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BRWM - The Evidence Supporting our Investment Philosophy.

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Presentation on theme: "BRWM - The Evidence Supporting our Investment Philosophy."— Presentation transcript:

1 BRWM - The Evidence Supporting our Investment Philosophy

2 Diversification I.The Impact of Volatility II.Growth of Wealth III.The Randomness of Returns IV.Balanced Strategies: Allocations V.Balanced Strategies: Historical Returns VI.Equity Returns of Developed Markets VII.World Market Capitalisation

3 The Impact of Volatility Year 1 Return Year 2 Return Average Return Compound Return Value at End of Year 2 Portfolio #150%-50%0%-13.4%£75,000 Portfolio #210%-10%0%-0.5%£99,000 Impact on a Hypothetical £100,000 Portfolio For illustrative purposes only

4 Growth of Wealth £10 £100 £1,000 £10,000 £2,943 Dimensional UK Value Index £472 FTSE All-Share Index £52 UK One Month Treasury Bills £19 UK Retail Price Index £2,529 Dimensional UK Small Cap Index For the fifty-four years from 1956 to 2009, the compound annual growth rate of return was 15.94% for the Value Index, 15.62% for the Small Cap Index, 12.08% for the Large Cap Index, 7.60% for T-Bills, and 5.64% for Inflation (RPI). Value Index,1955-December 1993: data provided by the London Business School; 1994-present simulated by Dimensional from Bloomberg securities data. Small Cap Index,1970-June 1981: Hoare Govett Smaller Companies Index; July 1981-December 1993 simulated by Dimensional from StyleResearch securities data; 1994-present simulated by Dimensional from Bloomberg securities data. Large Cap Index is the FTSE All-Share Index published with the permission of FTSE. T-Bills, : UK Three-Month T-Bills provided by the London Share Price Database; 1975-present: UK One-Month T-Bills provided by the Financial Times. Inflation is the UK Retail Price Index provided by the Office for National Statistics. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is not a guarantee of future results. This material is directed exclusively at professional customers as defined by the FSA. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. 2009

5 MSCI data copyright MSCI 2009, all rights reserved. FTSE data published with the permission of FTSE. Dimensional index data simulated by Dimensional from Bloomberg and StyleResearch securities data. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results. The Randomness of Returns In British Pounds UK One-Month Treasury Bills FTSE All-Share Index Dimensional UK Small Cap Index Dimensional UK Value Index MSCI World ex UK Index (gross div.) Dimensional International ex UK Small Index Dimensional International ex UK Value Index MSCI Emerging Markets Index (gross div.) Highest Return Lowest Return

6 FTSE All-Share Index20.00%16.00%12.00%8.00%4.00% – Dimensional UK Value Index15.00%12.00%9.00%6.00%3.00% – Dimensional UK Small Cap Index15.00%12.00%9.00%6.00%3.00% – MSCI World ex UK Index15.00%12.00%9.00%6.00%3.00% – Dimensional International ex UK Value Index15.00%12.00%9.00%6.00%3.00% – Dimensional International ex UK Small Index10.00%8.00%6.00%4.00%2.00% – MSCI Emerging Markets Index (gross div.)10.00%8.00%6.00%4.00%2.00% – UK One-Month Treasury Bills–20.00%40.00%60.00%80.00% % Total100.00% FTSE published with the permission of FTSE. MSCI data copyright MSCI 2009, all rights reserved. Dimensional index data simulated by Dimensional from Bloomberg and StyleResearch securities data; not available for direct investment. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results. Balanced Strategies: Allocations In British Pounds Fixed20/8040/6060/4080/20Equity Model Portfolios

7 Annualised Return Annual Standard Deviation Equity / / / / Fixed Standard deviation is a statistical measure of risk where past performance is used to determine the range of possible future performance. Generally speaking, the higher the standard deviation, the greater the risk. Assumes all strategies have been rebalanced monthly. All balanced strategies information is based on returns of indices with model/back-tested allocations. The returns were achieved with the benefit of hindsight and do not represent actual investment strategies. The model’s returns reflect hypothetical fund manager fees. There are limitations inherent in model allocations. In particular, model returns may not reflect the impact that economic and market factors may have had on the adviser’s decision making if the adviser were managing actual client money. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results. Lowest Return Highest Return Fixed20/8040/6060/4080/20Equity Balanced Strategies: Historical Returns In British Pounds

8 Equity Returns of Developed Markets Annual Return (%) In British Pounds Austria Spain Japan Belg Austria UK H.K H.K H.K Norway Switz Spain Switz Belg Sing Switz Austral Austria 5.36 Austria Austria Can Spain H.K Japan Norway Germ Italy Spain 7.62 Den Germ H.K Austral Switz Sing Japan US Sweden Italy Italy Sweden Can Austria Austral Spain Belg Japan Sing Germ Switz Austral Italy Japan UK 6.17 Sweden Norway Austria US US Switz Sweden Sweden H.K Den Spain Japan Den Belg Norway Germ Norway Austria Norway Norway US Sing Switz Belg Can Norway Den Norway Sing Sing Norway Neth Spain Norway US France H.K Norway 7.16 Spain Italy Sweden Sweden Den Sweden Can Spain Sweden France France Den France Sing Den France France Sweden Italy 5.52 Neth Can Spain US Can Italy 6.71 Norway Japan Can Italy Norway Den Sing France H.K Belg Sweden Austral Austral France US Neth Neth Germ Belg Belg Neth Germ Germ Norway Neth US Switz Den Den Switz Belg Belg Can Belg Norway H.K Belg Japan Neth Neth Den Belg Neth Sing H.K UK Neth Switz France France 3.46 UK Sing Austral Austral Austral Austria Den Germ Can Den Sing Neth Sing Sweden Switz UK UK Austral Austral UK US UK Neth US Austral Den Can Norway Spain Sing Germ Spain Sing Spain Neth Austral Norway H.K US Germ Switz Germ Den Germ. Den Den Belg UK Germ UK H.K Belg Italy H.K Neth France Neth Den UK Sweden Neth US Germ Switz Belg Spain Austria Spain Den Can France 9.58 Sweden Sweden Austral Austria Can UK France Sing Sweden Italy France Neth Austria Spain Germ Sing Can Can Sing Sweden Austral Italy Switz Germ Austral Can Den UK US Switz Spain Japan Can Germ Neth UK 6.59 UK Neth UK Austria Austria US UK Can Belg Can Austria US France Germ France Austral Den H.K Neth Den Belg UK France Austral Italy 4.32 Sweden Den H.K Switz Sweden Neth Italy Spain Can Sweden 5.76 Japan UK Austral Italy 1.80 Norway Japan 3.87 Neth Germ France H.K UK France Belg UK US 3.71 Italy France Japan UK H.K Spain Belg France Japan Japan UK Can Sing Belg Austria 5.84 Austria Spain 7.87 Spain Germ Neth H.K Germ H.K H.K Switz Austral Italy US 5.10 US Switz Italy Spain Austral Germ Spain Belg Spain Norway 6.98 Austria Austral H.K Italy 2.72 Belg Sing France Switz Japan 8.03 UK Switz Austria 0.50 H.K US Austral Can France Switz Austral Italy Italy 1.15 Italy France France Italy 1.96 Switz H.K Can Switz Sweden Italy US US Switz US Can Sweden Norway Switz Can Den Italy UK H.K Sweden Austria Norway Can Austria Japan 1.61 Sing Japan Sing Austria Sing Sweden Sweden Sing Neth Spain US 0.77 Belg Belg Germ Sing Norway Germ Austria 4.27 Japan Japan Norway Den US H.K Austria Japan Sing Norway Belg Japan Japan Germ Neth US 2.69 Italy Japan Japan Austria Japan Highest Return Lowest Return Source: MSCI developed markets country indices (net dividends) with at least twenty-five years of data. MSCI data copyright MSCI 2009, all rights reserved. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results

