BETTER INVESTMENT WITH SELF-ADMINISTERED PENSION FUNDS

1. BETTER INVESTMENT WITH SELF-ADMINISTERED PENSION FUNDS Paul McCarville Clarus Investment Solutions 07 October 2009

2. Agenda Introduction Investment options old & new Structured products A personal view on equity markets Suggestions for SSAPS

3. Deja Vu? At a talk to LIA South East after Tech Wreck I said that “Investors have been failed by almost every participant in the capital & financial markets” Regrettably, the same statement is true after latest debacle Governance failures Regulation Structural Failings Rating Agencies Banks In many cases SSAP clients ‘blew themselves up’ Serious consequences for them but Collateral damage for you

4. SSAPS and Investment SSAPS still the best option in terms of flexibility/control/costs (if big enough) • However, there have been major problems • Lack of diversification • Use of excessive leverage • Shortage of expertise

5. Back to Basics We need to go ‘back to basics’ but Recognise that the investment scene is quite different • The Basics Revisited • Understanding the investment objectives • Properly understanding risk • The importance of diversification • Develop portfolios with appropriate risk/reward profiles • Keep costs down • Separate Beta and Alpha

6. A Very Different Investment Scene • Appetite for risk changed for a generation • Trust in many providers is shattered • Core product concepts broken • Much greater focus on costs • New instruments & funds • Impact of ISTC, Credit Union & other litigation • More regulation, greater scrutiny from PI insurers ? • Requirement for those providing advice to demonstrate competence will increase

7. Core Products Broken (1) • Unitised With-Profits • Major changes in investment strategy behind the scenes • (probably under pressure from regulators, but not in long-term interest of policyholders) • Cutting/elimination of bonuses • Widespread and indiscriminate imposition of MVAs

8. Core Products Broken (2) • Managed/Consensus Funds • 10 year performance below price inflation • Not diversified enough • essentially a large holding of equities, with some bonds, remainder cash/property • far too much in Irish equities – home country bias universal, but not on our scale • Not managed! • little evidence of dynamic asset allocation • clearly most tracking each other • Little or no use of passive (Managed Funds) • SSAPs largely moved on from using, but still a big factor in pensions market

9. New Products & Instruments - Exchange-Traded Funds (ETFs) • bought and sold like shares, but structured as collective investment schemes • can deliver almost any asset class/investment strategy/sector/geography/style • exist in leveraged/short varieties (not recommended for SSAPs) • much cheaper than funds, and don’t underperform

10. New Products & Instruments - Diversified Assets Funds • a significant step forward from Managed/Consensus • current offerings tend to have static asset allocations • some have significant weightings in illiquid assets • often use ETFs (but cost on top of product level charge)

11. New Products & Instruments – Absolute Return Funds • Considerations • limited choice • short track records • hard to understand • depend on good risk management • skill in ‘long only’ may not translate to going ‘short’

12. New Products & Instruments – Absolute Return Funds The most readily available options Standard Life GARS target: cash + 5% (gross – 3 yr) Aviva/BlackRock European Equity AR no explicit target Friends First/Alder Insight Currency Fund high volatility • AR Funds aim to deliver a return whether markets rise or fall • most look to control volatility (eg GARS: 4%-8% range) • complex strategies, extensive use of derivatives • should have a low/moderate correlation with equities • usually a performance fee (except for GARS) • Can play a useful part in portfolio construction • Expect to come into broad usage in DC Default Strategies

13. Structured Products (Linked to Equity Indices) Dividend foregone is a huge opportunity cost S&P 500 Total Return 1926-2008: 9.7% p.a. Dividend element of return: 44% Illustrative Example Current yield 3.4%. Assume 5-yr capital growth of 5.6% 5 yr capital return: 31% 5 yr total return: 54% 23% cushion from dividend before guarantee kicks in

14. Structured Products – Cost Challenges People want guarantees…..but they are very expensive….due to low interest rates and high option prices • High Option Pricing • contraction among providers • higher market volatility • VIX Index – proxy for option pricing Low Interest Rates Example 5-yr term / 100% guarantee source: Yahoo Finance source: Duggan Asset Management

15. A Personal View of Equity Markets • corporate earnings at historical highs in 2007 • relative to trend earnings, equities never got particularly cheap • a lot of turkeys have been flying • own pension fund quite defensively positioned • when equity and bond markets diverge I trust the latter more

16. Better Investment of SSAPS: Some Suggestions • greater use of passive funds, especially ETFs • use some Absolute Return, even in Cautious portfolios • consider Currency and Commodities for Growth portfolios • use High-Yield (well served by local providers) • consider moving to ‘execution-only’ for direct equities (and switch bulk to ETFs)

17. Words of Wisdom "The herd instinct among forecasters makes sheep look like independent thinkers " Edgar R Fiedler "…..are only believed by people dropped on their heads when young" Andrew Smithers (on analysts’ profit forecasts) “Roughly speaking the banking world makes the same mistake every 15 or 20 years. It always has and I suspect it always will" Henry Hoare “In the short run themarket is a voting machine. In the long run it is a weighing machine” Benjamin Graham S&P 500 earnings 2008 Start-of year consensus forecast +15% Actual out-turn -40%

18. General Disclosures • Clarus Investment Solutions is authorised by the Financial Regulator under the Investment Intermediaries Act, 1995 • The value of your investment may go down as well as up