ASSET PROTECTION THROUGH DIVERSIFICATION

1. ASSET PROTECTION THROUGH DIVERSIFICATION John Mayo, Chartered FCSI – Vice President 26 June 2012

2. WHY INVEST IN A STOCK MARKET PORTFOLIO? • Unattractive inflation-adjusted returns on bank and building society deposit a/c’s • Very high conventional Gilt prices and income yields at extremely low levels • Commercial and Residential Property markets may fall further in the short-term • Equity markets, whilst currently experiencing exceptional volatility, are beginning to present attractive valuations and offer potential for longer-term capital growth in addition to income generation

3. Now 3months 6 months 1 year Bank of England 0.50% 0.50% 0.50% 0.50% Euro Central Bank 1.00% 0.75% 0.75% 0.75% US Federal Reserve 0.25% 0.25% 0.25% 0.25% CENTRAL BANK RATES – WHAT IS PRICED IN? Source: Bloomberg, based on consensus forecasts at 15 June 2012

4. EQUITIES-RELATIVE VALUATION UK GILT YIELD V DIVIDEND YIELD

5. EQUITIES - EX FINANCIALS, HISTORIC PRICE TO EARNINGS

6. EQUITIES - UK MARKET OUTLOOK • Market is pricing continued recession and earnings contraction • Companies and analysts still experiencing and expecting growth • Global policy support and cheap money • Strong balance sheets, access to funding and Emerging Markets exposure key drivers • Equity valuation attractive on all but doomsday scenario Source: Thomson Reuters DataStream, 5 June 2012 Source: Thomson Reuters Datastream 25/10/2011 Source: Thomson Reuters Datastream, 11/11/2011 Source: Citi European Portfolio Strategist, 7 June 2012

7. WHAT IS DIVERSIFICATION • Diversification simply means spreading the risk of investing over a range of investments – in other words not putting all your eggs in one basket. There are two main advantages of this: • minimising the impact of individual losses. • spreading your investment. • However it is not obvious that the inclusion of certain asset classes that may on their own be regarded as ‘risky’ can increase the level of diversification and reduce portfolio risk. • By adding the following ‘Diversifying asset classes’ to a conventional equity and bond portfolio we are able to reduce the overall level of risk, reduce volatility and increase the potential returns:- • Emerging market debt • Global high yield bonds • Property • Commodities • Hedge funds • Private equity

8. CORRELATION • Correlation refers to the way in which different investments or stocks react as a direct result of changes in the market. • Correlation is a statistical measure of the degree to which the movements of two different stocks, sectors, markets or asset classes are related. A positive correlation between two investments means they tend to move up and down together. A zero correlation means the change in the value of one investment has no impact or bearing on the change in value of the other investment. • A portfolio which consists of several types of assets, all with a different correlation to each other, should have lower volatility, reducing the risk of an overall fall in portfolio returns in any one year. • Studies and mathematical models have shown that maintaining a well diversified portfolio of 25-30 stocks should produce the most cost effective level of risk reduction. • Modern portfolio theory says the risk in a portfolio of diversely invested stocks, if the stocks are not truly correlated, will be less than the risk of holding just one single stock. This is because if one stock falls in value this should be offset by another lowly correlated stock in the portfolio rising in value. • For Example, during the first part of the credit crunch (Oct 2007 to Feb 2009) whilst global developed world equities fell circa 43%, global high yield corporate debt actually rose in value by 5%. • During this period of extreme risk aversion correlations between asset classes did increase; however, diversification still provided significant benefits relative to equity only portfolios.

9. ASSET ALLOCATION/DIVERSIFICATION • Effective diversification is often achieved by acquiring assets from different market categories. Spreading capital across different asset categories is referred to as asset allocation – perhaps the most important determinant of long term investment returns. • The key to diversification is finding asset classes that have low levels of correlation with each other. The construction of portfolios by Quilter takes into account correlation factors and as a result offer investors greater diversification across both sectors and asset classes. This helps to reduce the risks associated with investing and at the same time maximise potential returns.  • Asset allocation & risk management strategies should be unique to each investor and depend on many factors including: • Financial objectives • Risk tolerance • Time horizon • Portfolio value • Ethical parameters • It is therefore essential that portfolios are constructed on an individual bespoke basis

10. QUILTER’S INVESTMENT PROCESS • Top down…. asset allocation geographic allocation sector allocation stock selection

11. CORRELATION - MAJOR ASSET CLASSES V FTSE ALL SHARE Correlation Correlation Increasing Decreasing Source: Quilter database, DataStream, HFR, IPD 6 September 2010. Latest data available.

12. DIVERSIFICATION - CONCLUSION • Diversification is very important as it reduces portfolio risk. No one knows what the future will bring and thus a careful investment approach that reduces reliance on a limited number of sources of return and risk is more likely to be robust through an uncertain future. • A well diversified portfolio is likely to comprise equities, bonds, property and a range of alternative assets. Different strategies (active and passive) within markets can bring further risk reducing benefits. • The extent of the risk reduction can be material, possibly allowing a greater exposure to riskier assets than when a narrow policy is adopted. The relationship between asset classes does not remain constant and therefore a process to manage the overall diversified portfolio is necessary for success. • If this latest period of volatility has taught investors anything it is surely that outcomes are uncertain and therefore it is riskier than ever for investors to put all of their eggs in one basket.

13. QUILTER ESTIMATED LONG-TERM RETURNS (7 YR+ HORIZON)

14. QUILTER ESTIMATED LONG-TERM RETURNS (7 YR+ HORIZON) 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.

15. APPENDIX - AWARDS

16. DISCLAIMER This presentation has been prepared only for the recipient and date shown on the front page. It is not intended for any other persons and should not be relied upon by other persons. This presentation has been prepared for information purposes only and is not a solicitation or an offer to buy or sell any security. It does not purport to be a complete description of our investment policy, markets or any securities referred to in the material. The information on which the presentation is based is deemed to be reliable, but we have not independently verified such information and we do not guarantee its accuracy or completeness. All expressions of opinion are subject to change without notice. Any reference to the Quilter model portfolio, which is used for internal purposes, is purely illustrative and should not be relied upon. The figures quoted do not include charges. Investors should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future return. You may not recover what you invest. Changes in exchange rates may have an adverse effect on the value, price or income of foreign currency denominated securities. Levels and bases of taxation can change. Investments or investment services referred to may not be suitable for all recipients. Quilter is the trading name of Quilter & Co. Limited, registered in England with number 01923571, registered office at St Helen’s, 1 Undershaft, London EC3A 8BB. Quilter is a member of the London Stock Exchange and authorised and regulated by the UK Financial Services Authority.