9 Equity Returns of Developed Markets Annual Return (%) Australia Austria Belgium Canada Denmark France Germany Hong Kong Italy Japan Netherlands Norway Singapore Spain Sweden Switzerland United Kingdom United States Source: MSCI developed markets country indices (net dividends) with at least twenty-five years of data. MSCI data copyright MSCI 2009, all rights reserved. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results. Boxed Return is the highest return for the year

10 Where Dimensional Invests: Developed Markets Emerging Markets Not Invested In British pounds. Map reflects countries in the MSCI All Country World IMI Index, and MSCI Frontier Markets Index. Market cap data is free-float adjusted. MSCI data copyright MSCI 2010, all rights reserved. Many small nations not displayed. Totals may not equal 100% due to rounding. Dimensional makes case-by-case determinations about the suitability of investing in each emerging market, making considerations that include local market accessibility, government stability and property rights before making investments. For educational purposes; should not be used as investment advice. 1. An example large cap stock provided for comparison. United States7,509 United Kingdom1,528 Japan1,504 Canada745 France736 Australia600 Germany558 Switzerland519 China405 Brazil359 SCALE TOP 20 NATIONS BY MARKET CAPITALISATION (£ BILLIONS) Spain306 South Korea292 Taiwan287 Italy243 Sweden195 Netherlands189 India183 Hong Kong166 South Africa162 Russia131 World Market Capitalisation £17.7 Trillion as at December 31,

11 2. Market Efficiency I.Warren E. Buffett II.Efficient Markets Hypothesis III.UK Equity Fund Returns IV.Actively Managed Funds: Non-Survivorship and Underperformance

12 Warren E. Buffett Chairman and CEO, Berkshire Hathaway, Inc. Warren E. Buffet, Chairman’s Letter, Berkshire Hathaway Corp Annual Report, February 28, Available in (accessed May 21, 2007)www.berkshirehathaway.com/annual.html “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.”

13 Efficient Markets Hypothesis Eugene F. Fama, University of Chicago The Hypothesis States: Current prices incorporate all available information and expectations. Current prices are the best approximation of intrinsic value. Price changes are due to unforeseen events. “Mispricings” do occur but not in predictable patterns that can lead to consistent outperformance. Implications Active management strategies cannot consistently add value through security selection and market timing. Passive investment strategies reward investors with capital market returns. Eugene F. Fama, “Efficient Capital Markets: A Review of Theory and Empirical Work,” Journal of Finance 25, no. 2 (May 1970): Eugene F. Fama, “Foundations of Finance,” Journal of Finance 32, no. 3 (June 1977):

14 UK Equity Fund Returns January 1990-December 2009 Source: Morningstar data provided by Morningstar Inc. Includes all Morningstar UK Equity funds with twenty-year returns, distinct portfolios only, as of 31 December FTSE data published with the permission of FTSE. Dimensional index data simulated by Dimensional from Bloomberg and StyleResearch securities data; not available for direct investment. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results. Annualised Compound Return (%) Dimensional UK Value Index8.96 FTSE All-Share Index8.06 Dimensional UK Small Cap Index7.78 Morningstar Fund Average7.67 Number of Funds Annualised Compound Return (%)

15 Non-Surviving Equity Funds Actively Managed US Equity Funds Data provided by CRSP Survivor-Bias-Free US Mutual Fund Database. Sample includes mutual funds existing as of 12/2004. Returns analyzed for the five-year period from Multiple share classes are aggregated to fund level. Index funds, inverse funds, and leveraged funds are excluded. A benchmark is a standard against which the performance of an individual security or group of securities is measured. It is usually based on published indexes of securities of the same or similar class. However customized ones maybe used to suit a particular investment strategy. Past performance is not a guarantee of future results. Values change frequently, and past performance may not be repeated. There is always the risk that an investor may lose money. Total Universe of 2,231 Funds in 2005 Percentage of Cumulative Non-Survivors On average, 7.0% of the actively managed equity fund universe disappeared each year. During 2005, 6.8% of the fund universe disappeared. By the fifth year, 30.4% of the fund universe (677 funds) had disappeared. Reasons for non-survival likely include closure due to poor investment results. Non-Surviving Equity Funds Actively Managed US Equity Funds

16 Data provided by CRSP Survivor-Bias-Free US Mutual Fund Database. Sample includes mutual funds existing as of 12/2004. Returns analyzed for the five-year period from Multiple share classes are aggregated to fund level. Index funds, inverse funds, and leveraged funds are excluded. A benchmark is a standard against which the performance of an individual security or group of securities is measured. It is usually based on published indexes of securities of the same or similar class. However customized ones maybe used to suit a particular investment strategy. Past performance is not a guarantee of future results. Values change frequently, and past performance may not be repeated. There is always the risk that an investor may lose money. Equity funds that beat their category benchmark consistently. Few Consistent Equity Fund Winners Actively Managed US Equity Funds Equity funds did not outperform their respective category benchmark in most years or over the entire five-year period. Nearly half (46.8%) of actively managed US equity funds outperformed their benchmark in Five years later, only 1.0% of the initial funds (23 out of 2,231) had outperformed the benchmark every year. Few Consistent Equity Fund Winners Actively Managed US Equity Funds

