1. Climate change Climate Change Chair – Ian Ling Speakers Peter Bourne Ian Ling Tristan Hanson Anatole Kaletsky 19 th Annual Investment Conference

2. Climate Change – South African Conferences 2009 Climate change Peter Bourne Managing Director

3. Climate Change – South African Conferences 2009 0 30 60 100 120 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Equities Bonds Real Estate Ashburton $ Asset Management Ashburton £ Asset Management Global market performance April 08 – April 09 Source: Lipper 80

4. Climate Change – South African Conferences 2009 % Growth 1 Year5 Years Multi Asset Funds Replica Sterling Asset Management-13.2720.48 Sector Average-16.2710.29 Replica Dollar Asset Management-19.6116.45 Sector Average-27.56-2.76 Replica Euro Asset Management-14.307.43 Sector Average-15.44-2.72 Equity Funds Dollar International Equity-44.46-2.17 MSCI World CR USD-40.82-13.77 Fixed Income Funds Dollar Managed Income Fund-4.319.86 Sector Average-11.8214.77 Investment Performance - as at 30 April 2009 Source: Lipper

5. Climate Change – South African Conferences 2009 A world upside down

6. Climate Change – South African Conferences 2009 Today’s Speakers Tristan Hanson Ashburton strategist Ian Ling Ashburton Director Anatole Kaletsky Editor-at-large for ‘The Times’

7. Climate Change – South African Conferences 2009 Climate change Ian Ling Five stages of grief

8. Climate Change – South African Conferences 2009 Loads of grief 1.Equity markets have fallen sharply

9. Climate Change – South African Conferences 2009 World Equity Markets (USD) 30 April 2008 to 30 April 2009 Index% change USAS&P 500-37.01% UKFTSE 100-48.11% FranceCAC 40-46.45% GermanyDAX-41.88% JapanNikkei 225-32.84% Hong KongHang Seng-39.40% AsiaASX200 Index-48.05%

10. Climate Change – South African Conferences 2009 MSCI World 0 400 800 1200 1600 Mar-70 Mar-73Mar-76Mar-79 Mar-82 Mar-85Mar-88Mar-91 Mar-94 Mar-97Mar-00 Mar-03 Mar-06 Mar-09 Liquidity crunch

11. Climate Change – South African Conferences 2009 Loads of grief 1.Equity markets have fallen sharply 2.Property market collapse 3.Commodity prices collapse 4.Corporate bonds tank 5.Interest rates fall to zero …….worries over another depression … are we following Japan??

12. Climate Change – South African Conferences 2009 Nikkei Index Since 1970 0 10000 20000 30000 40000 Jan-70 Jan-74 Jan-78 Jan-82 Jan-86 Jan-90 Jan-94 Jan-98 Jan-02 Jan-06

13. Climate Change – South African Conferences 2009 What can we expect? Edwin Coppock – 1960’s Technique to determine long term investment opportunities Investors need time to mourn the death of a bull market 10-14 months according to Church Bishops Look at the thoughts of two analysts who have assessed the link between grief and market behaviour

14. Climate Change – South African Conferences 2009 2006 2005200420032002 2001 2000 1999 Australia's All Ordinaries Index The Coppock Indicator The indicator is trend-following, and based on monthly averages, so by its nature it doesn't pick a market bottom, but rather shows when a rally has become established. Buy signal

15. Climate Change – South African Conferences 2009 The Coppock Indicator 1.Very close to a buy signal for the S&P 2.Interestingly almost exactly 9 months after Lehmans collapse and Fannie Mae and Freddie Mac rescue

16. Climate Change – South African Conferences 2009 What can we expect? Elisabeth Kübler-Ross Developed a behavioural pattern of people suffering from terminal illness, and later to any form of catastrophic personal loss (job, income, freedom) … loss of capital!! Identified five stages of grief

17. Climate Change – South African Conferences 2009 Five stages of grief Elisabeth Kübler-Ross 1. DENIAL 2. ANGER 3. BARGAINING 5. ACCEPTANCE 4. DEPRESSION

18. Climate Change – South African Conferences 2009 Kübler-Ross Model – 5 stages of grief 1.Denial - "This can't be happening, not to me." 2.Anger- “It's not fair!"; "Who is to blame?"

