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    Global Fund Manager Survey Global Fund Manager Survey Document Transcript

    • GLOBAL 17 May 2005 Global Fund Manager Survey From a “Mid-cycle” to “Late-cycle” Mindset Contributors Highlights David Bowers Most negative growth expectations since 2001 Chief Investment Strategist The past two months have seen a dramatic reassessment of both the +44 20 7996 2468 investment strategy and the economic backdrop. The contrast with the views david_bowers@ml.com that were held in early March is truly breathtaking. Investors now think very differently about where we stand in the global business cycle. A majority of the fund managers on our panel (52%) now believe that we have entered the Sarah Franks ‘late-cycle’ phase of the economic cycle. Strategy Analyst +1 212 449 6601 Investors have become a lot gloomier about the prospects for economic sarah_franks@ml.com growth, corporate profits, and margins. The net balance of managers that are positive on growth has gone from plus 11% in March to minus 32% in May, while the prospects for corporate profits have swung from plus 4% in March to minus 34% in May. These two readings are the most negative since 2001. Moreover, the net balance expecting corporate margins to decline has shot up from 18% in March to 40% in May. A fifth of our panel expects zero and/or negative global EPS growth over the coming year. Investors still can’t bring themselves to buy bonds As worries about profit margins have intensified, so anxiety about inflation has diminished. In the past two months, the net balance worried about an acceleration in ‘core’ inflation has fallen from 73% to 45%. This has been accompanied by a significant change in investors’ interest rate expectations. The net balance expecting global short rates to be higher a year from now has fallen from 94% in March to 80% in May. There has been a similar shift in long-rate expectations. Worryingly though, the majority of our panel is still looking for more negatively sloped yield curves a year from now. However, although the macro prospects have deteriorated, and the inflation fears are subsiding, it has not stopped investors from believing that bonds are overvalued. Only 25% of our panel believe bonds are ‘fairly’ or ‘under’ valued – the comparable number for equities is 83% Investors in love with pharma again; less out-of-love with US stocks Investors are less negative on US stocks and less positive on equities in Japan and the eurozone. They have also become more concerned about the euro, which is now seen as the currency most likely to depreciate over the coming year. Global sector rotation shifted predictably against the industrials, the banks and the discretionary names, and to the benefit of pharma, staples and utilities. Pharmaceuticals are now the most loved global sector, while discretionary stocks and banks are now the least liked. Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 34. Global Securities Research & Economics Group RC#40413701 Global Fundamental Equity Research Department
    • Global Fund Manager Survey – 17 May 2005 global short rates to be higher a year from now has 1. Survey Sound Bites fallen from 94% in March to 80% in May. There has The fieldwork began on Friday 6th May (after the April US been a similar shift in long-rate expectations. non-farm payroll data was released) and closed on Worryingly though, the majority of our panel is still Thursday 12th (before the April US retail sales were looking for more negatively sloped yield curves a year published). from now. Investors are also unchanged in their belief that Fed Funds has to rise to around 3.75% to be Table 1: Markets Between Fieldwork Periods consistent with a neutral policy stance. Fieldwork Dates 5/5-12/5 8/4-14/4 4/3-10/3 4/2-10/2 4. Although the macro prospects have deteriorated, and change from last month: the inflation concerns are subsiding, it has not stopped World Equities (%) -1.3 -3.4 3.2 1.3 investors from believing that bonds are overvalued. Dow Jones (%) -1.2 -4.3 1.6 1.3 Only 25% of our panel believe bonds are ‘fairly’ or US 10-Year (bps) -18 1 35 -20 “under” valued – the comparable number for equities is Commodities (%) -0.8 -3.1 10.6 0.2 83%. History tells us that such a preference for equities Trade Weight Dollar (%) -0.4 2.8 -2.3 2.1 over bonds will only pay off if corporate earnings Source: Datastream surprise positively. We have our doubts. 5. More managers are overweight cash than was the case The past two months have seen a dramatic last month (net balance 23% vs. 17% in May), but the reassessment of investment strategy and the economic average cash balance actual fell slightly to 4.1%. The backdrop as global equities have sold off (down some last time that liquidity was high enough to trigger a 5%). The contrast with the views that were held in liquidity-driven rally in the markets was August 2004, early March is truly breathtaking. Here are some of the when the net balance ‘overweight cash’ stood at 30% main talking points from this month’s survey. and the average cash balance was 4.8%. 1. Investors now think very differently about where we 6. There has been a modest shift in regional preferences. stand in the global business cycle. A majority of the Investors are less negative on US equities, and more fund managers on our panel (52%) now believe that concerned about Japan and the eurozone region. They we have entered the ‘late-cycle’ phase of the global have also become more concerned about the euro, business cycle. There has been a pronounced change which is now seen as the currency that is most likely in perceptions over the past two months (15 ‘degrees’ to depreciate over the coming year. Asset allocators in our business cycle clock), far greater than the regard the euro as the most overvalued currency aggregate change in the preceding six months. When among the majors. you get shifts of this magnitude, you know that ‘macro’ is having a major impact on markets. 7. Investors are starting to reassess their view on China. This month sees a sharp downgrade in investors’ 2. Investors have become a lot gloomier about the perceptions of both the growth and inflation outlook, prospects for economic growth, corporate profits, and although they remain firmly convinced that the margins – certainly compared with two months ago. renminbi is overvalued. Once again, we asked The net balance of managers that are positive on investors what might they do if the renminbi was growth has gone from plus 11% in March to minus revalued 10% against the dollar. The results are 32% in May, while the prospects for corporate profits similar to last month’s poll only more pronounced. have swung from plus 4% in March to minus 34% in They think it will be bad for US treasuries, bad for the May. These two readings are the most negative since dollar, good for the Yen, bad for the euro, and bad for 2001. Moreover, the net balance expecting corporate global liquidity. Interestingly and just like last month, margins to decline has shot up from 18% in March to they remain deeply divided as to whether a revaluation 40% in May. A fifth of our panel expects zero and/or is good or bad for commodity prices. negative global EPS growth over the coming year. 8. Global sector rotation shifted predictably against the 3. As concerns about profit margins have intensified, so industrials, the banks and the discretionary names, and anxiety about inflation has diminished. This is a major to the benefit of pharmaceuticals, staples and utilities. change. A net 20% of our panel believe that the world Pharmaceuticals are now the most loved global sector, is operating below trend. A net 12% believe that while discretionary stocks and banks are now the least commodity prices (as measured by the CRB index) liked. Pharmaceuticals continue to be the sector that will be lower a year from now. In the past two investors continue to see as most undervalued, months, the net balance worried about an acceleration followed by insurance and telecoms. in ‘core’ inflation has fallen from 73% to 45%. This has been accompanied by a significant change in 9. A net 71% of asset allocators think that govt. bonds investors’ interest rate expectations. A net 30% still will outperform corporates over the coming year. That believe monetary policy to be too stimulative (down may reflect perceptions that companies are still under- from 41% in March), but the net balance expecting leveraged and the LBO window is still open. Refer to important disclosures on page 34. 2