17 Non-Surviving Bond Funds Actively Managed US Bond Funds Data provided by CRSP Survivor-Bias-Free US Mutual Fund Database. Sample includes mutual funds existing as of 12/2004. Returns analyzed for the five-year period from Multiple share classes are aggregated to fund level. Index funds, inverse funds, and leveraged funds are excluded. A benchmark is a standard against which the performance of an individual security or group of securities is measured. It is usually based on published indexes of securities of the same or similar class. However customized ones maybe used to suit a particular investment strategy. Past performance is not a guarantee of future results. Values change frequently, and past performance may not be repeated. There is always the risk that an investor may lose money. Total Universe of 911 Funds in 2005 Percentage of Cumulative Non-Survivors On average, 6.5% of the actively managed bond fund universe disappeared each year. During 2005, 7.8% of the funds had disappeared. By the fifth year, 28.5% of the fund universe (260 funds) had disappeared. Poor investment results is one likely reason for non-survivorship. Non-Surviving Bond Funds Actively Managed US Bond Funds

18 Data provided by CRSP Survivor-Bias-Free US Mutual Fund Database. Sample includes mutual funds existing as of 12/2004. Returns analyzed for the five-year period from Multiple share classes are aggregated to fund level. Index funds, inverse funds, and leveraged funds are excluded. A benchmark is a standard against which the performance of an individual security or group of securities is measured. It is usually based on published indexes of securities of the same or similar class. However customized ones maybe used to suit a particular investment strategy. Past performance is not a guarantee of future results. Values change frequently, and past performance may not be repeated. There is always the risk that an investor may lose money. Surviving bond funds that beat their category benchmark consistently. Few Consistent Bond Fund Winners Actively Managed US Bond Funds Even among survivors, few actively managed bond funds outperformed their category benchmark in most years or over the entire period. About four out of ten actively managed bond funds beat the benchmark in Five years later, less than 1% of the surviving funds had beat the benchmark every year. Few Consistent Bond Fund Winners Actively Managed US Bond Funds

19 3. Risk/Return I.Capital Asset Pricing Model II.Fama-French Three Factor Model III.Size and Value Effects Are Strong around the World IV.Risk Factors Have Periods of Under- and Over-Performance V.Precision in Portfolios VI.Does It Pay to Extend Maturities? VII.Distribution of US Market Returns

20 Capital Asset Pricing Model William Sharpe: Nobel Prize in Economics, 1990 Total Equity Risk Unsystematic Specific to firm or industry (lawsuit, fraud, etc.). Diversifiable. No compensation. Systematic Marketwide, affects all firms (war, recession, inflation, etc.). Non-diversifiable. Investor compensation. Measured by beta. Company Risk Industry Risk Market Risk Unsystematic Systematic Beta measures volatility relative to the total market. A beta higher than the market’s beta of 1 implies more volatility, and a beta lower than the market’s implies less volatility

21 Over 70% of the variation in returns is due to risk factor exposure. Source: Dimensional study (2002) of 44 institutional equity pension plans with US $452 billion total assets. Factor analysis run over various time periods, averaging nine years. Total assets based on total plan dollar amounts as of year end Average explanatory power (R 2 ) is for the Fama/French equity benchmark universe. 70% Structured Exposure to Market Factor 30% Stock Picking, Market Timing, and Noise SINGLE-FACTOR MODEL (CAPITAL ASSET PRICING MODEL) R(t) - RF(t) = a + b[RM(t) - RF(t)] + e(t) sensitivity to market [market return minus T-bills] random error e(t) ++= average expected return [minus T-bills] average excess return Capital Asset Pricing Model

22 Over 96% of the variation in returns is due to risk factor exposure. After fees, traditional management typically reduces returns. Source: Dimensional study (2002) of 44 institutional equity pension plans with $452 billion total assets. Factor analysis run over various time periods, averaging nine years. Total assets based on total plan dollar amounts as of year-end Average explanatory power (R 2 ) is for the Fama/French equity benchmark universe. sensitivity to market [market return minus T-bills] sensitivity to size [small stocks minus big stocks] sensitivity to BtM [value stocks minus growth] random error e(t) ++++= average expected return [minus T-bills] average excess return THE MODEL TELLS THE DIFFERENCE BETWEEN INVESTING AND SPECULATING Priced Risk Positive expected return. Systematic. Economic. Long-term. Investing. Unpriced Risk Noise. Random. Short-term. Speculating. 96% Structured Exposure to Factors. 4% Stock Picking and Market Timing Market. Size. Value/Growth. Fama-French Three Factor Model

23 Value stocks are above the 30th percentile in book-to-market ratio. Growth stocks are below the 70th percentile in book-to-market ratio. Simulations are free-float weighted both within each country and across all countries. UK and Europe data provided by London Business School/StyleResearch. US value and growth data provided by Fama/French. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results. Size and Value Effects Are Strong around the World Annual Index Data Percent per Annum in £ Annualised Compound Returns (%) Standard Deviation (%) UK Large Value UK Large Market UK Large Growth UK Small Value UK Small Market UK Small Growth Europe Large Value Europe Large Market Europe Large Growth Europe Small Value Europe Small Market Europe Small Growth US Large Value S&P 500 Index US Large Growth US Small Value CRSP 6-10 Index US Small Growth Emg. Markets Value Emg. Markets “Market” Emg. Markets Growth UK Large Capitalisation Stocks (£) UK Small Capitalisation Stocks (£) Europe ex UK Large Capitalisation Stocks (€) Europe ex UK Small Capitalisation Stocks (€) US Large Capitalisation Stocks ($) US Small Capitalisation Stocks ($) Emerging Markets Capitalisation Stocks ($)

24 Risk Factors Have Periods of Under- and Over-Performance In GBP Our source of share price and listing information was the London Share Price Database (LSPD) maintained at the London Business School. The master index of this database covers all listed stocks in the UK market since We selected stocks officially listed on the LSE and excluded foreign companies and investment trusts. To choose the value sectors we rank the universe by book-to-market and approximately the top 30% is the value universe. The small sectors we rank the universe by market capitalisation and approximately the bottom 10% is the small universe. Copyright © 2003 Elroy Dimson, Stefan Nagel and Garrett Quigley. UK research data provided by the London School of Business. From year to year, stocks with high book-to-market ratios and smaller market caps do not always produce higher returns. Over longer time periods, the size and value premiums are more prevalent. Investors that maintained disciplined size and value exposure were ultimately rewarded. Percent per Year Size Premium Value Premium Percent per Year 2009

