Investment Strategy

27th January 2012 ABM Breakfast Briefing, Cork

2

2011 - the year that was

• Bad year for “risk assets”: Eurozone crisis & lack of solutions outweighed low interest rates

• Economic growth disappointed.

• Eurozone debt crisis spread to „core‟ & deleveraging continued

• Bonds: flight to „relative‟ safety = ultra-low US, German & UK govt. bond yields

• Equities: negative returns but defensive & dividends beat higher-risk

– Pharma and tobacco best performers (+ oil & gas, food & beverage, mobile telecoms, utilities)

– Banks & mining worst sectors

– EM, Europe, Asia-Pacific worst markets (and smaller companies)

• Volatility well above average

3

Economic growth – weaker manufacturing activity ahead

Source: Reuters, 3 January 2012

Eurozone Manufacturing PMI

25

30

35

40

45

50

55

60

65

Jan-0

8

May

-08

Sep

-08

Jan-0

9

May

-09

Sep

-09

Jan-1

0

May

-10

Sep

-10

Jan-1

1

May

-11

Sep

-11

Jan-1

2

Germany Ireland Spain Greece

Global Manufacturing PMI

25

30

35

40

45

50

55

60

65

Jan-0

8

May

-08

Sep

-08

Jan-0

9

May

-09

Sep

-09

Jan-1

0

May

-10

Sep

-10

Jan-1

1

May

-11

Sep

-11

Jan-1

2

US ISM UK PMI Euro PMIJapan PMI China PMI

4

Deleveraging - US (and others) face years of debt reduction

Source: Federal Reserve, Morgan Stanley Research 1 Dec 2009

5

Deleveraging – the Scandinavian/Japanese experience

Source: Morgan Stanley, Bank of England, Financial Stability Report, Thompson Datastream and Bank Calculations. Finland and Japan represent bank lending and all other series represent lending by financial institutions

-15

-10

-5

0

5

10

15

20

25

30

35

-3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

Japan

Sweden US

UK

Spain

Finland

Years from Start of Crises

Real Lending growth rates Percentage changes on year earlier

Norway

6

Bonds

Eurozone 10-Year government bond yields

8

Sovereign debt - AAA alternatives but with currency risk

Source: Standard & Poors, Local Currency Rating, 16 January 2012

10 year government bond yields, selected countries

AAA AA- AAA AAA AAA AA+ AA+ AAA AAA AA+ AAA

0.74%0.96%

1.59% 1.66%1.85% 1.92% 1.94% 1.97% 2.05%

3.14%

3.78%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Switzerla

nd

Japan

Singap

ore

Sweden

Ger

many

Norw

ay

Unite

d Sta

tes

Canad

aU

K

France

Austr

alia

Corporate bonds - investment grade

UK Corporate Spreads

Source: Bloomberg, Merrill Lynch, 12 Jan 2012

Euro Corporate spreads bps bps

0

200

400

600

800

1000

1200

Jan-0

8

May-0

8

Sep-0

8

Jan-0

9

May-0

9

Sep-0

9

Jan-1

0

May-1

0

Sep-1

0

Jan-1

1

May-1

1

Sep-1

1

Jan-1

2

Non-banks

Banks

0

100

200

300

400

500

600

700

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Banks

Non-banks

10

Economic growth - stall speed

• GDP forecasts revised down – predominantly for developed world - but above 2% „stall speed‟

• Policy errors in Europe (& US) may eventually require even further austerity, eroding business confidence

• Marked contrast between DW and EM remains, EM to generate approx. 80% of global GDP growth

• Multi-year deleveraging = modest growth and low inflation for DW

• Asia ex Japan main driver global growth next 5 yrs

Source: Citi Global Economic Outlook and Strategy 18 January, Reuters 19 January 2012