    • Global Fund Manager Survey – 17 May 2005 CONTENTS n Section Page Editorial 1 Key Highlights from the Survey 2 Dare to be Different! 2 Your Checklist – How Consensus Are You? 4 Profit Expectations 3 Economic Cycle Phase and Growth Expectations; Commodity Prices, 5 EPS Estimates; Demands on Cash Flow; Contributors to Earnings Inflation & Monetary Policy 4 Expectations for Inflation; Assessment of Interest Rates; Outlook for 8 Bond Yields; Expectations of Fed Policy; Neutral Fed Policy Equity Valuation 5 Valuation of Global Equities and Bonds; Investing Time Horizons; 11 Small-Caps vs Large-Caps; Risk Appetite Measures of Risk 6 Beta Exposure; Investing Time Horizons; Small-Caps vs Large-Caps; 13 Risk Appetite Cash Positions 7 Overweight / Underweight vs Benchmark and Absolute Cash Positions; 14 Cash by Fund Type; Fund Inflows Regional Preferences 8 Profit Outlook; Earnings Quality; Equity Valuation; Regional Rotation 16 of Five Regions; Most and Least Favorite Currency China 9 Growth and Inflation Outlook for China; Currency Valuation 18 Assessment Sectors 10 Sector Positioning and Valuation; Sector Position and Relative 19 Performance Asset Allocation 11 Equity Weightings; Bond Preferences; Return on Assets; Equity Risk 24 Premium; Asset Positioning; Equity Market Positioning; Currency 12 Currency Valuation, Currency Hedging 29 Demographics 13 The Composition of Our Panel 31 Equity vs Debt Investors 14 Comparing Equity Fund Managers’ and Debt Fund Managers’ 32 Assessment of Bond Valuation and Interest Rate Expectations Refer to important disclosures on page 34. 3
    • Global Fund Manager Survey – 17 May 2005 2. Dare to be Different! Every month we contact around 300 fund managers from around the world. We ask them what they think about the macro outlook and how they have positioned their investment portfolios. This table summarizes some of their most commonly held views. As you go through the list, you might like to examine how different you are from the consensus by ticking one of the two columns. Table 2: How Different Are You from Consensus? I Agree I Disagree This Month, Fund Managers and Asset Allocators . . . 1 See the global economy as in the late part of the economic cycle o o 2 Think the global economy will weaken over the next year o o 3 See the profit outlook as deteriorating over the next year o o 4 Expect around 5% earnings growth over the next 12 months o o 5 See higher selling prices as the main driver of earnings growth, overtaking higher volumes o o 6 Expect a contraction in operating margins o o 7 Want corporate cash flow to be returned to shareholders rather than used for capex o o 8 Think corporate balance sheets are under-leveraged o o 9 Believe the global economy is operating with a negative output gap o o 10 Think commodity prices will be lower in a year o o 11 Expect core consumer price inflation to be higher a year from now o o 12 Think global monetary policy is too stimulative o o 13 Expect global short-term and long-term interest rates to be higher in 12 months time o o 14 Think yield curves will flatten over the next year o o 15 See a "neutral" Fed rate at 3.7% o o 16 On balance see equities as undervalued o o 17 Think that bond markets are overvalued o o 18 Prefer large-caps to small-caps o o 19 Have shorter-than-normal time horizons o o 20 Have lower-than-normal risk appetites o o 21 Are overweight cash, with just over 4% in portfolios o o 22 Think Emerging Markets have the best profit outlook. o o 23 Think UK equities have the least favorable profit outlook. o o 24 See US equities as having the highest earnings quality, GEM equities the lowest o o 25 See the most value in Eurozone equities o o 26 Think the yen will appreciate the most over the next 12 months o o 27 Think the euro is more likely to depreciate than the US$ o o 28 Would most want to overweight Japan over the next year o o 29 Would most want to underweight US equities o o 30 Expect China’s economy to be weaker in a year’s time, think inflation will be higher o o 31 See the RMB as around 8% undervalued o o 32 Think a RMB revaluation would have an initial negative impact on US treasuries o o 33 Are most overweight the Pharma sector o o 34 Are most underweight Discretionary o o 35 Think Tech is the most overvalued sector, and pharma is the most undervalued o o 36 Do not expect corporate bonds to outperform governments o o 37 Are overweight equities and underweight bonds o o 38 Are most overweight Eurozone equities, are most underweight US equities o o 39 See the EUR and GBP as the most overvalued currencies o o 40 Have the most unhedged currency exposure to GEM currencies o o Refer to important disclosures on page 34. 4
    • Global Fund Manager Survey – 17 May 2005 3. Profit Expectations Table 3: At This Time, in Which Phase of the Economic Cycle Would You Say the Global Economy is? 52% think the economy is in the % saying: May Apr Mar Feb “late-cycle” phase – the first Early-cycle 2 3 3 3 month more than half of the Mid-cycle 44 51 58 57 panelists expressed this view Late-cycle 52 43 39 37 Recession 0 0 0 0 Where Are We (In Terms of Degrees*) 227 O 217 O 212 O 211 O Don’t know 2 3 0 2 * To track how managers think we are progressing through the economic cycle, we’ve expressed their answer as if positioned on a circle. We have positioned “recession” at 0O, “early cycle” at 90O, “mid-cycle” at 180O and “late cycle” at 270O and calculated an overall position from those four locations. Chart 1: Phases of the Global Economic Cycle, In Degrees* This chart tracks, in Apr May Jun Jul “degrees”, how managers’ Feb Mar Aug Sep Jan-05 assessment of where we are in Oct Nov the economic cycle has M Feb-05 Dec changed over time. When we Mar-05 Apr-05 i asked in February, the answer d was firmly in “early-cycle” May-05 range; it is now into mid- C y cycle. c l Investor opinions as to where e we are in the cycle have moved forward, closer to Early Cycle Late Cycle ‘late-cycle’ range R e c e s s i o n * To track how managers think we are progressing through the economic cycle, we’ve expressed their answer to the question above as if positioned on a circle. We have positioned “recession” at 0O, “early cycle” at 90O, “mid-cycle” at 180O and “late cycle” at 270O and calculated an overall position from those four locations. This chart tracks how managers’ views of where we are in the cycle has changed this year – there’s been a steady climb upward from “early-cycle” to “mid- cycle”. Refer to important disclosures on page 34. 5