25 Precision in Portfolios Traditionally, “products” have been classified into rigid and sometimes arbitrary categories. Style boxes force crude strategic allocation. Three-Factor Model Traditional Consulting Style Box Value BlendGrowth Large Mid Small Large “The Market” Small GrowthValue Using the three-factor model, the total portfolio is measured by factors that determine risk and expected return. Freedom from brittle definitions allows precisely tuned portfolios

26 Does It Pay to Extend Maturities? Not all investors define risk as standard deviation. Some investors may seek to hedge long-term bonds. Historically, longer maturity instruments have higher standard deviations and have not provided consistently greater returns. UK Bills US Bonds UK Bonds US Bills US Equities UK Equities Standard Deviation (%) BillsBondsEquities UKUSUKUSUKUS Annualised Compound Returns (%) Annualised Standard Deviation (%) Dimson, Elroy, Paul Marsh and Mike Staunton, Millennium Book II: 101 Years of Investment Returns (ABN AMRO and London Business School, 2001). This publication defines the data used for the above chart and matrix as follows: UK Bills are UK One-Month Treasury Bills (FTSE). UK Bonds are the ABN AMRO Bond Index. UK Equities are the ABN AMRO/LBS Equity Index. US Bills are commercial bills and One-Month US Treasury Bills (Ibbotson) US Bonds are government bonds , the Federal Reserve Bond Index Years , Long-Term Government Bonds (Ibbotson) , and the JP Morgan US Government Bond Index US Equities are Schwert’s Index Series , CRSP 1-10 Deciles Index , and the Dow Jones Wilshire 5000 Index Return (%)

27 % to -40%-40% to -30%-30% to -20%-20% to -10%-10% to 0%0% to 10%10% to 20%20% to 30%30% to 40%40% to 50%50% to 60% Annual Return Range CRSP data provided by the Center for Research in Security Prices, University of Chicago. The CRSP 1-10 Index measures the performance of the total US stock market, which it defines as the aggregate capitalization of all securities listed on the NYSE, AMEX, and NASDAQ exchanges. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Positive Years:62 (74%) Negative Years:22 (26%) In 2008, the US stock market experienced its second worst performance year since In 2009, US market performance was in the top quartile of historical calendar year returns. Distribution of US Market Returns CRSP 1-10 Index Returns by Year

28 4. Long-Term Discipline I.The Importance of Long-Term Discipline II.The Stock Market’s Reaction III.Performance of the FTSE All-Share Index IV.Comparison of Market Returns, Fund Returns and Investor Returns V.UK Value vs. UK Market VI.UK Small vs. UK Market VII.UK One-Month T-Bills vs. UK Market VIII.Subsequent Performance of Top Equity Managers IX.Bull and Bear Markets

29 The Importance of Long-Term Discipline For illustrative purposes only. UK One-Month T-Bills provided by Datastream; prior to January 1975, UK Three-Month T-Bills provided by London Share Price Database. FTSE data published with the permission of FTSE. This material has been distributed by Dimensional Fund Advisors Ltd. which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results Annualised Compound Returns (%)2/ /20091/ /19741/ /2009 FTSE All-Share Index UK One-Month Treasury Bills

30 The Stock Market’s Reaction As Measured by the Dow Jones Industrial Average DateEvent First Trading Session ResponseSubsequent Market Behaviour Prior Day CloseCloseChange Percent Change One Month Six MonthsOne Year 11 September 2001World Trade Center towers destroyed9, , %-3.66%11.12%-8.71% 16 January 1991US launches bombing attack on Iraq2, , %16.97%18.93%29.52% 2 August 1990Iraq invades Kuwait2, , %-8.74%-4.67%4.95% 30 March 1981President Reagan shot by John Hinckley Jr %1.95%-14.33%-16.90% 9 August 1974President Nixon resigns %-14.71%-8.87%5.98% 22 November 1963President Kennedy assassinated in Dallas %6.57%15.37%24.99% 22 October 1962Cuban missile crisis %15.55%27.41%33.89% 24 September 1955President Eisenhower heart attack %0.04%12.48%5.72% 25 June 1950North Korea invades South Korea %-4.49%7.34%15.13% 7 December 1941Japan attacks Pearl Harbor, Hawaii %-0.86%-6.19%2.88% Dow Jones data provided by Dow Jones Indexes. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results

31 FTSE data published with the permission of FTSE. Long-Term Govt. Bonds are the Citigroup World Government Bond Index UK Years, copyright 2009 by Citigroup. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results. Growth of £1,000 Annualised Compound Return One-Month T-Bills 7.03% Missed 25 Best Days 4.41% Missed 15 Best Days 6.17% Missed 5 Best Days 8.30% Missed 1 Best Day 9.60% Total Period 10.00% Long-Term Govt. Bonds 8.70% Performance of the FTSE All-Share Index January 1986-December

32 US study in US dollars. Estimated Equity Fund Investor Return calculation based on a comparison of time-weighted returns with the dollar-weighted returns earned by the fund investors for 600 general equity funds during Source: John C. Bogle, “The Mutual Fund Industry 60 Years Later: For Better or Worse,” Financial Analysts Journal 61, no. 1 (2005): UK study in GBP sterling. Source: Lukas Schneider, An Examination of the Difference Between UK Fund Returns and UK Fund Investors’ Returns, July US: MeasureAnnual ReturnGrowth of $1 Stock Market Return13.00%$11.50 Average Equity Fund Return10.30%$7.10 Estimated Equity Fund Investor Return7.90%$4.57 UK: MeasureAnnual ReturnGrowth of £1 FTSE All Share8.99%£2.81 Average Fund6.93%£2.23 Average Fund Investor4.91%£1.78 Comparison of Market Returns, Fund Returns, and Investor Returns

33 Source: UK Market is the FTSE All-Share Index. FTSE data published with the permission of FTSE. UK Value simulated by Dimensional from Bloomberg securities data, prior to 1994 data provided by London Business School. This material has been distributed by Dimensional Fund Advisors Ltd which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results. Rolling Time Periods1 Year3 Years5 Years10 Years15 Years20 Years30 Years40 Years Number of Periods Periods UK Value > UK Market UK Value vs. UK Market Monthly: July 1955-December Percentage of All Rolling Periods Where UK Value Outperformed UK Market