19. Climate Change – South African Conferences 2009 Goodwin defiant over pension as investors heckle RBS Board The independent 04 Apr 09 Goodwin defiant over pension as investors heckle RBS Board The independent 04 Apr 09 Protestors smash into RBS branch The Financial Times 02 Apr 09 Protestors smash into RBS branch The Financial Times 02 Apr 09 Fury at $2.5bn Lehman bonus - The Times 21 Sep 08 Fury at $2.5bn Lehman bonus - The Times 21 Sep 08 Eleven AIG executives quit despite bonuses up to $4.6 million The Times – 17 Mar 2009 Eleven AIG executives quit despite bonuses up to $4.6 million The Times – 17 Mar 2009 Merrill Lynch’s CEO spent over $1 million to redecorate his office—even as the firm faced a financial crisis. Former RBS chief's house attacked amid pay outrage The Financial Times 26 Mar 09 Former RBS chief's house attacked amid pay outrage The Financial Times 26 Mar 09 The people v The banker: The payouts party is over The independent 15 Feb 09 The people v The banker: The payouts party is over The independent 15 Feb 09 AIG chief urges staff to return bonuses

20. Climate Change – South African Conferences 2009 Kübler-Ross Model – 5 stages of grief 1.Denial - "I feel fine."; "This can't be happening, not to me." 2.Anger- Why me? It's not fair!"; "How can this happen to me?"; "Who is to blame?" 3.Bargaining - “how can we sort this out?” – G20? G2?

21. Climate Change – South African Conferences 2009 Sorting it out – director/shareholder relationship Pre 2009 – companies not run for the benefit of shareholders run for benefit of directors Options…Exactly that…not a long-term commitment Borrowing to buy back shares.  Increased share price – make options more valuable  Increased gearing Excessive pay – Oligarchic. Justify paying in comparison to peers. Shareholders passive – stock going up so no concern.

22. Climate Change – South African Conferences 2009 Post 2009 - Change of sentiment Companies will be run for the shareholders again (e.g. Japan) In some cases CEOs have to buy a number of shares determined in relation to their overall remuneration. Proposal for average wage to appear in report and accounts and the difference between the highest and lowest salaries and male and female wage differential. Shareholders becoming more activist Sorting it out – director/shareholder relationship

23. Climate Change – South African Conferences 2009 Kübler-Ross Model – 5 stages of grief 1.Denial - "I feel fine."; "This can't be happening, not to me." 2.Anger- Why me? It's not fair!"; "How can this happen to me?"; "Who is to blame?" 3.Bargaining - “how can we sort this out?” – G20? G2? 4.Depression – “why bother with anything?"; What's the point in saving?“ 5.Acceptance - "It's going to be okay."; "I’ve taken the pain and can start again”

24. Climate Change – South African Conferences 2009 Caution Certainty Disbelief Concern Belief FEAR GREED Ian Ling Fear and Greed Model – (patent pending!!) Capitulation

25. Climate Change – South African Conferences 2009 MSCI World 0 400 800 1200 1600 Mar-70 Mar-73Mar-76Mar-79 Mar-82 Mar-85Mar-88Mar-91 Mar-94 Mar-97Mar-00 Mar-03 Mar-06 Mar-09 Trading range GREED FEAR

26. Climate Change – South African Conferences 2009 Climate change Tristan Hanson Ashburton outlook May 2009

27. Climate Change – South African Conferences 2009  Depression will be avoided: the worst of the economic news is behind us  Debate will now be about the sustainability of a global recovery  Risk assets – equities, emerging markets, corporate bonds – likely to provide the strongest returns over the next 12 months  But risks remain and volatility is likely to remain high Active asset allocation and portfolio diversification Introduction

