47 slides in Part 1.

1. Knowledge.The means to smarter investing. November 17, 2001 Investment SeminarSummary Slide Set for clients. 47 slides in Part 1.

2. Disclaimer • This presentation is NOT ADVICE. • Only that which is in writing is advice. • Not time to cover all the risks. • Some investments discussed might not be right for you.

3. What problem are we tackling today? • As an investor, what strategies might you use to • systematically out-perform over the long-term, • only take risks which are adequately rewarded, • reduce your chance of a very bad result and • survive & prosper … even if things get pretty rough. • Is that a big enough task for 3 hours? • This is a much studied problem • There is a lot of “folklore” about what works • Our focus is just on what there is EVIDENCE • and hard logic for. • The less you guess, the less likely you will lose a lot of money. • Assertion: Only if you understand “the problem” • are you likely to have “good answers”/ “good strategies”

4. Format for today. • How might we build a portfolio? • Section 1. Let’s start with “the answer”+Shares • I.e. Lets look at an investment portfolio. • We will look at “the case for each investment” individually • Section 2. The Theory. • How does portfolio theory help? • Section 3. Property, Stable Investments & Tax. • Only spending a little time on tax today. • Section 4. The problems we face + answers. • A look at history. Problems we might face. • Strategies that help us deal with these problems. • We ran out of time, & did not get to section 4.

5. Start with an answer. Then look at the “whys!” • Here is a $1.5m portfolio • Shares 33% ($500K) • Platinum Japan / Platinum International 20% $100K • Dimensional AVT 20% $100K • Hunter Hall VGT or AVT 20% $100K • Investors Mutual Small Companies 20% $100K • Cash (short-term) 20% $100K • Property 33% ($500K) (very largely direct property) • AXA 40% $200K • AM Property Plus 30% $150K • MCS Syndicates 30% $150K • “Other” 33% ($500K) • Cash - eg AMP Investment Builder 40% $200K • Income Securities 30% $150K • “Fixed term” Reset Preference Shares 30% $150K • The level of “risk” in this portfolio is not right for everyone!!! • We will talk more about that when we get to the theory.

6. Shares Summary - from 40 slidesThreads woven in to add value • “Value-add” streams woven together • for greater resilience • “Small Company” effect • “Value” effect • “Active Manager of Small Companies” • “Proven Boutique manager” effect. • “Managing down-side risk” - Platinum • “Behavioural Finance” • market swings between • over confidence and over-pessimism (eg Japan) • Buy when the newspapers scream “hopeless case”. • Also the deflating speculative bubble effect • Shares that have worked well over last 18 mths likely to continue out-performing next 2-3 years. View shared by Grantham Mayo van Otterloo

7. Diversification between ideas • The greater the diversification • of uncorrelated good ideas, • the lower the chance of a bad result.

8. What a strange bunch of fund managers! • At first observation, this set of share managers might look a little odd. • When you look closely, you will notice:- • They are all thoroughbreds in what they do • They are all different in their focus • and so as a set, they combine well

9. Investing - the theory.A practical approach to investment theory.The theory is discipline that delivers you financial security & prosperity. 36 slides in part 2.

10. We build a portfolio to help manage risk • The best investment • (eg the one which has the highest probability of doing best) • The best investment may not perform the best. • Just like the best horse does not always win a horse-race. • surprises and the unexpected DO happen. • “The future is ultimately unknowable” Greenspan • How accurate have economic forecasters been over the last few years? • And investment returns strongly depend on the economy • Greenspan 3/10/01 AFR “Nobody has the capacity to fathom fully how the tragedy of September 11 will play out.” • The best investment might fail altogether • specific risk I.e. unacceptably high level of risk of a bad return • The best investment might be too volatile for you • if it made up your entire portfolio

11. Professor Harry Markowitz • Nobel Prize 1990 • for contributions to Portfolio Theory. • When building an optimal portfolio • “Risk means facing the possibility of losing rather than winning.” P43 • “I was struck with the notion that you should be interested in risk as well as return”. P47 • “It is necessary to avoid investing in securities with high covariances among themselves.” P50. • “The riskiness of a portfolio depends on the covariances of its holdings, not on the average riskiness of the separate investments.” P54 • Investors should create an efficient frontier of efficient portfolios, then choose an acceptable level of risk. P58