34 Source: UK Small simulated by Dimensional from StyleResearch securities data; prior to July 1981, Hoare Govett Smaller Companies Index, provided by the London School of Business. UK Market is the FTSE All-Share Index. FTSE data published with the permission of FTSE. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results. Percentage of All Rolling Periods Where UK Small Outperformed UK Market Rolling Time Periods1 Year3 Years5 Years10 Years15 Years20 Years30 Years40 Years Number of Periods Periods UK Small > UK Market UK Small vs. UK Market Monthly: March 1955-December

35 Source: UK One-Month T-Bills provided by Datastream; prior to January 1975, UK Three-Month T-Bills. UK Market is the FTSE All-Share Index. FTSE data published with the permission of FTSE. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results. Percentage of All Rolling Periods Where UK Market Outperformed UK One-Month T-Bills Rolling Time Periods1 Year3 Years5 Years10 Years15 Years20 Years30 Years40 Years Number of Periods Periods UK Market > UK One-Month T-Bills UK One-Month T-Bills vs. UK Market Monthly: February 1955-December

36 Subsequent Period January 1985-December 1989January 1990-December 1994 Fund Name RankQuartile Rank Average Annual Total ReturnRankQuartile Rank Average Annual Total Return Ignis Balanced Growth Inc Fidelity Special Situations M&G Recovery A Acc Premier UK Thematic A Premier Castlefield UK Alpha General Acc Fidelity Growth + Income Allianz RCM UK Equity C Aviva Investors UK Income & Gr SC Family Charities Ethical Tr Inc CF Canlife Growth Schroder UK Equity Inc F&C Stewardship Growth 1 Inc TU British Trust Inc L&G (Barclays) 500 Inc Reliance British Life A/I SLTM UK Equity General Inc M&G UK Select A Acc Scottish Mutual UK Equity Acc Scottish Widows UK Select Gr C Henderson UK Equity A SWIP UK Advantage A Inc Santander N&P UK Growth M&G UK Growth A Acc Lincoln Growth Trust Aviva Investors UK Equity SC Threadneedle UK Overseas Earnings IN Inc Pru UK Growth Trust Inc A CF Canlife General Inc Threadneedle UK Inst Inst Net GBP SWIP UK Opportunities A Top 30 Funds Average Return All Funds Average Return FTSE All-Share Index Number of Funds3568 Number of Top 30 Funds > FTSE All-Share Index106 Number of All Funds > FTSE All Share Index1016 Do Winners Repeat? Subsequent Performance of Top Thirty Funds Five-Year Period: January 1985-December Source: Morningstar Direct (IMA UK All Companies sector, only funds with five year history used, in GBP, net returns). Source and copyright © Morningstar Limited. All rights therein are reserved, (http://www.funds.morningstar.com). This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results.

37 Subsequent Period January 1990-December 1994 January 1995-December 1999 Fund NameRankQuartile Rank Average Annual Total ReturnRankQuartile Rank Average Annual Total Return Aviva Investors UK Equity SC Artemis Capital IP UK Growth Acc Newton Income GBP Fidelity UK Growth Premier UK Thematic A Martin Currie IF UK Growth A Investec UK Special Situations A Acc Net Schroder UK Equity Inc Old Mutual UK Select Eq Acc CIS UK Growth M&G UK Select A Acc M&G Recovery A Acc Family Charities Ethical Tr Inc Jupiter UK Growth fund NFU UK Growth A Aviva Investors UK Idx Tracking SC UBS UK Equity Exempt – F&C FTSE All-Share Tracker 1 Inc Threadneedle UK Inst Inst Net GBP Standard Life UK Equity Growth R Thornhill Cap Trust Premier Alpha Growth A Investec UK Blue Chip A Acc Net Allianz RCM UK Equity C Royal London UK Growth Insight Inv UK Discretionary A TU British Trust Inc M&G UK Growth A Acc SWIP UK Advantage A Inc Top 30 Funds Average Return All Funds Average Return FTSE All-Share Index Number of Funds 6886 Number of Top 30 Funds > FTSE All Share Index 1613 Number of All Funds > FTSE All Share Index 1632 Do Winners Repeat? Subsequent Performance of Top Thirty Funds Five-Year Period: January 1990-December Source: Morningstar Direct (IMA UK All Companies sector, only funds with five year history used, in GBP, net returns). Source and copyright © Morningstar Limited. All rights therein are reserved, (http://www.funds.morningstar.com). This material has been distributed by Dimensional Fund Advisors Ltd which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results.

38 Subsequent Period January 1995-December 1999January 2000-December 2004 Fund NameRankQuartile Rank Average Annual Total ReturnRankQuartile Rank Average Annual Total Return Jupiter UK Alpha Aviva Investors UK Equity SC Allianz RCM UK Mid Cap A Artemis Capital Allianz RCM UK Growth A Liontrust First Growth Family Asset Trust Sovereign Ethical Inc New Star UK Strategic Capital Allianz RCM UK Equity C Jupiter UK Growth fund Family Charities Ethical Tr Inc Royal London UK Growth Insight Inv UK Discretionary A Baring UK Growth JPMorgan Premier Equity Growth A Acc Aviva Investors UK Growth SC1 Acc Thornhill Cap Trust Standard Life UK Equity Growth R Smith & Williamson UK Equity Gr Trust Old Mutual UK Select Eq Acc BlackRock UK Special Situations A Acc Rensburg UK Blue Chip Growth Cavendish Opportunities Retail F&C UK Equity Aberdeen UK Opportunities A Inc CIS UK Growth Ignis Balanced Growth Inc Fidelity Special Situations Fidelity Growth + Income Top 30 Funds Average Return All Funds Average Return FTSE All-Share Return Number of Funds Number of Top 30 Funds > FTSE All-Share Number of All funds > FTSE All share Do Winners Repeat? Subsequent Performance of Top Thirty Funds Five-Year Period: January 1995-December 1999 Source: Morningstar Direct (IMA UK All Companies sector, only funds with five year history used, in GBP, net returns). Source and copyright © Morningstar Limited. All rights therein are reserved, (http://www.funds.morningstar.com). This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results