    • Global Fund Manager Survey – 17 May 2005 Table 4: How do You Think the Global Real Economy Will Develop Over the Next 12 Months? Economic expectations % saying: May Apr Mar Feb continue to soften. A net 32% of Get a Lot Stronger 0 2 4 1 investors think that economic Get a Little Stronger 23 29 41 34 Stay the Same 20 18 21 21 growth will be slower over the Get a Little Weaker 53 46 32 43 next twelve months Get a Lot Weaker 3 4 1 2 Net % Expecting Stronger Economy -32 -20 11 -10 DK/Refused 1 1 0 0 Chart 2: Expectations for Economic Growth vs Expectations for Inflation 100 inflation 100 expectations 80 80 60 60 40 40 20 20 0 0 -20 -20 -40 -40 -60 -60 economic expectations -80 -80 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 % Stronger Economy % Higher Inflation Source: DATASTREAM Table 5: Over the Next 12 Months, Do You Think the Outlook for Managers are much more Corporate Profits World-Wide Will … cautious on the profit outlook, a % saying: May Apr Mar Feb net 34% expect it to deteriorate. Improve Strongly 0 2 2 1 Improve Slightly 25 33 41 41 Remain Unchanged 14 12 16 14 Investors have also downgraded Deteriorate Slightly 55 48 38 42 their eps growth assumptions, Deteriorate Strongly 5 4 1 3 from 5.8% to 5.1%. Net % Expecting Corporate Profits to Improve -34 -17 4 -3 DK/Refused 2 2 1 1 Chart 3: Profit Expectations and EPS Forecasts Table 6: What is Your % Forecast 5-12-05 for Global EPS Growth Over the 100 Investors expect around 5.1% eps growth 14 Next 12 Months? 80 12 % saying: May Apr Mar 60 Minus 25% or less 0 0 0 10 40 Minus 20% 0 1 0 Minus 15% 1 0 1 20 8 Minus 10% 4 3 1 0 6 Minus 5% 7 6 4 Zero 7 3 5 -20 4 Plus 5% 39 36 32 -40 Plus 10% 34 38 47 2 Plus 15% 2 4 4 -60 Plus 20% 0 0 1 -80 0 Plus 25% or more 0 0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Net % Expecting Profit Outlook to Improve Average EPS % 5.1 5.8 6.9 12-mth eps growth est %(R.H.SCALE) Source: DATASTREAM DK / Refused 6 8 4 Refer to important disclosures on page 34. 6
    • Global Fund Manager Survey – 17 May 2005 Higher volumes as an earnings Table 7: What Do You See as the Most Positive Contributor to Global driver falls sharply – now Corporate Earnings Over the Next Twelve Months? overtaken by higher selling % saying: May Apr Mar Feb prices (though lower costs also Higher Volumes 29 40 50 44 Higher Selling Prices 39 33 30 29 on the rise!) Lower Costs 27 21 16 23 DK/Refused 5 6 4 5 Chart 4: What’s the Most Positive Contributor to Earnings Over the Next Twelve Months? A net 40% of investors anticipate margin contraction 80 over the next 12 months 70 higher v olume s 60 50 Table 8: Over the next 12 months, do you think corporate 40 higher se lling p rices operating margins will… 30 % saying May Apr Mar 20 Increase 14 18 22 Decrease 54 49 40 10 Stay the same 31 30 36 low e r costs 0 Net % Say Improve -40 -30 -18 Sep-02 Sep-03 Sep-04 Jul-02 Jul-03 Jul-04 Jan-03 Mar-03 Jan-04 Mar-04 Jan-05 Mar-05 May-02 Nov-02 May-03 Nov-03 May-04 Nov-04 May-05 DK/Refused 2 3 2 Table 9: What Would You Most Like to See Companies Doing With Cash 49% of the panel want Flow at the Current Time? corporate cash returned to % saying: May Apr Mar Feb shareholders Increase capital spending 30 36 36 33 Improve balance sheets (e.g. repay debt, top up company pension plan) 17 14 14 14 Return cash to shareholders (increased share buybacks / dividends) 49 44 47 49 Don’t Know / Refused / Other 5 5 3 4 A net 35% of investors think Chart 5: What Would You Most Like to See Companies Doing With Cash Flow? corporate balance sheets are 60 return cash to shareholders under-leveraged 50 increase capex Generally speaking, do you think 40 that corporate balance sheets are currently… 30 % saying: May Apr 20 Over-leveraged 6 6 Under-leveraged 41 44 10 Appropriately Leveraged 47 44 Net % Say Under- 0 rebuild balance sheets Leveraged 35 38 Aug-02 Oct-02 Dec-02 Apr-03 Aug-03 Oct-03 Dec-03 Apr-04 Aug-04 Oct-04 Dec-04 Apr-05 Jun-02 Jun-03 Jun-04 Feb-03 Feb-04 Feb-05 DK/Refused 6 7 Refer to important disclosures on page 34. 7
    • Global Fund Manager Survey – 17 May 2005 4. Inflation & Monetary Policy Table 10: At This Time, Do You Think the Global Economy is Operating … % saying May Apr Mar Feb With a positive output gap (i.e. output above its long- term sustainable growth path) 22 26 21 24 On balance, investors With a negative output gap (i.e. output below its long- believe the global economy term sustainable growth path) 42 37 43 38 to be operating below trend With a zero output gap (i.e. output in line with its long- term sustainable growth path) 31 31 29 32 % See Positive Output Gap - % See Negative -20 -10 -22 -15 Don’t know 5 6 7 6 Chart 6: Net % See a Positive (Negative) Output Gap 0 -5 -10 -15 -20 -25 N et % S ee a P os itiv e O utput G ap -30 A ug-04 S ep-04 O c t-04 N ov -04 Dec -04 J an-05 F eb-05 M ar-05 A pr-05 M ay -05 Table 11: In 12 months' time, do you think that commodity prices (as tracked by the CRB index) will be…? % saying May Apr A net 12% of investors think A Lot Higher (+15% or more) 0 2 commodity prices will be lower Moderately Higher (+5-15%) 29 31 Broadly Unchanged (between +/- 5%) 28 29 in a year’s time, on average by Moderately Lower (-5-15%) 36 28 around 1% A Lot Lower (-15% or less) 5 7 Net % Expect Commodity Prices to be Higher -12 -3 Average % Expected Change in CRB Index -1 -1 Don’t know 2 3 Refer to important disclosures on page 34. 8
    • Global Fund Manager Survey – 17 May 2005 Chart 7: Expectations for Inflation and Assessment of Interest Rates Table 12: Inflation & Monetary 100 100 Policy Inflation expectations % saying: May Apr Mar decline 80 80 In 12m, A Lot Higher 2 3 4 Will Slightly Higher 59 67 74 Global 60 60 Unchanged 22 21 15 Core Inflation Slightly Lower 16 8 5 40 40 Be... A Lot Lower 0 0 0 Net % Saying Higher 45 62 73 20 20 Do You Too Think Stimulative 34 41 43 0 0 Global About Right 61 55 53 Monetary Too Policy is... Restrictive 3 1 2 -20 -20 Net % Saying Too Stimulative 30 39 41 -40 monetary policy -40 seen as stimulative -60 -60 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Net % Expecting Higher Inflation Net % Saying Global Monetary Policy Too Stimulative Source: DATASTREAM Chart 8: Outlook for Rates Table 13: Outlook for Rates 63% expect long rates 5-12-05 100 100 % saying: May Apr Mar to rise In 12 A Lot Higher 6 14 15 80 80 Months, Slightly Higher 79 78 80 Will Short- Unchanged 10 5 4 60 60 Term Interest Slightly Lower 4 2 0 40 40 Rates Be... A Lot Lower 0 0 0 Net % Saying Higher 80 90 94 20 20 In 12 A Lot Higher 9 10 16 Months, Slightly Higher 62 67 67 0 0 Will Long- Unchanged 18 16 14 Term Slightly Lower 7 6 4 -20 -20 Interest A Lot Lower Rates Be... 2 1 0 -40 80% think short rates -40 Net % Expect Higher 63 69 79 will be higher in a year -60 -60 -80 -80 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Net % Expecting Short-Term Rates to be Higher in 12 Months Net % Expecting Long-Term Rates to be Higher in 12 Months Source: DATASTREAM Refer to important disclosures on page 34. 9