28. Climate Change – South African Conferences 2009 Economic outlook

29. Climate Change – South African Conferences 2009 A very severe global recession Annualised rates of economic contraction: Q4 2008 % South Africa-1.8 Australia-2.0 France-4.3 UK-6.2 US-6.3 Germany-8.1 Japan-12.1 Singapore-12.5 Brazil-13.6 South Korea-18.9

30. Climate Change – South African Conferences 2009  Developed nations were in recession by mid-2008  Synchronised bursting of Anglo-Saxon housing bubbles  Oil shock comparable to 1970s  Chinese domestic slowdown  September 2008: Lehman collapse  Credit markets freeze up  Wealth destruction (housing, stocks, pensions)  Collapse in business and consumer confidence – sharp declines in spending Why has the global economy contracted so sharply?

31. Climate Change – South African Conferences 2009 7 Comparison with the Great Depression Industrial Production: 1929-33 vs 2008- 40 50 60 70 80 90 100 110 6 1218 24 303642 Months US Japan Germany US: Aug 1929 - Mar 1933

32. Climate Change – South African Conferences 2009  Monetary Policy  Fiscal Policy  Institutional Differences  China – a source of external growth Why another Great Depression will be avoided:

33. Climate Change – South African Conferences 2009 Why another Great Depression will be avoided: Source: St. Louis Fed, Bernanke (2000) US Money Supply: The Great Depression Compared 80 100 120 140 160 180 200 220 3711151719212325272931333537 Months Index US (Dec 2007- ) US (Aug 1929- Aug 1932) Lehman/AIG collapse

34. Climate Change – South African Conferences 2009 US Treasury Secretary Mellon (1921-32): Why another Great Depression will be avoided: “…purge the rottenness out of the system.” “I will do whatever it takes to put this economy back on track” President Obama (2009):

35. Climate Change – South African Conferences 2009  Institutional differences with the early 1930s No Gold Standard Deposit insurance Welfare states Less risk of protectionism (cf. Smoot Hawley tariff, 1930) globally integrated supply chains Why another Great Depression will be avoided:

36. Climate Change – South African Conferences 2009 China – a source of growth: Source: IMF Share of World Growth (volume) % 0% 10% 20% 30% 40% 1981-19901991-20002001-20082009-2014

37. Climate Change – South African Conferences 2009 Reasons to be cheerful - 1 Source: Bloomberg US$ 3-mth Interbank Lending Rates - normalising 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 01/200707/200701/200807/200801/2009 % Credit markets easing

38. Climate Change – South African Conferences 2009 Reasons to be cheerful - 2 Source: Bloomberg US personal consumption growth (QoQ) -6 -4 -2 0 2 4 6 8 % annual rate Dec-93 Dec-95Dec-97 Dec-99Dec-01 Dec-03 Dec-05 Dec-07

39. Climate Change – South African Conferences 2009 Reasons to be cheerful - 3 Source: Bloomberg China - Bank Lending Growth 0 5 10 15 20 25 30 35 Nov-99Nov-00 Nov-01Nov-02Nov-03Nov-04Nov-05Nov-06 Nov-07Nov-08 % (YoY)

40. Climate Change – South African Conferences 2009 Reasons to be cheerful - 4 Source: Bloomberg Korea: Exports (US$ mln) 15,000 25,000 35,000 45,000 Feb-03Feb-04Feb-05Feb-06Feb-07Feb-08Feb-09 Collapse in global trade over ?