12. Markowitz logic drives us to certain conclusions • Direct property over listed property • because of much lower correlation of performance • Listed property, bonds & shares • have fairly high correlation of performance to each other. • As you would probably expect from a mathematical perspective NPV • Also focuses our attention on alternatives • to bonds/debentures & other fixed interest investments. • We will come back to that

13. Markowitz bottom line • For each proposed investment you need to ask • Do returns of this investment correlate with my other investments? • Does this share investment have a high correlation with that share investment? (I.e. Am I really achieving any diversification effect by adding this investment?) • Does this share investment increase my expected return for the same level of risk … or maintain my expected level of return but at a lower overall risk? • With investment class - and between investment classes.

14. James Tobin - Nobel Prize 1981 • The Separation Theorem “argues that the Markowitz process of selecting securities for the most efficient risky portfolio is completely separate from the decision of how to divide the total portfolio between risky and risk-free assets.” P72.

15. James Tobin • The Separation Theorem • Markowitz assumes that investors select securities for their portfolio from a universe consisting totally of risky assets. P71. • The Separation Theorem “The convenient fact that has been proved is that the proportionate composition of the non-cash [I.e. risky] assets is independent of their aggregate share of the investment balance.” P72 • Conclusion: The risk-averse retiree should use the same stocks as the “aggressive” young executive - just different amounts cash.

16. William SharpeNoble Prize 1990 • Sharp who brought into focus the idea • that for well-diversified investors, “investors are rewarded for the amount of risk that they take” Multifactor Investing P2. • And that there was “rewarded risk” and “unrewarded risk” • “risk=volatility” notion - for well diversified investors • you could define a beta of a portfolio such that • if market is up by 1.00 & your small cap portfolio up by 1.2 • if market is down by 1.00 & your small cap portfolio down by 1.2 • then your portfolio had a beta of 1.2. • Sharpe’s model is called the single index model • or single factor model. (CAPM)

17. William Sharpe • Sharpe eventually concluded • The most efficient portfolio is the market itself • Hence the logic of Index Funds • Assumptions include: • The market is efficient • Efficient Market is where “everyone receives all the necessary information, understands it completely, and acts on it at once.” P108. Terms “efficient market” and “market efficiency” coined by Eugene Fama 1966. • P136 “Fama’s point about market efficiency is that, on the average, information moves so fast that the market as a whole knows more than any individual investor can know.” • We will come back to Fama’s 1990 work later

18. Eugene Fama & Ken French • Found weaknesses in Sharpe single-factor model • eg US Small companies had a historical beta of 1.2 • From 1984-1990, US stock returns 13.8%pa average • Sharpe’s model implied that • returns on small companies should have been 1.2 x 13.8% • Actual returns small companies 3.9%pa 1984-1990 • Multifactor Investing P2.

19. Eugene Fama & Ken French • In 1990, went looking for • “the sources of risk that the market systematically rewards with higher returns.” • This was around the time “Capital Ideas” was written • so “Capital Ideas” won’t catch you up on this.

20. F & F Answer - 3 factor model • 3 factors determine return • Classic market beta • Proportion of your portfolio. • I.e. degree to which you have accepted the risk of shares. • Firm size (market capitalisation) • Size bias of your share portfolio • Book-to-Market (BtM) • value bias of your share portfolio • together do the best job explaining returns. • Multifactor Investing P3.

21. Merton MillerNobel prize 1990 • Takes a while to come to grips with 3 factor model • Miller’s concept of “cost of capital” helps. • If excellent company borrows money rate =X% • Unexcellent company charged X% + Delta • because bank feels they are taking a greater risk. • Investors do the same. • Investors happy pay a higher P/E for excellent company • I.e. happy to accept a lower after-tax profit yield%

22. Miller - “Cost of Capital” • Value stocks have a higher cost of capital • and this is delivered to investors • by way of higher returns over the long-term. • Small companies have a higher cost of capital • and this is delivered to investors • by way of higher returns over the long-term.

