New Approaches in Asset Allocation

1. New Approaches in Asset Allocation

2. Agenda • Lessons to be learnt in asset allocation • BlackRock’s asset allocation process • Fund key parameters

3. S&P 500 and PE Ratio (Trailing) 1600 70 Tiger Fund 1400 60 Closes 1200 50 Greenspan: 1000 'Irrational Exuberance' 40 800 Jeff Vinick Leaves 30 Fidelity 600 20 400 10 200 S&P 500 (LHS) PE Ratio (RHS) 0 0 Jan-00 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Case Study 1: US equity market 1995 to 2005 Source: Morgan Stanley

4. Case Study 2: The A$ in retrospect 1995 2005 Source: Bloomberg

5. Limitations of ‘old-style asset allocation’ • Shifting physical pools of money around is costly and imprecise • Mandates a ‘value’ style without the diversification required for successful value investing • Poor risk management – end up fighting market momentum

6. Limitations of ‘old style’ asset allocation • Inputs • Views • Meaningful Risk Positions Economics Equities – Country -Sector - Size - Style - Status Bonds - Duration - Credit - Yield Curve FX Commodities Australian Equities International Equities Liquidity A$ Hedge Valuation

7. Industry response • Balanced funds abandoned in favour of sector specialist • Strategic benchmark diversified to alternatives, emerging markets etc • This divided the active risk among a number of different stock selection processes • However, tactical asset allocation was left pretty much unchanged in approach

8. Key issues in TAA evolution • Introduce true accountability for TAA decisions • Move away from adjusting physical allocation of assets to a derivative overlay • Increase focus on how views are monetised and risk management • An honest assessment of what investment views can be monetised and what can’t be OUTCOME Efficient implementation of asset allocation views

9. Implementation of Asset Allocation Views Derivatives have grown enormously in depth and coverage. This allows: • Extremely low cost implementation • Targeted position taking • Tight risk management • Increased importance of momentum in portfolio construction

10. A ‘New’ Approach to TAA – Investment Philosophy • Economics and liquidity still crucial for now much broader TAA call • Wait for extreme valuation events • Don’t be a victim of ‘fat tails’ • Have an exit strategy • Maintain participation in winning trades • Pull apart investment thematics to look for most prospective risk strategy

11. A Leading Edge Asset Allocation Process – Diversifying Across Risk Strategies • Inputs • Views • Meaningful Risk Positions Economics Three Directional Risk Strategies 1. Equity / Cash 2. Bond / Cash 3. Commodity / Cash Equities –Country - Sector - Size - Style - Status Bonds - Duration - Credit - Yield Curve FX Commodities Liquidity • Six Relative Value Risk Strategies • 1. Equity / Equity • 2. Equity / Bond • 3. Equity / Commodity • 4. Bond / Bond • 5. FX • 6. FX / Commodity Valuation

12. Investment Philosophy – The BlackRock Asset Allocation Alpha Fund • Invest in liquid derivatives – liquidity is under-priced in asset markets • Wait for momentum to turn – ‘black swans’ make fighting market momentum a poor investment proposition • Invest in ‘vanilla’ derivatives – complex derivatives underwrite investment bank profits and undermine returns • Avoid ‘curve fitted’ quantitative rules • Create a diversified portfolio of asset allocation views, rather than excessive reliance on one theme • Constantly monitor the risk reward trade-off to lock-in profits, while maintaining participation in winning positions and cut risk on losing positions • Investment Style:Discretionary asset allocation fund aligning market momentum with BlackRock’s investment views.

13. BlackRock’s approach - competitive advantages vs other Macro funds • Systematically accessing the best investment ideas of BlackRock globally • Discretionary macro fund less vulnerable if there are multi standard deviation events • Flexible risk allocation between risk books – no arbitrary risk allocation to strategies that aren’t working

14. BlackRock Australia’s Top Ten Market Predictions for 2008 • View Possible portfolio positions • Equities • US growth to out-perform US value Long Growth vs short value • US large cap to out-perform US small cap Long S&P 500 vs short Russell 2000 • US equities to out-perform Europe Long S&P vs short Eurostoxx Bonds • US Yield Curve to steepen further Long US 2 yr vs US 5 yr and 10 yr • High quality credit to out-perform cash Long investment grade credit Equities vs Bonds • US equities to out-perform US bonds Long S&P 500 vs US Treasuries Commodities • Soft commodities extend bull market Long wheat, corn, soy beans, sugar, coffee • Gold price to extend rally Long gold Currencies • Sterling to under-perform USD and JPY Short GBP/USD and GBP/JPY • Commodity currencies to out-perform vs Euro Long AUD/EUR and BRL/EUR