41. Climate Change – South African Conferences 2009 Reasons to be cheerful - 5 Source: Bloomberg Copper Price ($) 100 150 200 250 300 350 400 May-08 Aug-08 Nov-08 Feb-09 MSCI World Equity Index ($) 600 800 1000 1200 1400 1600 May-08 Aug-08 Nov-08 Feb-09 Sentiment improving

42. Climate Change – South African Conferences 2009 1.Stabilisation of US consumption & housing 2.Easing credit market conditions 3.Chinese domestic recovery sustained 4.Protectionist threat must be contained 5.Governments must outline long-term plans to reduce deficits Steps to sustainability

43. Climate Change – South African Conferences 2009 7 Don’t worry…the authorities are on top of things “We saved the world…” - Gordon Brown

44. Climate Change – South African Conferences 2009 7 Ashburton Investment Strategy

45. Climate Change – South African Conferences 2009 Investment Strategy Replica Asset Management  Positive 12-month view towards equities  Overweight Asia relative to US/Europe  We have increased exposure to credit  Bond exposure concentrated in Europe Focused on delivering cash- plus returns over the cycle and containing portfolio risk Asset Allocation Bonds 58% Govt/Govt Guaranteed25% Supranational20% Inflation-linked bonds9% Corporate4% Equities 37% US12% Pan Europe11% Asia14% Cash/Tbills5% 100% Source: Ashburton - as at 12 May 2009

46. Climate Change – South African Conferences 2009 Investment Strategy Replica Asset Management – currency overlay  Exposure to undervalued Asian currencies through Korea and Taiwan.  Sterling preferred currency of the four majors.  Norway – attractive fundamentals Currency Weightings (%) £€$ GBP77-5 EUR-77- USD--72 JPY--- NOK555 KRW555 TWD555 Other Asia666 Source: Ashburton

47. Climate Change – South African Conferences 2009 Equities for the long-run? More relevant now… Source: Bloomberg S&P Index Dividends per share 200 400 600 800 1000 1200 1400 1600 199319961999200220052008 $8 $12 $16 $20 $24 $28 $32

48. Climate Change – South African Conferences 2009 Equities – low P/E ratio by historical standards Source: Bloomberg, Ashburton calculations US: cyclically-adjusted PE ratio 0 5 10 15 20 25 30 35 40 45 1950 19551960196519701975198019851990199520002005

49. Climate Change – South African Conferences 2009 Equities – highest equity risk premium since 1970s Source: Bloomberg, Ashburton calculations US: Implied Equity Risk Premium (%) -4 -2 0 2 4 6 8 10 12 14 1969 1974 19791984 1989 1994 19992004

50. Climate Change – South African Conferences 2009 Corporate Bonds – spreads narrowing but remain high Source: Cazenove, iBoxx 0 100 200 300 400 500 600 700 800 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Euro investment grade corporate bond spread Financials Industrials

51. Climate Change – South African Conferences 2009 Sterling – cheapest major currency Source: Bloomberg 1.25 1.50 1.75 2.00 2.25 Dec-88Dec-92Dec-96Dec-00Dec-04Dec-08 Sterling versus US dollar

52. Climate Change – South African Conferences 2009 7 The challenge: control those emotional swings! “Up three points? My Gawd, I jumped too soon!” (1930s cartoon)

53. Climate Change – South African Conferences 2009 7 Managing portfolio volatility Source: Bloomberg, Ashburton  Replica Asset Management volatility has been contained.  Equity, bond and currency volatility has been extreme. -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 2009 YTD Ashburton Replica Asset Management S&P 500 Daily moves

54. Climate Change – South African Conferences 2009 Long term performance track record Replica Asset Management vs cash since launch of fund (04/02/1992) Ashburton Replica Sterling Asset Management Lipper Global Money Market -25 25 75 125 175 225 275 Feb-92 Feb-94 Feb-96Feb-98Feb-00Feb-02 Feb-04 Feb-06Feb-08 MSCI World Equities

55. Climate Change – South African Conferences 2009 Climate change Anatole Kaletsky Reaction

56. Climate Change – South African Conferences 2009 Q&A

57. Thank you Active Investment Managers

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