39 Subsequent Period January 2000-December 2004January 2005-December 2009 Fund NameRankQuartile Rank Average Annual Total ReturnRankQuartile Rank Average Annual Total Return Rathbone Recovery Fd Acc GAM UK Diversified Acc Saracen Growth Beta Fidelity Special Situations Schroder UK Mid 250 Acc IP UK Growth Acc Cavendish Opportunities Retail MFM Bowland BlackRock UK Special Situations A Acc Investec UK Special Situations A Acc Net Artemis UK Growth fund CF Walker Crips Uk Growth Inc Rensburg UK Mid Cap Growth HSBC FTSE 250 Index Retail Acc BlackRock UK A Acc Ecclesiastical UK Equity Growth A Lazard UK Alpha Retail Inc Mirabaud Mir GB Income Insight Inv UK Dynamic Mgd A Fidelity UK Aggressive Ecclesiastical Amity UK A M&G Recovery A Acc GLG UK Growth Instl Newton Income GBP Jupiter UK Growth fund Jupiter Environmental Income Acc Investec UK Alpha A Acc Net HSBC UK Growth & Income Retail Acc Artemis Capital Martin Currie IF UK Growth A Top 30 Funds Average Return All Funds Average Return FTSE All-Share Return Number of Funds Number of Top 30 Funds > FTSE All-Share Number of All funds > FTSE All share Do Winners Repeat? Subsequent Performance of Top Thirty Funds Five-Year Period: January 2000-December 2004 Source: Morningstar Direct (IMA UK All Companies sector, only funds with five year history used, in GBP, net returns). Source and copyright © Morningstar Limited. All rights therein are reserved, (http://www.funds.morningstar.com). This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results.

40 Bull and Bear Markets FTSE All-Share Index (GBP) February 1955-March 2010 Average Duration: Bull Market: 23 Months Bear Market: 10 Months FTSE data published with the permission of FTSE. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market: (1) begins with a negative monthly return, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points that are not considered part of a bear market are designated as a bull market. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results. Months = Duration of Bull/Bear Market % = Total Return for the Bull/Bear Market 6 mos. 14% 7 mos. 29% 38 months 172% 26 mos. 38% 12 mos. 25% 27 months 122% 23 months 103% 6 months 126% 11 mos. 98% 14 mos. 54% 20 mos. 61% 31 months 120% 40 months 191% 25 mos. 67% 29 months 57 months 135% 29 months -43% 4 months -16% 23 months 43% 47 months 123% 5 months -15% 3 mos. -15% 9 mos. -17% 2 mos. -34% 1 mos. -10% 1 mos. -16% 8 mos. -14% 5 mos. -12% 9 mos. -27% 31 mos. -66% 16 mos. -30% 4 mos. -18% 9 mos. -11% 15 mos. -22% 8 mos. -21% 16 mos. -18% 20 mos. 48% 17 mos. 68% mos. 43% 2 mos. -13% March % Feb %

41 Bull and Bear Markets MSCI Europe Index, Net Dividends (DEM/EUR) Monthly Returns: January 1970-March 2010 Average Duration: Bull Market: 31 Months Bear Market: 12 Months MSCI Europe Index: , denominated in deutsche marks; 1999-present, denominated in euros. MSCI data copyright MSCI 2008, all rights reserved. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market: (1) begins with a negative monthly return, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points that are not considered part of a bear market are designated as a bull market. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results. Months = Duration of Bull/Bear Market % = Total Return for the Bull/Bear Market 13 months 59% 9 months -28% 5 months -15% 27 months 38% 54 months 87% 4 months 19% 16 mos. 59% 5 months -18% 21 months 70% 2 months -31% 40 months 188% 23 months 71% 50 months 146% 2 months -21% 2 mos. -11% 14 months -19% 3 mos. -22% 20 mos. 35% 8 mos. 14% 28 months -50% 72 months 268% months -53% 34 months March % Feb %

42 Bull and Bear Markets MCSI World Index, Net Dividends (USD) Monthly Returns: January 1970-March 2010 Months = Duration of Bull/Bear Market % = Total Return for the Bull/Bear Market Average Duration: Bull Market: 36 Months Bear Market: 11 Months mos. 44% 6 months -19% 33 months 75% 18 months -41% 53 months 72% 3 mos. -11% 8 mos. 36% 19 mos. 56% 20 mos. 60% 1 mos. -11% 37 months 214% 20 months -19% 25 months 50% 4 months -10% 3 months -20% 93 months 193% 9 months -24% 61 months 149% 29 months 2 mos. -14% 30 months -47% MSCI data copyright MSCI 2008, all rights reserved. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market: (1) begins with a negative monthly return, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results March % Feb %

43 5. Investment Considerations I.Investment Considerations II.Equity Fund Expenses III.Fees Matter IV.The Limits of Fund Rating Services

44 Investment Considerations Reduce expenses. Diversify systematically. Minimise taxes and turnover. Think long term. Apply discipline. Hold low-cost funds. Maintain asset allocation.

45 Equity Fund Expenses “After costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar for any time period.” —William F. Sharpe, 1990 Nobel Laureate William F. Sharpe, “The Arithmetic of Active Management,” Financial Analysts Journal 47, no. 1 (January/February 1991): 7-9. Data source: Lipper UK Fund Charges, January 2010; Dimensional OEIC TERs per Report and Accounts, December 2009, audited; Dimensional UCIT TERs per Report and Accounts, November 2009, audited. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results. UK Equity UK Equity Fund Expense RatiosGlobal Equity Fund Expense Ratios UK Index Tracking Equity Dimensional UK Equity Global EquityGlobal Index Tracking Equity Dimensional International Equity

46 Fees Matter £4,983,951 £3,745,318 £2,806,794 £ 1,000,000 £2,000,000 £3,000,000 £4,000,000 £5,000,000 1 Year3 Years5 Years 10 Years20 Years 30 Years Time 1% Fee 2% Fee 3% Fee British Pounds Assumed 6.5% Annualised Return over 30 Years Fees matter. Over long time periods, high management fees and related expenses can be a significant drag on wealth creation. Passive investments generally maintain lower fees than the average actively managed investment by minimising trading costs and eliminating the costs of researching stocks. For illustrative purposes only

47 Fund AFund BFund CFund D Morningstar (Dec 2000) Forbes (Dec 2000)CAA+D US News & World Report (Dec 2000) Wall Street Journal (Jan 2001)ECAB BusinessWeek (Jan 2001)ANo RatingB+C Funds A, B, C and D are actual funds. They are not identified because the purpose of this illustration is to emphasise that ratings, by themselves, do not provide enough information to make a sound investment decision. Morningstar: Five stars is highest rating; one star is lowest rating. US News & World Report: 100 is highest rating; 1 is lowest rating. The Limits of Fund Rating Services