    • Global Fund Manager Survey – 17 May 2005 Table 14: In 12 months’ time, do you think yield curves (i.e. 10-year minus 3-month rates) will… % saying May Apr Mar Feb A net 31% of investors think Flatten (become more negatively sloped) 54 57 52 66 yield curves will flatten over the Steepen (become more positively sloped) 23 24 29 20 next year Remain the same 19 14 16 11 Net % Expect Flatter Yield Curves 31 33 23 46 DK/Refused 4 6 4 3 Chart 9: At this time, what do you consider to be a neutral Fed Funds rate (i.e. one that is neither stimulative nor restrictive)? What’s a “Neutral” Fed Funds Rate? 4.0 Equity Fund Debt Fund Equity FM Debt FM % saying: Managers Managers* 2% or lower 1 1 3.8 2.25% 0 0 Both equity and debt investors see a “neutral” 2.5% 1 0 rate around 3.7-3.8% 2.75% 0 0 3.5 3.0% 7 3 3.25% 9 5 3.3 3.5% 28 27 3.75% 12 17 4.0% 22 29 3.0 4.25% 3 6 4.5% 7 8 4.75% or higher 5 2 2.8 Oct-04 Apr-05 Aug-04 Sep-04 Dec-04 Jun-04 Jul-04 Jan-05 Mar-05 Feb-05 Nov-04 May-05 “Neutral” Fed Rate 3.7 3.8 * Results from the ML FX and Debt Survey Refer to important disclosures on page 34. 10
    • Global Fund Manager Survey – 17 May 2005 5. Equity Valuation Table 15: Do You Think Global Equity Markets are Currently . . . % saying: May Apr Mar Feb On balance, a net 15% think Overvalued 15 14 12 10 global equities are Fairly Valued 54 63 66 62 undervalued Undervalued 29 20 22 27 Net % Saying “Overvalued” -15 -6 -10 -17 DK/Refused 2 3 1 1 Table 16: Do You Think Global Bond Markets are Currently . . . 68% think bonds are % saying: May Apr Mar Feb overvalued Overvalued 71 70 76 74 (to see what fixed income Fairly Valued 22 20 16 20 Undervalued 3 4 3 3 managers think see the last Net % Say Overvalued 68 67 73 71 pages) DK/Refused 5 6 4 3 Chart 10: Equity Valuation vs Bond Market Valuation 5-12-05 75 75 Bonds seen as overvalued 60 60 40 40 20 20 0 0 -20 -20 Stocks seen as undervalued -40 -40 -50 -50 1998 1999 2000 2001 2002 2003 2004 2005 2006 Net % Think Global Equities are Overvalued Net % Think Bonds are Overvalued Source: DATASTREAM Refer to important disclosures on page 34. 11
    • Global Fund Manager Survey – 17 May 2005 Chart 11: Equity Valuation and Net % of Managers Overweight Cash 10 Mar-04 Jan-02 5 Feb-04 Apr-02 Apr-04 May -02 Cash on hand and an 0 Sep-03 Dec-03 Nov -03 -5 Jan-04 0 5 10 15 20 25 30 35 40 45 undervalued market (points in -5 Jul-03 the lower right corner of the -10 chart) can be a powerful <- Undervalued // Overvalued -> -15 May -05 combination -20 May -03 On this chart we’ve marked -25 Sep-01 where the +/-1 standard -30 Jul-02 Apr-01 Oct-01 deviation bands lie, showing Aug-02 Oct-02 -35 “extremes” in the cash & value Feb-03 Mar-03 combination -40 -45 <- Underweight Cash // Overweight Cash -> Table 17: In the Current Environment, Do You Prefer Large-Cap or Small Cap Stocks? % saying: May Apr Mar Feb Large-Cap 69 64 60 55 Large-caps preferred to small- Small-Cap 9 8 9 13 caps No Preference 16 23 26 26 Net Preferring Small Caps -60 -55 -52 -43 DK/Refused 6 5 4 6 Chart 12: Net % Preferring Small Caps and Relative Performance 5-12-05 10 0.16 0 0.15 0.14 -10 -20 0.13 -30 0.12 -40 0.11 -50 0.10 -60 -70 0.09 2001 2002 2003 2004 2005 NET % PREFERRING SMALL CAPS OVER LARGE CAPS SMALL CAPS REL TO WORLD(R.H.SCALE) Source: DATASTREAM Refer to important disclosures on page 34. 12
    • Global Fund Manager Survey – 17 May 2005 6. Measures of Risk Chart 13: Risk Appetite & Investing Time Horizons 20 Net % Longer Time Horizons Table 18: Risk Appetite & Net % Higher Risk Investing Time Horizons 10 % saying: May Apr Mar longer time horizons . . . higher risk appetite How would you describe your current investment time horizon? 0 shorter time horizons . . . Longer than normal 9 6 4 lower risk appetite Normal 62 67 65 -10 Shorter than normal 24 21 27 Net % Say Longer -20 Than Normal -16 -15 -23 DK/Refused 5 5 4 -30 What level of risk are you currently taking in your investment strategy / portfolio, relative to your benchmark? -40 Higher than normal 10 12 15 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Aug-01 Dec-01 Aug-02 Dec-02 Aug-03 Dec-03 Aug-04 Dec-04 Jun-01 Feb-02 Jun-02 Feb-03 Jun-03 Feb-04 Jun-04 Feb-05 Normal 51 51 59 Lower than normal 34 34 22 Net % Say Higher Than Normal -23 -21 -7 Chart 14: Investing Time Horizons and Risk Appetite DK/Refused 6 4 4 +1 st dev (time) +1 st dev (risk) A net 23% of our panel have a <<low<< RISK APPETITE >>high>> lower-than-normal risk appetite, a net 16% have a shorter-than- normal investing time horizon -1 st dev (risk) May 2005 -1 st dev (time) The shaded boxes represent ‘extremes’ in risk taking (upper right) or risk aversion (lower left). While investors currently have low risk appetite, their time horizons are not extreme <<short<< TIME HORIZONS >>long>> Refer to important disclosures on page 34. 13
    • Global Fund Manager Survey – 17 May 2005 7. Cash Positions Table 19: Are You Currently Overweight, Underweight or Neutral Cash Relative to Your Benchmark? A net 23% of the panel are % saying: May Apr Mar Feb overweight cash Overweight 34 29 28 26 Neutral 41 42 42 38 Underweight 11 12 16 20 Net Balance Overweight 23 17 12 6 Not Applicable/DK 14 16 14 16 Table 20: Which of the Following Comes Closest to Your Current Cash Position? % saying: May Apr Mar Feb Average cash in portfolios is 0% 15 18 20 18 around 4.1% - broadly 2% 26 23 24 28 unchanged from last month 4% 22 20 18 21 6% 7 10 10 10 8% 4 3 4 3 10% 4 4 5 3 12% or more 9 10 11 8 Mean Cash Balance (%) 4.1 4.2 4.2 3.9 Not Applicable/DK 14 13 8 9 Chart 15: Net Overweight Cash and Mean Cash Balance 50 11 More investors say they’re overweight cash (though 40 % balances are broadly unchanged) 10 30 9 20 8 10 0 7 -10 6 -20 5 -30 4 -40 -50 3 1998 1999 2000 2001 2002 2003 2004 2005 2006 Net % Overweight Cash Average Cash Balance %(R.H.SCALE) Source: DATASTREAM Refer to important disclosures on page 34. 14
    • Global Fund Manager Survey – 17 May 2005 Chart 16: Net Overweight Cash and Mean Cash Balance 6.5 Oct-01 The upper right hand corner of 6.0 Nov -01 this chart shows months where cash has been plentiful (above 5.5 Mar-03 1 standard deviation), the lower average cash balance (%) Oct-02 left shows months where cash 5.0 Aug-04 has been scarce. 4.5 May -04 The current month’s reading is May -05 4.0 Oct-03 in neither of those ranges. Jan-04 Dec-03 Jun-03 Apr-02Feb-05 3.5 Sep-03 Mar-04 3.0 (5) - 5 10 15 20 25 30 35 40 45 <= net % overweight cash => Chart 17: Cash Balances By Type of Fund* 14 Institutional Retail Hedge 12 10 hedge fund: 8.0% 8 6 retail funds: 4.1% 4 institutional fund: 3.3% 2 Dec-01 Dec-02 Dec-03 Dec-04 Sep-01 Sep-02 Sep-03 Sep-04 Jun-01 Jun-02 Jun-03 Jun-04 Mar-02 Mar-03 Mar-04 Mar-05 *Please note that the sample of hedge funds is low, please use the hedge fund results as indicative only. Refer to important disclosures on page 34. 15
    • Global Fund Manager Survey – 17 May 2005 8. Regional Preferences Where is the Outlook for Corporate Profits Chart 18: Net % Saying Profit Outlook is Most Favorable Most / Least Favourable? 5-12-05 % saying: May Apr Mar 60 60 Most US 20 15 13 40 40 Eurozone 18 20 18 UK 3 5 3 GEM 20 20 Japanese 19 24 20 Japan Global Emg Mkt 27 26 35 0 Euro 0 Least US 25 30 29 US Eurozone 25 18 24 -20 -20 UK 16 18 17 UK Japanese 10 9 7 -40 -40 Global Emg Mkt 10 11 5 Net US -5 -15 -16 -60 -60 Eurozone -7 1 -5 US improvement – Japan and Eurozone decline UK -13 -13 -14 -80 -80 2001 2002 2003 2004 2005 2006 Japanese 9 15 13 US JAPAN EUROZONE GEM Global Emg Mkt 18 16 30 UK Source: DATASTREAM In Which Region is the Quality* of Earnings the Best / Worst? Chart 19: Net % Saying Earnings are Highest Quality % saying: May Apr Mar 5-12-05 60 60 Best US 39 38 38 Eurozone 12 14 16 40 40 UK 21 18 20 Japanese 6 5 6 US Global Emg Mkt 4 4 3 20 UK 20 Worst US 12 11 9 Eurozone 5 7 8 Euro 0 0 UK 2 2 2 Japan Japanese 15 16 19 -20 -20 Global Emg Mkt 42 43 42 Net US 27 27 29 GEM -40 -40 Eurozone 7 8 8 UK 18 16 18 -60 -60 Japanese -9 -11 -13 2001 2002 2003 2004 2005 2006 US JAPAN Global Emg Mkt -39 -39 -39 EUROZONE GEM UK * Most / Least Volatile Earnings Source: DATASTREAM Which of the Following Equity Markets is Most Overvalued / Most Undervalued? Chart 20: Net % Saying Region is Most Overvalued % saying: May Apr Mar 5-12-05 80 80 Over US 59 58 58 Eurozone 7 5 6 60 60 UK 7 9 10 US Japanese 7 5 5 40 40 Global Emg Mkt 8 8 7 Under US 5 3 3 20 20 Eurozone 28 26 25 UK 6 5 5 0 UK 0 Japanese 22 27 24 Japan Global Emg Mkt 25 27 28 -20 GEM -20 Net US 54 56 55 Euro Eurozone -21 -21 -19 -40 -40 UK 2 4 5 -60 -60 Japanese -15 -21 -19 2001 2002 2003 2004 2005 2006 US JAPAN Global Emg Mkt -18 -19 -21 EUROZONE GEM UK Source: DATASTREAM Refer to important disclosures on page 34. 16