2011 2012E 2013E 2011 2012E 2013E 3 mnth 6 mnth 12 mnth 2011 2012E 2013E

UK 0.9% 0.2% 1.0% 4.5% 2.6% 2.3% 0.7% 1.4% 1.8% 3.7% 1.7% 1.5%

US 1.7% 1.9% 1.9% 3.2% 1.7% 1.7% 0.3% 0.7% 1.2% 2.8% 2.2% 2.7%

EMU 1.5% -1.5% -0.4% 2.7% 2.2% 1.4% 1.0% 1.4% 1.7% 2.7% 1.5% 1.7%

Japan -1.0% 1.0% 1.3% -0.3% -0.4% -0.2% 0.1% 0.3% 0.5% 1.1% 1.2% 1.5%

Asia 7.3% 6.9% 7.3% 5.8% 4.2% 4.3%

Industrial World 1.3% 0.6% 1.1% 2.6% 1.6% 1.4%

Emerging World 6.0% 5.2% 5.9% 6.2% 5.2% 5.1%

Global 3.0% 2.3% 3.0% 3.8% 2.9% 2.8%

10-Year Bond YieldsGrowth (GDP) Inflation (CPI) Reuters Deposit Rates

11

Financial stress - getting back on track, unit labour costs

Source: Bank of England Financial Stability Report Dec 2011, Eurostat

12

Equities

13

Equities - global market outlook

• Global policy actions and negative real interest rates supportive

• Strong balance sheets, access to funding and EM exposure key drivers,

• Slowing GDP growth unlikely to lead to profit recession, but

• Reduced business confidence can become self-fulfilling

• Equities attractive on most valuation measures

Source: Citi GES, FactSet Consensus Estimates, MSCI, 18 January 2012, Reuters

MSCI AW MSCI MSCI ROE 10 yr Eq Risk

BMK WGT 2011E 2012E 2011E 2012E P/B Yield 2011E 2011E 2010E Yield Premium

UK 8.4% 14% 8% 10.3x 9.5x 1.5x 4.3% 15% 9.7% 10.5% 1.9% 7.8%

US 50.9% 16% 11% 13.4x 12.1x 1.8x 2.3% 15% 7.5% 8.3% 1.7% 5.8%

Europe 14.8% -5% 11% 11.0x 10.0x 1.2x 4.7% 12% 9.1% 10.0% 1.7% 7.4%

Japan 7.9% 6% 23% 13.8x 11.6x 0.9x 2.8% 7% 7.2% 8.6% 1.0% 6.3%

Asia Pac ex J 12.6% 8% 10% 11.7x 10.8x 1.5x 3.7% 14% 8.5% 9.3% 2.3% 6.3%

Emerging 5.4% 13% 9% 10.5x 9.7x 1.4x 3.3% 15% 9.5% 10.3% 5.8% 3.7%

World 100.0% 10% 11% 12.2x 11.1x 1.5x 3.1% 13% 8.2% 9.0%

EPS YoY% Price/Earnings Earnings Yield

14

Equities - 10-year periods of weak GDP „Lost Decades‟

Source: Citi Research Global Equity Strategist, 16 November 2011

Compound Average Real GDP Growth Over 'Lost Decades'

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

UK 1

974

Italy

199

0

Sw

eden 1

988

Ger

man

y 19

93

Euro

Zone

2001

US 1

929

Japan

199

0

US 2

011-1

5E

Euro

zone

2011-

15E

UK 2

011-

15E

Co

mp

ou

nd

Avera

ge R

eal G

DP

Gro

wth

Over

10 Y

ears

15

Equities - 10-year periods of weak GDP „Lost Decades‟

Source: Citi Research Global Equity Strategist, 16 November 2011

Compound Annual Average Total Equity Return

Over 'Lost Decades'

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

UK 1

974

Italy

199

0

Sw

eden 1

988

Ger

man

y 19

93

Euro

Zone

2001

US 1

929

Japan

199

0

US 2

011-1

5E

Euro

zone

2011-

15E

UK 2

011-

15E

An

nu

al T

ota

l E

qu

ity R

etu

rn

16

Equities - buy cheap = potentially good returns

Source: Oriel Securities UK Equity Briefing, 7 October 2011

17

Equities – 2012 investment themes

• Defensive companies with attractive dividend yields: Well-covered & growing – versus low bond yields

• Other lower-risk companies: i.e. higher-quality, stable growth with strong balance sheets

• Emerging market exposure:

– Via specialist funds

– Via Developed World companies with significant emerging market exposure

• Hedge against risk of euro break-up:

– Via big, defensive, non-Euro with Emerging Markets exposure

18

Summary: 2012 – slowing and uneven growth

• Global economic growth to slow but to avoid recession (except for Eurozone).

• Inflation pressures (from commodity prices etc.) should ease

• Interest rates to remain low until at least 2013

• Market valuations

– Bonds: Governments fully priced (negative “real” yields), Corporates look better

– Equities: Reasonably priced & investors very risk averse

– Commercial Property: fair value

– (Include Absolute Return Funds to reduce portfolio volatility)

Lessons for investors from the “Great Recession”

• Risk matters: (risk= potential for financial loss)

• Danger of leverage: - compounds risk

• Asset Allocation / Diversification matters

• Price matters (Performance = fn{Price paid})