48 6. Investment Theory I.Innovations in Finance II.Fixed Interest Investing

49 Innovations in Finance The Birth of Index Funds John McQuown, Wells Fargo Bank, 1971; Rex Sinquefield, American National Bank, 1973 Banks develop the first passive S&P 500 Index funds. Efficient Markets Hypothesis Eugene F. Fama, University of Chicago Extensive research on stock price patterns. Develops Efficient Markets Hypothesis, which asserts that prices reflect values and information accurately and quickly. It is difficult if not impossible to capture returns in excess of market returns without taking greater than market levels of risk. Investors cannot identify superior stocks using fundamental information or price patterns. Single-Factor Asset Pricing Risk/Return Model William Sharpe Nobel Prize in Economics, 1990 Capital Asset Pricing Model: Theoretical model defines risk as volatility relative to market. A stock’s cost of capital (the investor’s expected return) is proportional to the stock’s risk relative to the entire stock universe. Theoretical model for evaluating the risk and expected return of securities and portfolios. The Role of Stocks James Tobin Nobel Prize in Economics, 1981 Separation Theorem: 1. Form portfolio of risky assets. 2. Temper risk by lending and borrowing. Shifts focus from security selection to portfolio structure. “Liquidity Preference as Behavior Toward Risk,” Review of Economic Studies, February Conventional Wisdom circa 1950 “Once you attain competency, diversification is undesirable. One or two, or at most three or four, securities should be bought. Competent investors will never be satisfied beating the averages by a few small percentage points.” Gerald M. Loeb, The Battle for Investment Survival, 1935 Analyse securities one by one. Focus on picking winners. Concentrate holdings to maximise returns. Broad diversification is considered undesirable. Diversification and Portfolio Risk Harry Markowitz Nobel Prize in Economics, 1990 Diversification reduces risk. Assets evaluated not by individual characteristics but by their effect on a portfolio. An optimal portfolio can be constructed to maximise return for a given standard deviation. Investments and Capital Structure Merton Miller and Franco Modigliani Nobel Prizes in Economics, 1990 and 1985 Theorem relating corporate finance to returns. A firm’s value is unrelated to its dividend policy. Dividend policy is an unreliable guide for stock selection. Behaviour of Securities Prices Paul Samuelson, MIT Nobel Prize in Economics, 1970 Market prices are the best estimates of value. Price changes follow random patterns. Future share prices are unpredictable. “Proof That Properly Anticipated Prices Fluctuate Randomly,” Industrial Management Review, Spring First Major Study of Manager Performance Michael Jensen, 1965 A.G. Becker Corporation, 1968 First studies of mutual funds (Jensen) and of institutional plans (A.G. Becker Corp.) indicate active managers underperform indices. Becker Corp. gives rise to consulting industry with creation of “Green Book” performance tables comparing results to benchmarks. Options Pricing Model Fischer Black, University of Chicago; Myron Scholes, University of Chicago; Robert Merton, Harvard University Nobel Prize in Economics, 1997 The development of the Options Pricing Model allows new ways to segment, quantify and manage risk. The model spurs the development of a market for alternative investments

50 Innovations in Finance Nobel Prize Recognises Modern Finance Economists who shaped the way we invest are recognised, emphasising the role of science in finance. William Sharpe for the Capital Asset Pricing Model. Harry Markowitz for portfolio theory. Merton Miller for work on the effect of firms’ capital structure and dividend policy on their prices. Variable Maturity Strategy Implemented Eugene F. Fama With no prediction of interest rates, Eugene Fama develops a method of shifting maturities that identifies optimal positions on the fixed interest yield curve. “The Information in the Term Structure,” Journal of Financial Economics 13, no. 4 (December 1984): Multifactor Asset Pricing Model and Value Effect Eugene Fama and Kenneth French, University of Chicago Improves on the single-factor asset pricing model (CAPM). Identifies market, size, and “value” factors in returns. Develops the three-factor asset pricing model, an invaluable asset allocation and portfolio analysis tool. “Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Financial Economics 33, no. 1 (February 1993): Database of Securities Prices since 1926 Roger Ibbotson and Rex Sinquefield, Stocks, Bonds, Bills, and Inflation An extensive returns database for multiple asset classes is first developed and will become one of the most widely used investment databases. The first extensive, empirical basis for making asset allocation decisions changes the way investors build portfolios. A Major Plan First Commits to Indexing New York Telephone Company invests $40 million in an S&P 500 Index fund. The first major plan to index. Helps launch the era of indexed investing. “Fund spokesmen are quick to point out you can’t buy the market averages. It’s time the public could.” Burton G. Malkiel, A Random Walk Down Wall Street, 1973 ed. International Size Effect Steven L. Heston, K. Geert Rouwenhorst and Roberto E. Wessels Find evidence of higher average returns to small companies in twelve international markets. “The Structure of International Stock Returns and the Integration of Capital Markets,” Journal of Empirical Finance 2, no. 3 (September 1995): The Size Effect Rolf Banz, University of Chicago Analyzed NYSE stocks, Finds that, in the long term, small companies have higher expected returns than large companies and behave differently. Integrated Equity Eugene F. Fama and Kenneth R. French Increasing exposure to small and value companies relative to their market weights and integrating the portfolio across the full range of securities may reduce the turnover and transaction costs normally associated with forming an asset allocation from multiple components. “Migration” CRSP Working Paper No. 614, February 2007)

51 Fixed Interest Investing One aspect of fixed interest’s role in a portfolio is to reduce volatility. This may be accomplished by employing: Shorter maturities with lower equity correlations. High-quality issues. A global approach that hedges all currencies

52 7. Limitations of Indexing I.Tracking an Index Can Be Costly II.The Effect of Index Reconstitution on Stock Prices

53 Tracking an Index Can Be Costly Tracking an index may result in significant trading costs. Index replication requires executing with pre-specified transactions, stocks, amounts and trade dates. Timing lag between reconstitution announcement and effective date enables non-indexers to buy additions and sell deletions before tracking-sensitive investors, when prices are often more attractive

54 The Effect of Index Reconstitution on Stock Prices For illustrative purposes only. S&P 500 data source: Anthony Lynch and Richard Mendenhall, “New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index,” Journal of Business 70, no. 3 (July 1997): MSCI EAFE Index data provided by Rajesh Chakrabarti, Wei Huang, Narayanan Jayaraman and Jinsoo Lee, “Price and Volume Effects of Changes in MSCI Indices: Nature and Causes,” Journal of Banking and Finance 29, no. 5 (May 2005): FTSE 100 Index data provided by Brian Moore, “The Impact of Changes in the FTSE 100 Index.” FTSE-100 Index S&P 500 Index MSCI EAFE Index One-Day Return after Announcement (%) Run-Up to Effective Date (%) Decay after Effective Date (%) AnnouncementEffective Price Time Stocks rise on announcement of inclusion. Index funds are forced to buy high on effective date. Buying and selling to track index changes reduces tracking error but generates transaction costs