    • Global Fund Manager Survey – 17 May 2005 Chart 21: Net % Think Currency Will Appreciate / Depreciate the Most Over the next 12 months, which currency do you expect to appreciate / depreciate the most 5-12-05 80 on a trade-weight basis? Net optimism on the US$ overtakes the Euro (though the Yen is still expected to appreciate the most) % saying: May Apr Mar 60 Appreciate USD 29 30 26 EUR 11 19 23 40 ¥ YEN 37 33 38 20 Depreciate USD 38 42 50 EUR 34 29 27 0 YEN 5 9 4 U.S. $ Net USD -8 -12 -24 -20 EUR -23 -10 -4 -40 YEN 32 24 34 -60 -80 2001 2002 2003 2004 2005 EURO US DOLLAR YEN Source: DATASTREAM Over the next 12 months, which region would you most like to overweight / underweight? % saying: May Apr Mar Chart 22: Net % Would Overweight the Region on a 12-month View Most US 12 7 6 Japan and Eurozone equities most would overweight 5-12-05 Eurozone 24 29 25 40 40 UK 8 8 5 30 30 Japan Japanese 25 32 31 20 20 Global Emg Mkt 22 16 25 GEM Least US 47 52 52 10 10 Eurozone 11 9 10 Euro 0 0 UK 11 10 15 UK -10 -10 Japanese 7 7 7 Global Emg Mkt 14 10 6 -20 -20 Net US -35 -45 -45 -30 -30 Eurozone 13 21 15 -40 -40 UK -3 -3 -10 US Japanese 18 25 24 -50 -50 Global Emg Mkt 9 6 19 -60 -60 2001 2002 2003 2004 2005 2006 US JAPAN EUROZONE GEM UK Source: DATASTREAM Chart 23: Implied Currency Pair Trade (Selected Trades) 50 45 long ¥-short $ 40 35 long E-short $ Table 21: Implied FX Pair Trade 30 “Short” long $-short E 25 Don’t “Long” USD EUR JPY Know 20 USD 22 5 2 15 long $-short ¥ EUR 11 0 0 JPY 25 11 1 10 Don’t Know 2 1 0 19 5 0 5/01 8/01 11/01 2/02 5/02 8/02 11/02 2/03 5/03 8/03 11/03 2/04 5/04 8/04 11/04 2/05 5/05 8/05 Refer to important disclosures on page 34. 17
    • Global Fund Manager Survey – 17 May 2005 9. Questions on China Investors expect China’s Table 22: Assessment of China’s Growth & Inflation May Apr Mar Feb economy to weaken How do you think Get a lot stronger 4 7 8 7 that China’s Get a little stronger 18 25 24 22 A net 52% think China’s economy will Stay the same 33 32 37 31 develop over the inflation will be higher over the next 12 months?* Get a little weaker 39 29 29 37 next year Get a lot weaker 2 2 0 1 Net % Say Stronger -18 0 3 -9 In 12 months’ time A lot higher 5 6 7 5 Chart 24: Net % See Stronger Chinese do you think A little higher 56 63 53 53 Economy / Higher Inflation Over Next China’s inflation the Same 25 17 24 26 rate (in year-on- 12-Months year terms) will A little lower 8 6 11 13 80 Net % See Stronger Economy be... A lot lower 0 1 0 1 Net % See Higher Inflation 60 Net % Say Higher 52 61 48 44 40 * includes Asia-ex-Japan panelists. 20 0 -20 -40 Table 23: Based on current fundamentals, do you think the Chinese Renminbi is . . . Aug-03 Sep-03 Dec-03 Aug-04 Sep-04 Dec-04 Feb-03 Mar-03 Apr-03 Oct-03 Feb-04 Mar-04 Apr-04 Oct-04 Feb-05 Mar-05 Apr-05 Jun-03 Jul-03 Jan-04 Jun-04 Jul-04 Jan-05 May-03 Nov-03 May-04 Nov-04 May-05 May Apr Mar Feb Significantly overvalued (more than 15%) 4 4 4 7 Moderately overvalued (between 5% & 15%) 16 16 11 12 Fairly valued (between + / - 5%) 5 7 9 9 A net 47% of investors think the Moderately undervalued (between 5% & 15%) 40 35 40 36 Chinese renminbi is Significantly undervalued (more than 15%) 26 26 26 27 Net % Say Overvalued -47 -41 -50 -44 undervalued; on average, they Average % Over/Undervalued -8 -7 -8 -7 see this undervalution at Don’t Know 9 12 11 9 around 8% Table 24: If China revalued the Renminbi 10% against the US Dollar tomorrow, what do you think the short-term impact on the following asset classes might be? Net % (Last Investors think the near-term Positive Negative No Signif. Saying Month’s Don’t impact of a renminbi % saying Impact Impact Impact Positive Results) Know US Bond Prices 9 59 18 -51 -38 14 revaluation would be most US Equities 37 20 29 16 16 14 negative for US bond prices and Commodity Prices in USD (CRB for global liquidity conditions Index) 31 30 21 1 0 18 Trade Weighted Dollar 20 52 9 -32 -15 19 Trade-Weighted Yen 51 17 13 34 16 20 Trade-Weighted Euro 17 30 30 -13 0 23 Global Liquidity Conditions 7 43 29 -36 -28 22 Refer to important disclosures on page 34. 18
    • Global Fund Manager Survey – 17 May 2005 10. Global Sectors Chart 25: This Month’s Snapshot – Current Sector Positioning Pharma Table 25: Current Sector Energy Positions Telecoms May-05 Apr-05 Mar-05 Staples Banks -20 -14 -9 Industrials Discretionary -29 -15 -11 Materials Energy +24 +21 +29 Industrials +4 +12 +20 Insurance Insurance +0 +4 +3 Tech Pharma weight surges – Materials +2 +5 +11 Utilities now the sector most Pharma +33 +14 +10 overweight! Banks Staples +8 +0 -7 Discretionary Tech -9 -11 -3 Telecoms +10 +10 +12 -35 -25 -15 -5 +5 +15 +25 +35 <= underweight // overweight => Utilities -13 -21 -25 n Sector Positions and Sector Performance Relative to World Chart 26: Net % Overweight Banks 5-12-05 15 102 Underweight banks 100 Banks 10 98 5 % saying: May Apr Mar 96 Aggressively Overweight 1 3 2 0 94 Moderately Overweight 11 14 15 -5 92 Neutral 24 18 24 -10 90 Moderately Underweight 25 26 22 -15 88 Aggressively Underweight 7 5 4 -20 86 Net % Overweight -20 -14 -9 -25 84 2002 2003 2004 2005 NET % OVERWEIGHT BANKS BANKS (-3M=100)(R.H.SCALE) Source: DATASTREAM Chart 27: Net % Overweight Energy 5-12-05 35 Still overweight energy 110 Energy 30 105 % saying: May Apr Mar 25 100 Aggressively Overweight 8 9 12 20 95 Moderately Overweight 27 26 26 15 90 Neutral 23 20 21 10 Moderately Underweight 9 11 7 5 85 Aggressively Underweight 2 3 2 0 80 Net % Overweight 24 21 29 -5 -10 75 2002 2003 2004 2005 NET % OVERWEIGHT ENERGY ENERGY (-3M=100)(R.H.SCALE) Source: DATASTREAM Refer to important disclosures on page 34. 19
    • Global Fund Manager Survey – 17 May 2005 Chart 28: Net % Overweight General Industries 5-12-05 40 Industrials weight declines 102 General Industrials 35 100 30 % saying: May Apr Mar 25 98 Aggressively Overweight 4 6 7 20 96 Moderately Overweight 19 23 24 15 10 Neutral 27 21 25 94 5 Moderately Underweight 17 15 10 0 92 Aggressively Underweight 2 2 1 -5 90 Net % Overweight 4 12 20 -10 -15 88 2002 2003 2004 2005 NET % OVERWEIGHT GENERAL INDUSTRIALS GENERAL INDUS. (-3M=100)(R.H.SCALE) Source: DATASTREAM Chart 29: Net % Overweight Insurance 5-12-05 20 120 15 Insurance 115 10 % saying: May Apr Mar 5 110 Aggressively Overweight 4 5 3 0 Moderately Overweight 16 19 19 -5 105 Neutral 28 22 25 -10 100 Moderately Underweight 18 15 14 -15 Aggressively Underweight 2 5 5 -20 Small overweight insurance 95 Net % Overweight 0 4 3 -25 -30 90 2002 2003 2004 2005 NET % OVERWEIGHT INSURANCE INSURANCE (-3M=100)(R.H.SCALE) Source: DATASTREAM Chart 30: Net % Overweight Basic Materials 5-12-05 40 Materials weight falls 105 35 Basic Materials 100 30 % saying: May Apr Mar 25 95 Aggressively Overweight 4 7 8 20 90 Moderately Overweight 21 19 20 15 85 Neutral 20 21 22 10 80 Moderately Underweight 17 13 13 5 Aggressively Underweight 6 8 4 0 75 Net % Overweight 2 5 11 -5 -10 70 2002 2003 2004 2005 NET % OVERWEIGHT BASIC MATERIALS BASIC MATS (-3M=100)(R.H.SCALE) Source: DATASTREAM Chart 31: Net % Overweight Pharma/Health 5-12-05 35 Pharma overweight surges this month! 140 135 Pharma / Healthcare 30 25 130 % saying: May Apr Mar 20 125 Aggressively Overweight 11 6 5 15 120 Moderately Overweight 29 25 24 10 115 Neutral 20 19 20 5 110 Moderately Underweight 5 13 12 0 105 Aggressively Underweight 2 4 7 -5 100 Net % Overweight 33 14 10 -10 -15 95 2002 2003 2004 2005 NET % OVERWEIGHT PHARMA/HEALTHCARE PHARMAS (-3M=100)(R.H.SCALE) Source: DATASTREAM Refer to important disclosures on page 34. 20