• Liquidity matters

• Other: - Beware of the “crowd” at extremes

- Beware of investing in what you don‟t understand

19

20

Appendix: Equity theme - exposure to growth by sector

Source: MS European Strategy, 3 October 2011

Revenue Exposure to EM & DM2011 estimates, % of Total

0

20

40

60

80

100

120

Techn

olog

y

Energ

y

Semicon

ductor

s

Food

beve

rage

& to

bacc

o

Con

sumer

dur

ables

Mater

ials

Autom

obile

s

Hou

seho

ld &

per

sona

l pro

ducts

Cap

ital g

oods

Pharm

aceu

ticals

Telec

omm

unicat

ions

Trans

porta

tion

Banks

Food

& sta

ples

reta

iling

Com

mer

cial ser

vice

s

Insu

ranc

e

Med

ia

Softw

are & ser

vice

s

Ret

ailin

g

Utilities

Hea

lthca

re e

quipm

ent &

ser

vice

s

Diver

sifie

d fin

ancials

Con

sumer

ser

vice

s

Rea

l estat

e

% o

f to

tal re

ve

nu

e

Emerging Markets

Developed Markets

21

Appendix: Equities - dividends important even in growth markets

Source: DataStream indices, 17 November 2011

Equity Returns: Capital Price vs. Dividend Income

Developed Market, UK and Asia ex Japan

4.7% 4.6%

6.0%

2.2%

3.7%

2.4%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

DM UK Asia ex Japan

20 Years

An

nu

alis

ed

Retu

rn

Dividend Return

Price Return

22

Appendix: Deleveraging - debt/GDP ratio‟s are unsustainable everywhere

Source: Morgan Stanley GEOS 28/11/2011

Forecasts for Budget Deficit

v General Government Debt in 2012

Sweden

Germany

ItalyEuro Area

France

United StatesIndia

Portugal

Greece

Spain

United Kingdom

Japan

-2%

0%

2%

4%

6%

8%

10%

12%

30% 80% 130% 180% 230%

General Government Debt, % GDP

Bu

dg

et

Defi

cit

, %

GD

P

23

Appendix: Govt. Bonds: Large refinancing of Euro debt in 2012

Source: Bloomberg. IMF and Citi Research, 7 November 2011

Sovereign Total Financing Needs

0

200

400

600

800

1000

1200

1400

1600

2012 2013 2014

Bil

lio

n €

Portugal

Ireland

Greece

Belgium

Spain

Germany

Italy

France

24

Appendix: Asset Returns 2011 – (Euro terms)

Asset Returns 31/12/10 - 28/12/11

-20.0

-17.3

-15.5

-14.3

-12.4

-10.7

-7.5

-7.0

-3.5

-3.3

1.9

2.4

2.5

4.7

7.8

9.2

15.2

15.0

20.0

20.5

-25.00 -20.00 -15.00 -10.00 -5.00 0.00 5.00 10.00 15.00 20.00 25.00

Copper (€)

MSCI Frontier Markets

MSCI Emerging Markets (€)

FTSE W Europe ex UK (€)

FTSE W Japan (€)

FTSE W Asia Pacific ex Japan (€)

CRB commodities Index (€)

FTSE W ex UK (€)

US $ to Euro €

FTSE 100

FTSE Corp (€)

Euro € to UK £

Euro € to CHF

FTSE W US (€)

FTSE Ireland (€)

Bunds (€)

FTSE All Gilts

Gold (€)

FTSE Index-Linked Gilts

Brent crude oil (€)

Percent (%)

25

Appendix: Quilter estimated return - secure v variable

Notes

Estimated returns source: Quilter. These represent our estimate of long-term investment returns over a full cycle of seven years or more.

Any data shown is for illustrative purposes only. It does not and cannot constitute a projection of the future which is unknown.

Past performance is no guarantee of future performance and the value of investments and income from them can fall as well as rise.

UK

Equ

itie

s

Inte

rnation

al E

qu

itie

sS

overe

ign

Debt

Corp

ora

te B

on

ds

Ind

ex-L

inked G

ilts

UK

Cash

UK

Pro

pert

y

Hedg

e F

und

s

UK

Pri

vate

Equ

ity

Return Decomposition

Income

Yield

Capital

Appr

Total

Return

Estimated total return 6.0% 6.0% 2.0% 3.0% 2.5% 0.1% 5.0% 4.0% 6.5%

Est. yield 3.8% 2.9% 2.0% 3.0% 0.5% 0.1% 5.0% 0.0% 0.0%

Est. capital appreciation 2.2% 3.1% 0.0% 0.0% 2.0% 0.0% 4.0% 6.5%

Quilter Apcims Growth 48% 33% 8% 3% 3% 8% 100%3.0% 2.4% 5.4%

Quilter Apcims Balanced 43% 25% 20% 5% 3% 5% 100%2.9% 1.9% 4.8%

Quilter Multi Asset Classs 30% 22% 28% 1% 8% 12% 100%2.3% 2.4% 4.7%

Quilter Apcims Income 40% 15% 35% 5% 3% 3% 100%2.8% 1.4% 4.2%

Quilter Apcims Conservative 22% 11% 53% 5% 3% 8% 100%2.3% 1.1% 3.4%

Quilter Apcims Distribution 18% 8% 70% 5% 100%2.3% 0.6% 2.9%

26

Disclaimer

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Whilst we have taken reasonable care to ensure that the information and commentary contained in this presentation is correct at the

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guarantee its accuracy or completeness. All expressions of opinion are subject to change without notice. Any reference to the Quilter

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process but cannot be relied upon as a guide to the future performance of a client‟s portfolio. The figures quoted do not include charges.

All figures correct to 31st December 2011 unless otherwise noted.

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