2012 Jan 27 John McElroy - Investment Strategy

Investment Strategy27th January 2012ABM Breakfast Briefing, Cork

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 2

Economic growth – weaker manufacturing activity ahead Global Manufacturing PMI Eurozone Manufacturing PMI 65 65 60 60 55 55 50 50 45 45 40 40 35 35 30 30 25 25 Ja 08 Ja 09 Ja 10 Ja 11 Ja 08 Ja 09 Ja 10 Ja 11 S e 08 S e 09 S e 10 S e 11 S e 08 S e 09 S e 10 S e 11 M -08 M 09 M -10 M -11 12 M -08 M 09 M -10 M -11 12 - - - - - - - - n- n- n- n- p- p- p- p- p- p- p- p- ay ay ay ay ay ay ay ay n n n n n n Ja Ja US ISM UK PMI Euro PMI Japan PMI China PMI Germany Ireland Spain Greece 3Source: Reuters, 3 January 2012

Deleveraging - US (and others) face years of debt reduction 4Source: Federal Reserve, Morgan Stanley Research 1 Dec 2009

Deleveraging – the Scandinavian/Japanese experience Real Lending growth rates Percentage changes on year earlier 35 30 Spain 25 Finland 20 15 Norway 10 UK 5 Japan 0 -5 US Sweden -10 -15 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 Years from Start of CrisesSource: Morgan Stanley, Bank of England, Financial Stability Report, Thompson Datastream and Bank Calculations. Finland and Japanrepresent bank lending and all other series represent lending by financial institutions 5

Bonds 6

Eurozone 10-Year government bond yields

Sovereign debt - AAA alternatives but with currency risk 10 year government bond yields, selected countries 4.0% 3.78% 3.5% 3.14% 3.0% 2.5% 2.05% 1.85% 1.92% 1.94% 1.97% 2.0% 1.59% 1.66% 1.5% 0.96% 1.0% 0.74% 0.5% 0.0% lia nd es y e en ay n a K ce an or ad pa at la tra U ed w an ap m er St an Ja or us Sw Fr er ng itz C d N A G te Si Sw ni U AAA AA- AAA AAA AAA AA+ AA+ AAA AAA AA+ AAA 8Source: Standard & Poors, Local Currency Rating, 16 January 2012

Corporate bonds - investment grade UK Corporate Spreads Euro Corporate spreads bps bps 1200 700 Banks 1000 Non-banks 600 Non-banks Banks 500 800 400 600 300 400 200 200 100 0 0 May-08 May-09 May-10 May-11 Sep-08 Sep-09 Sep-10 Sep-11 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jul-08 Jul-09 Jul-10 Jul-11 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12Source: Bloomberg, Merrill Lynch, 12 Jan 2012

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 Growth (GDP) Inflation (CPI) Reuters Deposit Rates 10-Year Bond Yields 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% 10Source: Citi Global Economic Outlook and Strategy 18 January, Reuters 19 January 2012

Financial stress - getting back on track, unit labour costs 11Source: Bank of England Financial Stability Report Dec 2011, Eurostat

Equities 12

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 MSCI AW EPS YoY% Price/Earnings MSCI MSCI ROE Earnings Yield 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% 13Source: Citi GES, FactSet Consensus Estimates, MSCI, 18 January 2012, Reuters

Equities - 10-year periods of weak GDP „Lost Decades‟ Compound Average Real GDP Growth Over Lost Decades Compound Average Real GDP Growth Over 10 Years 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 90 93 90 01 5E 5E 29 74 5E 88 19 19 20 19 19 19 19 -1 -1 -1 11 11 11 ly y ne n S K en an pa U Ita 20 20 20 U Zo ed m Ja S K ne Sw er ro U U zo G Eu ro Eu 14Source: Citi Research Global Equity Strategist, 16 November 2011

Equities - 10-year periods of weak GDP „Lost Decades‟ Compound Annual Average Total Equity Return Over Lost Decades 25.0% Annual Total Equity Return 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 90 93 90 01 5E 5E 29 74 5E 88 19 19 20 19 19 19 19 -1 -1 -1 11 11 11 ly y ne n S K en an pa U Ita 20 20 20 U Zo ed m Ja S K ne Sw er ro U U zo G Eu ro Eu 15Source: Citi Research Global Equity Strategist, 16 November 2011

Equities - buy cheap = potentially good returns 16Source: Oriel Securities UK Equity Briefing, 7 October 2011

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 17

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) 18

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

Te % of total revenue ch no 0 20 40 60 80 100 120 lo Fo g y od Se En be m e ve ico rg ra nd y ge uc C & to on rs su to m ba cc er H du o ou ra se b ho M les ld a & Au teri pe to al rs m s on ob al il pr es C od uc ap Ph ital ts Te arm goo le co ace ds m ut m iSource: MS European Strategy, 3 October 2011 un cals Tr ic an atio sp n Fo or s od ta & tio st n C ap Ba om le n m s re ks er ta ci al iling se rv i 2011 estimates, % of Total I n ce s su So ra nc ftw e M Revenue Exposure to EM & DM ar e ed H & ea se ia lth rv ca ic re R e eq et s ai ui lin pm g D en Ut iv t & iliti es er si s fie erv C d ic on fin es Appendix: Equity theme - exposure to growth by sector su an m ci er a se ls r R vice ea Emerging Markets le s Developed Markets st at e 20