    • Global Fund Manager Survey – 17 May 2005 Chart 32: Net % Overweight Consumer Staples 5-12-05 30 130 Consumer Staples 20 Overweight staples 125 % saying: May Apr Mar 120 10 Aggressively Overweight 5 3 1 115 Moderately Overweight 21 20 18 0 Neutral 23 21 23 -10 110 Moderately Underweight 15 18 19 105 -20 Aggressively Underweight 3 5 7 Net % Overweight 8 0 -7 -30 100 -40 95 2002 2003 2004 2005 NET % OVERWEIGHT CONSUMER STAPLES STAPLES (-3M=100)(R.H.SCALE) Source: DATASTREAM Chart 33: Net % Overweight Technology 5-12-05 30 160 Tech 20 150 140 % saying: May Apr Mar 10 130 Aggressively Overweight 2 2 3 0 120 Moderately Overweight 17 17 16 -10 Neutral 21 18 26 110 -20 Moderately Underweight 18 19 15 100 Aggressively Underweight 10 11 7 -30 Underweight tech 90 Net % Overweight -9 -11 -3 -40 -50 80 2002 2003 2004 2005 NET % OVERWEIGHT TECHNOLOGY TECHNOLOGY (-3M=100)(R.H.SCALE) Source: DATASTREAM Chart 34: Net % Overweight Telecoms 5-12-05 30 110 108 20 Telecoms 106 10 104 % saying: May Apr Mar 102 0 Aggressively Overweight 5 3 4 100 -10 Moderately Overweight 23 23 24 98 96 Neutral 22 26 23 -20 Overweight telecoms 94 Moderately Underweight 12 13 13 -30 92 Aggressively Underweight 6 3 3 -40 90 Net % Overweight 10 10 12 -50 88 2002 2003 2004 2005 NET % OVERWEIGHT TELECOMS TELECOMS (-3M=100)(R.H.SCALE) Source: DATASTREAM Chart 35: Net % Overweight Utilities 5 Underweight utilities 5-12-05 104 Utilities 0 102 -5 % saying: May Apr Mar -10 100 Aggressively Overweight 4 3 0 -15 98 Moderately Overweight 10 10 10 -20 96 Neutral 27 22 22 -25 94 Moderately Underweight 19 24 22 -30 92 -35 Aggressively Underweight 8 10 13 90 -40 Net % Overweight -13 -21 -25 -45 88 -50 86 2002 2003 2004 2005 NET % OVERWEIGHT UTILITIES UTILITIES (-3M=100)(R.H.SCALE) Source: DATASTREAM Refer to important disclosures on page 34. 21
    • Global Fund Manager Survey – 17 May 2005 Global Sector Valuation n Global Sector Positions vs Sector Valuation Chart 37: Banks Weight & Valuation O verweight Overweight Table 26: Which Sector is the Most Undervalued 5 Overvalued Over/Undervalued? M ay Apr Net % Saying Over(Under) May-05 Apr-05 Mar-05 Feb-05 -25 Aug -20 -15 -10 -5 0 0 5 D ec 10 15 20 25 Banks +1 +2 -3 -3 Jun Feb Mar Discretionary +1 +5 +5 -1 -5 Jul Energy +1 -2 +11 -1 N ov Jan Industrials -1 -4 -5 -3 Sep -10 Insurance -6 -11 -14 -6 Underweight Oct Underweight Materials +11 +7 +8 +11 Undervalued Overvalued Pharma -34 -30 -31 -28 -15 Staples +5 +3 +2 +2 Tech +25 +27 +21 +29 Chart 38: Energy Weight & Valuation Telecoms -6 -3 -5 -8 Utilities +2 +6 +10 +9 15 Overweight Underweight 10 Overvalued Apr Overvalued 5 Chart 36: Sector Valuation Assessment M ay 0 -10 -5 0 5 10 15 20 25 30 Aug 35 Pharma D ec F eb M ar Sep Oct Jan Insurance Underweight -5 Overweight N ov Undervalued Undervalued Telecoms -10 Jun Industrials Jul Tech is seen as Banks -15 expensive Energy Pharma seen as Discretionary Chart 39: Industrials Weight & Valuation cheap Utilities 3 Staples Overweight Underweight 2 Materials Overvalued Overvalued 1 Tech 0 -5 0 M ay 5 10 15 N ov 20 25 -35 -30 -25 -20 -15 -10 -5 +0 +5 +10 +15 +20 +25 +30 +35 -1 Oct undervalued // overvalued -2 -3 F eb Sep Aug Apr -4 Jun Underweight Overweight Jan Mar -5 Undervalued Undervalued D ec -6 Jul -7 Chart 40: Insurance Weight & Valuation 15 Overweight Underweight 10 Overvalued Overvalued 5 0 -5 -3 -1 1 3 5 7 9 Jul Sep F eb Aug -5 May Oct Jan D ec -10 Jun Overweight Underweight Nov Apr Undervalued Undervalued -15 Mar Refer to important disclosures on page 34. 22
    • Global Fund Manager Survey – 17 May 2005 Chart 41: Materials Weight & Valuation Chart 45: Telecoms Weight & Valuation 15 4 U nderweight O verweight Underweight Overweight M ay O vervalued Overvalued Overvalued 2 Overvalued 10 F eb D ec Jan 0 M ar -10 -5 0 5 10 15 20 25 Apr 5 Jun -2 N ov Jan Aug Apr Jun Oct -4 0 M ay Oct Sep -5 0 5 10 15 20 -6 Aug M ar U nderweight -5 Jul Overweight -8 Jul Feb N ov U ndervalued Undervalued Sep D ec Underweight -10 Overweight Undervalued -10 -12 Undervalued Chart 42: Pharma Weight & Valuation Chart 46: Utilities Weight & Valuation Underweight 5 Overweight 15 O vervalued O vervalued Underweight 0 Overvalued M ar Overweight -1 0 -5 0 5 10 15 20 25 30 35 10 Overvalued -5 F eb N ov Underweight O verweight Jan -10 Undervalued Sep Jun Undervalued Apr D ec 5 M ay -15 Oct Jul 0 -20 Aug Oct N ov -40 -35 -30 -25 -20 -15 -10 -5 0 5 10 D ec Jul Aug -25 Sep Jun -5 Feb -30 Overweight M ar Jan Apr M ay Underweight Undervalued -35 Undervalued -10 Chart 43: Staples Weight & Valuation 15 Underweight Overweight Overvalued 10 Overvalued Jul oct Jun N ov 5 M ay Sep M ar Apr Dec Jan F eb Aug 0 -25 -20 -15 -10 -5 0 5 10 Underweight -5 Overweight Undervalued Undervalued -10 Chart 44: Technology Weight & Valuation 50 Sep Jul 40 Jan Aug Oct Feb 30 Jun Apr N ov Dec May 20 Mar Underweight Overweight Overvalued 10 Overvalued 0 -25 -20 -15 -10 -5 0 5 10 15 20 25 -10 Overweight Underweight -20 Undervalued Undervalued Refer to important disclosures on page 34. 23
    • Global Fund Manager Survey – 17 May 2005 Asset Allocation Investors who answer this section are involved with the global asset allocation of their fund. The sample size is slightly smaller. Refer to important disclosures on page 34. 24
    • Global Fund Manager Survey – 17 May 2005 11. Asset Allocation Table 27: What is Your Current Equity Weighting in a Global Mixed Fund? % saying: May Apr Mar Feb 25% or less 5 4 4 5 Asset allocators have a 53% 30% 4 2 3 3 weighting in equities (in a 35% 5 6 6 4 40% 3 3 2 3 cash/bond/equity fund), the 45% 7 7 5 4 lowest since November. 50% 12 9 10 12 55% 15 17 16 11 60% 8 13 12 17 65% 12 9 14 12 70% 7 7 4 6 75% or more 7 7 7 8 Mean Weight (%) 53 54 54 55 DK / Refused 16 18 16 15 Table 28: Over the next 12 months, do you expect corporate / high yield bonds to outperform government (sovereign) bonds? % saying: May Apr Mar Feb Asset allocators don’t expect Yes 12 18 19 24 No 73 60 52 51 corporate bonds to outperform No preference - total returns will be similar 12 15 19 17 governments over the next year Net % Think Corporates Will Outperform -61 -42 -33 -27 Don’t Know 4 7 11 8 Chart 47: % Think Corporates Will Beat Governments +60 Corp v Govt +40 +20 +0 -20 -40 -60 -80 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Aug-03 Dec-03 Aug-04 Dec-04 Jun-03 Jun-04 Feb-03 Feb-04 Feb-05 Refer to important disclosures on page 34. 25
