Amount Accrual Amount Accrual

CONTRIBUTIONS

Pound Sterling

10-24-12 10-24-12 500,000.00 GBP Cash Account 1.0000 500,000.00 500,000.00

11-23-12 11-23-12 212,600.99 GBP Cash Account 1.0000 212,600.99 212,600.99

Total Contributions 712,600.99 0.00

WITHDRAWALS

US Dollar

11-30-12 11-30-12 0.07 Cash Adjustment 1.6027 -0.07 -0.04

12-10-12 12-10-12 0.03 Cash Adjustment 1.6075 -0.03 -0.02

Pound Sterling

11-23-12 11-23-12 42,956.74 Longview Partners Management Fee, Guernsey 1.0000 -42,956.74 -42,956.74

11-23-12 11-23-12 169,644.25 Longview Partners Management Fee, London 1.0000 -169,644.25 -169,644.25

11-30-12 11-30-12 9.00 Collective UK PTM Levy On Equity Trading 1.0000 -9.00 -9.00

11-30-12 11-30-12 0.01 Cash Adjustment 1.0000 -0.01 -0.01

12-10-12 12-10-12 6.00 Collective UK PTM Levy On Equity Trading 1.0000 -6.00 -6.00

Total Withdrawals -212,616.06 0.00

NET CONTRIBUTIONS/WITHDRAWALS 499,984.93 0.00

Equity prices used are the last traded price on the given day. Fixed income prices, where applicable, are closing mid-prices taken from various third party sources. Equity and Fixed Income prices are provided by Bloomberg. FX Rates are provided by WM/Reuters and are taken at the close of business in London.

The content of this document is meant solely for investment professionals for informational purposes. Unless otherwise stated, any valuations set forth herein are unaudited. Such valuations are meant to be a true and accurate assessment at the time stated but may be adjusted or modified at any time without prior notice or warning. Valuations do not represent the terms by which new transactions or investments could be entered into or the terms by which existing transactions or investments could be unwound or liquidated. Past performance is not indicative of future performance. Due to various risks and uncertainties, any forward-looking statements contained herein should not be relied upon as representing actual results or performance. Longview specifically disclaims liability for any losses, damages (incidental, consequential or otherwise) that may arise from use or reliance on any financial information contained herein by you or any other party for any reason including, without limitation, your use of such information in preparation of your own financial books and records.

Longview Partners (Guernsey) Limited is licensed and regulated by the Guernsey Financial Services Commission.

Longview Partners LLP is authorised and regulated by the Financial Services Authority.

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Royal Borough of Kensington and Chelsea Pension Fund