55 This material has been distributed by Dimensional Fund Advisors Ltd., registered address 7 Down Street, London W1J 7AJ, Company Number , which is authorised and regulated by the Financial Services Authority - Firm Reference No It is provided for information purposes and intended for your use only and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned. The information provided is not intended to provide a sufficient basis on which to make an investment decision. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional Fund Advisors Ltd. to be reliable, but Dimensional Fund Advisors Ltd makes no representation as to their accuracy or completeness. Dimensional Fund Advisors Ltd. accepts no liability for loss arising from the use of this material. This material is directed exclusively at persons who are experienced or existing investors in the products described in this document, who are professional customers as defined by the rules of the Financial Services Authority or are otherwise eligible under these rules. It is not intended for retail customers and such persons should not rely on this material. Moreover, any investment or service to which this material may relate, will not be made available to such retail customers. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. Client Presentation

56 The Basic Institutional Portfolio Monthly: Passively Invested Portfolio 1 Annualised Compound Return (%) Annualised Standard Deviation (%) Portfolio Citigroup UK Govt. Bond Index Years (hedged) FTSE All-Share Index Portfolio 140%60% On average, portfolios of institutional investors are about 60% stocks and 40% bonds. Data sourced internally at Dimensional Fund Advisors from Dimensional’s Returns Program 2.0. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results

57 Does It Pay to Extend Maturities? Not all investors define risk as standard deviation. Some investors may seek to hedge long-term bonds. Historically, longer maturity instruments have higher standard deviations and have not provided consistently greater returns. UK Bills US Bonds UK Bonds US Bills US Equities UK Equities Standard Deviation (%) BillsBondsEquities UKUSUKUSUKUS Annualised Compound Returns (%) Annualised Standard Deviation (%) Dimson, Elroy, Paul Marsh and Mike Staunton, Millennium Book II: 101 Years of Investment Returns (ABN AMRO and London Business School, 2001). This publication defines the data used for the above chart and matrix as follows: UK Bills are UK One-Month Treasury Bills (FTSE). UK Bonds are the ABN AMRO Bond Index. UK Equities are the ABN AMRO/LBS Equity Index. US Bills are commercial bills and One-Month US Treasury Bills (Ibbotson) US Bonds are government bonds , the Federal Reserve Bond Index Years , Long-Term Government Bonds (Ibbotson) , and the JP Morgan US Government Bond Index US Equities are Schwert’s Index Series , CRSP 1-10 Deciles Index , and the Dow Jones Wilshire 5000 Index Return (%)

58 The Basic Institutional Portfolio Monthly: Portfolio 2 Annualised Compound Return (%) Annualised Standard Deviation (%) Portfolio Portfolio Citigroup UK Govt. Bond Index Years (hedged) FTSE All-Share Index Global Short-Dated Bonds Portfolio 140%60% Portfolio 260%40% Data sourced internally at Dimensional Fund Advisors from Dimensional’s Returns Program 2.0. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results

59 Where Dimensional Invests: Developed Markets Emerging Markets Not Invested In British pounds. Map reflects countries in the MSCI All Country World IMI Index, and MSCI Frontier Markets Index. Market cap data is free-float adjusted. MSCI data copyright MSCI 2010, all rights reserved. Many small nations not displayed. Totals may not equal 100% due to rounding. Dimensional makes case-by-case determinations about the suitability of investing in each emerging market, making considerations that include local market accessibility, government stability and property rights before making investments. For educational purposes; should not be used as investment advice. 1. An example large cap stock provided for comparison. United States7,509 United Kingdom1,528 Japan1,504 Canada745 France736 Australia600 Germany558 Switzerland519 China405 Brazil359 SCALE TOP 20 NATIONS BY MARKET CAPITALIZATION (£ BILLIONS) Spain306 South Korea292 Taiwan287 Italy243 Sweden195 Netherlands189 India183 Hong Kong166 South Africa162 Russia131 World Market Capitalisation £17.7 Trillion as at December 31,

60 A Diversified Portfolio Monthly: Portfolio 3 Annualised Compound Return (%) Annualised Standard Deviation (%) Portfolio Portfolio Portfolio Citigroup UK Govt. Bond Index Years (hedged) FTSE All-Share Index Global Short-Dated Bonds MSCI World ex UK Index Emerging Markets Companies Portfolio 140%60% Portfolio 260%40% Portfolio 325%40%25%10% Data sourced internally at Dimensional Fund Advisors from Dimensional’s Returns Program This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results

61 Value stocks are above the 30th percentile in book-to-market ratio. Growth stocks are below the 70th percentile in book-to-market ratio. Simulations are free-float weighted both within each country and across all countries. UK and Europe data provided by London Business School/StyleResearch. US value and growth data provided by Fama/French. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results. Size and Value Effects Are Strong around the World Annual Index Data Percent per Annum in £ UK Large Value UK Large Market UK Large Growth UK Small Value UK Small Market UK Small Growth Europe Large Value Europe Large Market Europe Large Growth Europe Small Value Europe Small Market Europe Small Growth US Large Value S&P 500 Index US Large Growth US Small Value CRSP 6-10 Index US Small Growth Emg. Markets Value Emg. Markets “Market” Emg. Markets Growth UK Large Capitalisation Stocks (£) UK Small Capitalisation Stocks (£) Europe ex UK Large Capitalisation Stocks (€) Europe ex UK Small Capitalisation Stocks (€) US Large Capitalisation Stocks ($) US Small Capitalisation Stocks ($) Emerging Markets Capitalisation Stocks ($) Annualised Compound Returns (%) Standard Deviation (%)

62 Data sourced internally at Dimensional Fund Advisors from Dimensional’s Returns Program 2.0. This material has been distributed by Dimensional Fund Advisors Ltd., which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results. A Diversified Portfolio Monthly: Portfolio 4 Annualised Compound Return (%) Annualised Standard Deviation (%) Portfolio Portfolio Portfolio Portfolio Citigroup UK Govt. Bond Index Years (hedged) FTSE All-Share Index Global Short-Dated Bonds MSCI World ex UK Index Emerging Markets Companies UK Value Companies UK Small Companies International Value Companies International Small Companies Portfolio 140%60% Portfolio 260%40% Portfolio 325%40%25%10% Portfolio 410%40%10% 7.5%


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