23. The last leg. • Which property investments & why? • Higher returns from the “stable part of portfolio” • Which tax structures to use? 23 slides in Part 3.

24. Reminder of why property? • Diversification of the part of the portfolio in which we are trying to achieve capital growth. • Not for any particular market timing reason.

25. And the yields are good.

26. Compared with cash (4.5%) or long-term returns from shares.

27. Property Diversification • Between sectors (retail, industrial, commercial) • Between managers • Between structures of vehicles. • Shares 33% ($500K) • Platinum Japan / Platinum International 20% $100K • Dimensional AVT 20% $100K • Hunter Hall VGT or AVT 20% $100K • Investors Mutual Small Companies 20% $100K • Cash (short-term) 20% $100K • Property 33% ($500K) (very largely direct property) • AXA 40% $200K • AM Property Plus 30% $150K • MCS Syndicates 30% $150K • “Other” 33% ($500K) • Cash - eg AMP Investment Builder 40% $200K • Income Securities 30% $150K • “Fixed term” Reset Preference Shares 30% $150K

28. Also note the 50/50 shares/property split • Not conventional wisdom • 4:1, shares:property • But if a high priority goal is minimising heartburn • there this will be achieved more effectively • by combining equal quantities of investments with low correlations.

29. Conventional wisdom has much less property because investors are momentum players. More extreme of holders of US shares (which make up 50% of international share portfolios) • We are just coming out of a 20-year period of high share returns • Investors & fund managers still have not adjusted for this period being over.

30. Reset Preference Shares • Take Coles Myer’s ReCAPS • Can be treated like a 5-year bond • “Maturing” in November 2005 (4 years to go) • Yield 6.5% fully franked I.e. 9.2% grossed up • on face value of $100. • Current price around $109.60 • Your get a 5% “conversion bonus” at the end • so current premium could be said to be $4-$5 • Still giving you an effective yield in the 8%pa-9%pa range • Note: Can skip payments & there is some capital risk.

31. Income Securities • Take AMP Income Securities • Perpetuities - go on forever, no maturing date* • unless certain events occur * • Promise 1.3% higher yield than 90-day bills • on $100 face value. Current price ~$90 • Effective yield calculated something like this • (90-day bill rate +1.3%)/((Price-accum interest)/100) • = approx (4.3%+1.3%)/0.9 • = 6.2% • Note: These are long-term investments, not cash substitutes. Capital values will fluctuate significantly. • Note: In certain circumstances, interest payments can be skipped.

32. Summary “Fixed Interest” • With advent of Internet cash accounts • Far from clear case to invest in term deposit, • bonds or debentures. • Unless your want to take a timing decision on fixed interest • and then you might choose Reset Pref Shares 1st • Want long-term (eg 10-year) cash-like investment? • You should be considering Income Securities • likely to deliver much better return over long-term • However: Higher return IS achieved with extra risk

33. “What is the right level of risk?” • How much volatility can you live with? • This is the key one over the long-term. • Rule of thumb guide…. • Can be short-term issues:- • I believe there is a bubble in XYZ, • so wish to reduce my risk level.

34. Super is even more crucial under Costello’s New Tax System • What are your super choices? • Institution • Master trust - generally far too expensive • SuperWrap - in line with institution costs • Small APRA Funds - since 1/7/2000 • Self-Managed Super Funds • We act as mailing address for many super funds • to enable to trustees to ensure that fulfill their • legal obligations / compliance etc.

35. There is the portfolio & why. • Not intended as “one size fits all”. • Intended as educational way to show • “the principle behind how a portfolio might be constructed.” • Questions? • Shares 33% ($500K) • Platinum Japan / Platinum International 20% $100K • Dimensional AVT 20% $100K • Hunter Hall VGT or AVT 20% $100K • Investors Mutual Small Companies 20% $100K • Cash (short-term) 20% $100K • Property 33% ($500K) (very largely direct property) • AXA 40% $200K • AM Property Plus 30% $150K • MCS Syndicates 30% $150K • “Other” 33% ($500K) • Cash - eg AMP Investment Builder 40% $200K • Income Securities 30% $150K • “Fixed term” Reset Preference Shares 30% $150K