Appendix: Equities - dividends important even in growth markets Equity Returns: Capital Price vs. Dividend Income Developed Market, UK and Asia ex Japan 10% Dividend Return 9% Price Return 8% 2.4% Annualised Return 7% 3.7% 6% 2.2% 5% 4% 3% 6.0% 4.7% 4.6% 2% 1% 0% DM UK Asia ex Japan 20 Years 21Source: DataStream indices, 17 November 2011

Appendix: Deleveraging - debt/GDP ratio‟s are unsustainable everywhere Forecasts for Budget Deficit v General Government Debt in 2012 12% Greece 10% Japan United Kingdom Budget Deficit, % GDP 8% India United States Spain 6% Portugal France 4% Euro Area Italy 2% Germany 0% Sweden 30% 80% 130% 180% 230% -2% General Government Debt, % GDP 22Source: Morgan Stanley GEOS 28/11/2011

Appendix: Govt. Bonds: Large refinancing of Euro debt in 2012 Sovereign Total Financing Needs 1600 1400 Portugal Ireland 1200 Greece 1000 Belgium Billion € Spain 800 Germany 600 Italy 400 France 200 0 2012 2013 2014 23Source: Bloomberg. IMF and Citi Research, 7 November 2011

Appendix: Asset Returns 2011 – (Euro terms) Asset Returns 31/12/10 - 28/12/11 Brent crude oil (€) 20.5 FTSE Index-Linked Gilts 20.0 Gold (€) 15.0 FTSE All Gilts 15.2 Bunds (€) 9.2 FTSE Ireland (€) 7.8 FTSE W US (€) 4.7 Euro € to CHF 2.5 Euro € to UK £ 2.4 FTSE Corp (€) 1.9 FTSE 100 -3.3 US $ to Euro € -3.5 FTSE W ex UK (€) -7.0 CRB commodities Index (€) -7.5 FTSE W Asia Pacific ex Japan (€) -10.7 FTSE W Japan (€) -12.4 FTSE W Europe ex UK (€) -14.3 MSCI Emerging Markets (€) -15.5 MSCI Frontier Markets -17.3 Copper (€) -20.0 -25.00 -20.00 -15.00 -10.00 -5.00 0.00 5.00 10.00 15.00 20.00 25.00 Percent (%) 24

Appendix: Quilter estimated return - secure v variable s itie ts ity ds qu Gil bt qu on al E De s ked E y te B nd s ert ion itie at e n Fu Lin eig ash rop ora at riv qu ge ex- ver ern C E P P rp d Ind UK UK UK UK So Co Int He Return Decomposition Income Capital Total Yield Appr 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%NotesEstimated returns source: Quilter. These represent our estimate of long-term investment returns over a full cycle of seven years or more. 25Any 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.

DisclaimerThis communication is directed at and is intended to be viewed by investment professionals only (as defined in Article 19 of the FinancialServices and Markets Act (Financial Promotion) Order 2005) and must not be acted on or relied upon by any other person.Whilst we have taken reasonable care to ensure that the information and commentary contained in this presentation is correct at thetime of publication, we cannot guarantee its accuracy or completeness. Opinions, estimates and projections in this presentationconstitute the current opinion of the individual(s) as at the date of this presentation and are subject to change without notice.This presentation has been prepared for information purposes only and is not a solicitation or an offer to buy or sell any security. It doesnot purport to be a complete description of our investment policy, markets or any securities referred to in the material. The informationon which the presentation is based is deemed to be reliable, but we have not independently verified such information and we do notguarantee its accuracy or completeness. All expressions of opinion are subject to change without notice. Any reference to the Quiltermodel portfolio, which is used for internal purposes, is purely illustrative and should not be relied upon. The model portfolio performanceis for illustrative purposes only and may not be achievable within a specific client‟s portfolio. It is intended to represent our investmentprocess 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.Investors should remember that the value of investments, and the income from them, can go down as well as up and that pastperformance is no guarantee of future return. You may not recover what you invest. Changes in exchange rates may have an adverseeffect on the value, price or income of foreign currency denominated securities. Levels and bases of taxation can change. Investmentsor investment services referred to may not be suitable for all recipients.Quilter is the trading name of Quilter & Co. Limited. A member of the London Stock Exchange and authorised and regulated by theFinancial Services Authority. Quilter is a private limited company that is registered in England No. 01923571. The registered office is at20 Bank Street, Canary Wharf, London E14 4AD. Quilter is a wholly owned subsidiary of Morgan Stanley Smith Barney.“Quilter” and the “Quilter” logo are registered Community Trade Marks and “Quarrier” is a registered trademark. “Quilter” and “Quarrier”remain the exclusive property of Quilter & Co. Limited. You are prohibited from using these marks for any purpose without the priorwritten authority of Quilter.Messages and telephone calls to and from Quilter will be monitored. 26

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2012 Jan 27 John McElroy - Investment Strategy

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2012 Jan 27 John McElroy - Investment Strategy — Presentation Transcript