    • Global Fund Manager Survey – 17 May 2005 n Assets: Current Position & Future Intentions Chart 48: Equities Aggressiv e Over(Under) Current net % overweight equities equals 60 Moderate Over(Under) level in November Equities Net % Increasing Position 50 % saying: May Apr Mar Aggressively Overweight 4 3 7 40 Moderately Overweight 50 56 61 Neutral 21 17 15 30 Moderately Underweight 14 13 6 Aggressively Underweight 3 3 3 20 Net % Overweight 37 43 59 Increase 23 18 24 10 Decrease 20 26 20 0 Net % Increasing 3 -8 4 -10 1/99 5/99 9/99 1/00 5/00 9/00 1/01 5/01 9/01 1/02 5/02 9/02 1/03 5/03 9/03 1/04 5/04 9/04 1/05 5/05 Bonds Chart 49: Bonds % saying: May Apr Mar 10 Aggressively Overweight 2 1 1 0 Moderately Overweight 7 6 7 Neutral 18 17 14 -10 Moderately Underweight 44 52 50 Aggressively Underweight 16 13 15 -20 Net % Overweight -51 -58 -57 -30 Increase 16 17 9 Decrease 18 17 24 -40 Net % Increasing -2 0 -15 -50 Aggressive Over(Under) -60 Moderate Over(Under) Net % Increasing Position -70 1/99 5/99 9/99 1/00 5/00 9/00 1/01 5/01 9/01 1/02 5/02 9/02 1/03 5/03 9/03 1/04 5/04 9/04 1/05 5/05 Cash Chart 50: Cash % saying: May Apr Mar 40 Aggressiv e Ov er(Under) Moderate Over(Under) Aggressively Overweight 7 4 3 Net % Increasing Position 30 Moderately Overweight 31 29 25 Neutral 35 44 40 20 Moderately Underweight 13 9 17 10 Aggressively Underweight 1 2 2 Net % Overweight 24 22 9 0 Increase 16 21 19 Decrease 22 14 13 -10 Net % Increasing -6 7 6 -20 -30 -40 1/99 5/99 9/99 1/00 5/00 9/00 1/01 5/01 9/01 1/02 5/02 9/02 1/03 5/03 9/03 1/04 5/04 9/04 1/05 5/05 Note: all data prior to April 2001 is estimated from regional asset allocation data. Refer to important disclosures on page 34. 26
    • Global Fund Manager Survey – 17 May 2005 n Equity Allocation: Position & Intentions Chart 51: US Equities 30 Aggressive Over(Under) Moderate Over(Under) Underweight US equities U.S. Equities Net % Increasing Position 20 % saying: May Apr Mar Aggressively Overweight 2 1 1 10 Moderately Overweight 18 14 16 0 Neutral 19 16 21 Moderately Underweight 35 39 38 -10 Aggressively Underweight 17 19 15 Net % Overweight -32 -43 -36 -20 Increase 18 12 15 -30 Decrease 12 16 11 Net % Increasing 6 -4 4 -40 -50 1/99 5/99 9/99 1/00 5/00 9/00 1/01 5/01 9/01 1/02 5/02 9/02 1/03 5/03 9/03 1/04 5/04 9/04 1/05 5/05 Chart 52: Eurozone Equities 70 Aggressive Over(Under) Overweight Eurozone equities Moderate Over(Under) Eurozone Equities 60 Net % Increasing Position % saying: May Apr Mar 50 Aggressively Overweight 9 11 9 Moderately Overweight 44 45 48 40 Neutral 22 25 23 30 Moderately Underweight 14 9 11 Aggressively Underweight 2 1 1 20 Net % Overweight 37 46 45 10 Increase 12 13 15 0 Decrease 14 18 15 Net % Increasing -2 -5 0 -10 -20 1/99 5/99 9/99 1/00 5/00 9/00 1/01 5/01 9/01 1/02 5/02 9/02 1/03 5/03 9/03 1/04 5/04 9/04 1/05 Chart 53: UK Equities 5/05 50 Aggressive Over(Under) Moderate Over(Under) 40 Net % Increasing Position Very small underweight on UK UK Equities 30 % saying: May Apr Mar Aggressively Overweight 3 3 1 20 Moderately Overweight 19 22 19 10 Neutral 35 32 39 Moderately Underweight 25 26 26 0 Aggressively Underweight 5 6 6 -10 Net % Overweight -8 -7 -12 Increase 13 10 7 -20 Decrease 9 14 11 -30 Net % Increasing 4 -4 -4 -40 1/99 5/99 9/99 1/00 5/00 9/00 1/01 5/01 9/01 1/02 5/02 9/02 1/03 5/03 9/03 1/04 5/04 9/04 1/05 5/05 Refer to important disclosures on page 34. 27
    • Global Fund Manager Survey – 17 May 2005 Chart 54: Japanese Equities 60 Japanese Equities Japan weight falls decline 40 % saying: May Apr Mar Aggressively Overweight 7 7 9 Moderately Overweight 35 42 38 20 Neutral 34 24 27 Moderately Underweight 10 12 12 0 Aggressively Underweight 4 4 6 Net % Overweight 28 33 29 -20 Increase 15 15 22 Decrease 14 14 9 -40 Aggressive Over(Under) Net % Increasing 1 1 13 Moderate Over(Under) Net % Increasing Position -60 1/99 5/99 9/99 1/00 5/00 9/00 1/01 5/01 9/01 1/02 5/02 9/02 1/03 5/03 9/03 1/04 5/04 9/04 1/05 5/05 Chart 55: Global Emerging Market Equities 60 Aggressive Over(Under) GEM Equities Moderate Over(Under) 50 % saying: May Apr Mar Net % Increasing Position 40 Aggressively Overweight 10 8 10 Moderately Overweight 35 34 39 30 GEM weight continues to decline Neutral 26 30 27 20 Moderately Underweight 11 7 9 Aggressively Underweight 4 4 2 10 Net % Overweight 30 31 38 0 Increase 14 9 14 Decrease 16 18 15 -10 Net % Increasing -2 -9 -1 -20 -30 1/99 5/99 9/99 1/00 5/00 9/00 1/01 5/01 9/01 1/02 5/02 9/02 1/03 5/03 9/03 1/04 5/04 9/04 1/05 5/05 Chart 56: Current Country Overweights vs Valuation Perceptions (Asset Allocators) US equities are seen as the +80 most expensive – asset U S equities +60 allocators are underweight +40 und e rwe ig ht o v e rwe ig ht Eurozone, Japan and GEM o ve rv alue d o ve rvalue d are all overweight and +20 U K equities undervalued +0 Eurozone equities -20 GEM equities Japan equities und e rwe ig ht -40 und e rvalue d o ve rwe ig ht und e rvalue d -60 -50 -40 -30 -20 -10 +0 +10 +20 +30 +40 +50 Refer to important disclosures on page 34. 28
    • Global Fund Manager Survey – 17 May 2005 12. Currency Valuation Table 29: Based on current fundamentals, do you think each of the following currencies are . . . May Apr Mar Feb U.S. Dollar Overvalued 38 38 39 34 Chart 57: FX Valuation Snapshot Fairly Valued 20 21 18 23 45 Undervalued 31 31 34 31 35 EUR GBP Net % Saying Overvalued 7 7 5 3 25 Don’t Know 11 10 10 12 15 USD Japanese Yen Overvalued 15 17 18 16 5 -5 Fairly Valued 24 25 19 27 -15 Undervalued 46 46 48 41 -25 Net % Saying Overvalued -31 -29 -30 -25 -35 JPY Don’t Know 15 12 15 16 -45 GEM Euro Overvalued 49 50 53 46 Fairly Valued 27 24 25 26 Undervalued 14 16 13 16 Net % Saying Overvalued 35 34 40 30 Don’t Know 10 9 10 12 Sterling Overvalued 41 40 37 39 Fairly Valued 35 36 40 35 Yen & GEM currencies seen Undervalued 8 8 5 8 Net % Saying Overvalued 33 32 32 31 as cheap – euro, sterling Don’t Know 16 17 18 17 overvalued Global Emerging Market Overvalued 8 8 5 6 Currencies Fairly Valued 13 24 15 16 Undervalued 49 40 50 48 Net % Saying Overvalued -41 -32 -45 -42 Don’t Know 30 27 30 30 Chart 58: USD Valuation & Trade Weight Chart 59: Euro Valuation & Trade Weight 5-12-05 5-12-05 60 135 60 104 102 130 50 40 100 125 40 98 20 120 96 30 0 94 115 20 92 110 -20 90 10 105 -40 88 0 86 100 -60 -10 84 -20 95 -80 82 2002 2003 2004 2005 2002 2003 2004 2005 % say US$ Overvalued % say Euro Overvalued Trade Weight $ (-3M=100)(R.H.SCALE) Trade Wgt Euro (-3M=100)(R.H.SCALE) Source: DATASTREAM Source: DATASTREAM Chart 60: Yen Valuation & Trade Weight Chart 61: Sterling Valuation & Trade Weight 5-12-05 5-12-05 40 undervalued Yen 103 45 Overvalued sterling 106 102 30 40 104 101 35 20 100 30 102 99 10 98 25 0 100 97 20 -10 96 15 98 95 -20 10 94 96 -30 5 93 -40 92 0 94 2002 2003 2004 2005 2002 2003 2004 2005 % say Yen Overvalued %say Sterling Overvalued Trade Wgt Yen (-3M=100)(R.H.SCALE) Trade Wght GBP(-3M=100)(R.H.SCALE) Source: DATASTREAM Source: DATASTREAM Refer to important disclosures on page 34. 29
    • Global Fund Manager Survey – 17 May 2005 Table 30: Relative to your benchmark, do you currently have unhedged exposure to any of the following currencies? May Apr Mar Feb U.S. Dollar Overweight 15 17 11 19 Underweight 31 26 34 31 Investors are underweight the None 22 25 27 20 dollar Net % Overweight -16 -9 -23 -12 Not Applicable / Don’t Know 32 32 29 31 Japanese Yen Overweight 25 22 26 22 Underweight 12 12 10 13 Overweight the Yen . . . None 32 32 34 32 Net % Overweight 13 10 16 9 Not Applicable / Don’t Know 31 34 30 33 Euro Overweight 26 23 27 29 Underweight 14 15 9 12 Overweight the Euro None 26 27 36 25 Net % Overweight 12 8 18 17 Not Applicable / Don’t Know 34 34 29 33 Sterling Overweight 14 12 14 12 Underweight sterling Underweight 20 16 17 19 None 33 38 40 35 Net % Overweight -6 -4 -3 -7 Not Applicable / Don’t Know 33 34 30 34 Global Emerging Market Overweight 25 19 23 25 Overweight emerging market Currencies Underweight 3 5 6 4 currencies None 36 38 34 32 Net % Overweight 22 14 17 21 Not Applicable / Don’t Know 37 38 37 40 Chart 62: Currency Positions (Net % With Unhedged Exposure) 25 GEM 20 15 JPY EUR 10 5 0 -5 GBP -10 -15 USD -20 Refer to important disclosures on page 34. 30
    • Global Fund Manager Survey – 17 May 2005 13. Demographic Data Table 31: Position / Institution / Approach to Global Equity Strategy % saying: May Apr Mar Feb Structure of the Panel (# saying) Global Specialists 153 152 141 149 Regional Specialists With A Global View 92 87 84 93 Regional Specialists Only 94 84 76 77 Total # of Respondents to Global Questions 246 240 226 243 Total number involved in Global Asset Allocation 182 181 176 186 Which of the Following Best Describes the Type of Money You are Running? (% saying) Institutional Fund 58 56 55 56 Hedge Fund 8 8 9 7 Retail Fund 25 26 28 28 Other 9 9 9 10 What Do You Estimate to be the Total Current Value of Assets Under Your Direct Control? (% saying) Up to $250mn 14 15 17 17 Around $500mn 13 12 13 12 Around $1bn 16 13 13 12 Around $2.5bn 8 8 9 10 Around $5bn 8 8 6 9 Around $7.5bn 2 5 5 4 Around $10bn or more 18 18 18 17 No Funds Under Direct Control 21 22 20 19 Total Responding to Global Questions (USDbn) 688 709 659 701 Total, Including Regional Specialists (USDbn) 1057 1060 994 1067 n Additional information on how the survey works Taylor Nelson Sofres (TNS) begins fieldwork on the day the U.S. payroll data is released. Fieldwork continues through the following week and is closed on the following Thursday. TNS sends a link containing the unprocessed results to its survey panelists on Friday. If you would like to become a panelist, please e-mail fms@ml.com or contact Sarah Franks. All bona fide institutional fund managers are invited to participate in the panel. If you have a moment, we do recommend you take a look at the Taylor Nelson Sofres (TNS) web site that displays all the results from the latest survey (the URL for the site is below). The results site has a breakdown of global specialists and regional specialists, and also features the results from the regional questionnaires. See the May 2005 results in English at: http://online.tns-global.com/multimedia/ml/may2005_xp2.htm and in Japanese at: http://online.tns-global.com/multimedia/ml/may2005_xpj.htm Merrill Lynch makes no representations or warranties whatsoever as to the data and information provided in any referenced website and shall have no liability or responsibility arising out of or in connection with any referenced website. Merrill Lynch did not gather the data for this survey. The content displayed on the website is the responsibility of Taylor Nelson Sofres (TNS). Refer to important disclosures on page 34. 31
    • Global Fund Manager Survey – 17 May 2005 14. Comparing the Fund Manager Survey and the Global Investor Survey About The Global Fixed Income Investor Survey The Merrill Lynch Global FX & Debt Investor Survey (“Global Investor Survey”) is a long-running survey for fixed income managers. The fieldwork for the Global Investor Survey and the Fund Manager Survey is conducted at the same time – but each survey has a completely separate panel of respondents. There are five “crossover” questions that we ask both groups of investors. On these two pages, we compare their responses to these five questions. Table 32: Equity Fund Managers vs Fixed Income Managers May Apr Mar Feb Jan Net % Think Bonds Are Overvalued Equity Fund Managers 68 67 73 71 71 Bond Fund Managers 76 56 55 77 55 Net % Prefer Corporate Bonds to Government Bonds Equity Fund Managers -61 -42 -33 -27 -37 Bond Fund Managers -54 -53 -37 -42 -33 Net % Expecting Higher Short Rates in 12M Time Equity Fund Managers 80 90 94 89 90 Bond Fund Managers 91 95 92 96 93 Net % Expecting Higher Long Rates in 12M Time Equity Fund Managers 63 69 79 66 77 Bond Fund Managers 71 70 71 61 70 Refer to important disclosures on page 34. 32
    • Global Fund Manager Survey – 17 May 2005 Chart 63: Net % Think Bonds are Overvalued Chart 65: Net % Think Short Rates Will Be Higher in 12m 80 overvalued 100 Equity FMs Equity FMs Bond FMs 70 Bond FMs 60 80 e p c h h rs o rate x e t ig e h rt s 50 60 40 30 40 20 20 10 0 0 -10 -20 undervalued -20 -30 e p ct lo e s o rate x e w r h rt s -40 -40 Dec-03 Dec-04 Aug-03 Oct-03 Apr-04 Aug-04 Oct-04 Apr-05 Jun-03 Jun-04 Feb-04 Feb-05 Aug-03 Oct-03 Dec-03 Apr-04 Aug-04 Oct-04 Dec-04 Apr-05 Jun-03 Jun-04 Feb-04 Feb-05 Chart 64: Net % Think Corporate/High-Yield Bonds Will Outperform Government Bonds Chart 66: Net % Think Long Rates Will Be Higher in 12m 45 Equity FMs e p c h h rlo grate x e t ig e n s expect corp/HY to outperform 90 Bond FMs 35 80 25 70 15 60 5 50 -5 40 -15 30 -25 20 Equity FMs Bond FMs -35 10 -45 0 Aug-03 Dec-03 Aug-04 Dec-04 10/03 12/03 10/04 12/04 Jun-03 Oct-03 Apr-04 Jun-04 Oct-04 Apr-05 6/03 8/03 2/04 4/04 6/04 8/04 2/05 4/05 Feb-04 Feb-05 Refer to important disclosures on page 34. 33
    • Global Fund Manager Survey – 17 May 2005 Important Disclosures Investment Rating Distribution: Global Group (as of 31 March 2005) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy 1060 39.91% Buy 368 34.72% Neutral 1379 51.92% Neutral 403 29.22% Sell 217 8.17% Sell 44 20.28% * Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months. FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium, and C - High. INVESTMENT RATINGS, indicators of expected total return (price appreciation plus yield) within the 12-month period from the date of the initial rating, are: 1 - Buy (10% or more for Low and Medium Volatility Risk Securities - 20% or more for High Volatility Risk securities); 2 - Neutral (0-10% for Low and Medium Volatility Risk securities - 0-20% for High Volatility Risk securities); 3 - Sell (negative return); and 6 - No Rating. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure); 8 - same/lower (dividend not considered to be secure); and 9 - pays no cash dividend. The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill Lynch, including profits derived from investment banking revenues. Copyright 2005 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). All rights reserved. Any unauthorized use or disclosure is prohibited. This report has been prepared and issued by MLPF&S and/or one of its affiliates and has been approved for publication in the United Kingdom by Merrill Lynch Pierce, Fenner & Smith Limited, which is authorized and regulated by the Financial Services Authority; has been considered and distributed in Australia by Merrill Lynch Equities (Australia) Limited (ABN 65 006 276 795), licensed under the Australian Corporations Act, AFSL No 235132; has been considered and distributed in Japan by Merrill Lynch Japan Securities Co, Ltd, a registered securities dealer under the Securities and Exchange Law in Japan; is distributed in Hong Kong by Merrill Lynch (Asia Pacific) Ltd, which is regulated by the Hong Kong SFC; and is distributed in Singapore by Merrill Lynch International Bank Ltd (Merchant Bank) and Merrill Lynch (Singapore) Pte Ltd (Company Registration No. 198602883D), which are regulated by the Monetary Authority of Singapore. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Neither the information nor any opinion expressed constitutes an offer to buy or sell any securities or options or futures contracts. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk. Refer to important disclosures on page 34. 34