15. Asset Allocation Alpha Fund – objectives & key parameters • The strategy has a five year track record with current assets of approximately A$216 million* • Fund aims to deliver a return of bank bills plus 12% before fees over rolling 3 year periods • Target risk level similar to an actively managed equity fund • Returns randomly correlated with other asset class returns and other alpha sources • Returns expected to be “income” in nature due to the underlying derivatives exposures • Fees are 1% base + 20% of performance above benchmark (UBSA Bank Bill Index) with “high water mark” implemented *at 31 December 2008

16. BlackRock Asset Allocation Alpha Fund – “D Class” Units Investment performance to 31 December 2008 * The benchmark for the Fund is the UBS Australia Bank Bill Index. ** The inception date of the Fund was 29 May 2006. *** Outperformance represents the difference between gross return and benchmark return Past performance shown is for illustrative purpose only. Past Performance is no indication of future performance. Long term performance shows the potential volatility of return over time

17. Key People • David HudsonHead of Asset Allocation, B.Ec. (Hons) • Mr Hudson joined BlackRock following the merger with MLIM in 2006. He is Head of Asset Allocation in Australia and his primary responsibility is managing the Asset Allocation Alpha Fund. At MLIM Mr Hudson had the same role, a position he has held since 1998. He also participates in the Global Central Strategy Group meetings, based in London. • Mr Hudson was previously with Bankers Trust Australia in a variety of senior roles in strategic advice in the early to mid 1990s. At first this was with the Investment Bank in the Economics Team and then on the Fixed Income desk advising proprietary traders and price makers as well as external clients on the implications of the economic outlook for asset prices. Later Mr Hudson transferred to the Funds Management Division of Bankers Trust to work as an equity Strategist and was a member of Bankers Trust’s Asset Allocation group. • In the early 1990s, Mr Hudson was Senior Adviser to the then Prime Minister Bob Hawke, where he provided advice on range of macroeconomic and microeconomic issues. He started his career with the Department of the Treasury as an economist. • Mr Hudson is the lead fund manager for the Asset Allocation Alpha Fund. • Investment experience: 20 years; BlackRock/ MLIM: 10 years. • Geoff RyanSenior Portfolio Manager, Asset Allocation, B. Ec (Hons) • Mr Ryan joined BlackRock following the merger with MLIM in 2006. His primary responsibility is Senior Portfolio Manager for the Asset Allocation Alpha Fund. At MLIM Mr Ryan had the same role, a position he has held since 2002. • Prior to 2002, Mr Ryan worked for Bankers Trust Australia in a number of roles. He worked for the Investment Bank for 8 years where his responsibilities were primarily price making and book running in interest rate swaps, but also included trading in other interest rate derivatives (including options) and proprietary trading. Later Mr Ryan transferred to the Funds Management Division of Bankers Trust in the Asset Allocation Division where his responsibilities included implementing active and passive asset allocation overlays, both stand alone and within balanced portfolios, developing quantitative asset allocation models and advising on implementation strategies for active risk positions. • Geoff’s role includes building and maintaining the infrastructure supporting the Asset Allocation Alpha Fund; generating trade ideas; advising on trade location and risk management. • Investment experience: 20 years; BlackRock/ MLIM: 5 years.

18. Additional Information • Issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975, AFS Licence Number 230523 (BlackRock). • BlackRock is the responsible entity of the BlackRock Asset Allocation Alpha Fund listed in this presentation. • A Product Disclosure Statement (PDS) for the BlackRock Asset Allocation Alpha Fund is available from BlackRock. You should consider the PDS in deciding whether to acquire, or to continue to hold, the product. • BlackRock, its officers, employees and agents believe that the information in this document is correct at the time of compilation, but no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors or omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. • This presentation contains general information only and is not intended to represent general or specific investment or professional advice. The information does not take into account an individual's financial circumstances. An assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial or other professional adviser before making an investment decision. • No guarantee as to the capital value of investments in the BlackRock Asset Allocation Alpha Fund nor future returns is made by BlackRock. • Past performance is no indicator of future performance. Long term performance returns show the potential volatility of returns over time. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially.