1. n\uk\2007\g07\InvestmentWeek-0307.ppt Graham Kitchen Henderson UK Equity Fund Manager Can Megacaps ever perform? Thursday 1 March 2007

2. 1 n\uk\2007\g07\InvestmentWeek-0307.ppt Top 10 stocks account for almost 40% of the UK Market What are Megacaps? Information ratio = CompanySector Market Capitalisation All Share Weighting Royal Dutch ShellOil & Gas Producers£116bn6.3% BPOil & Gas Producers£111bn6.0% HSBCBanks£107bn5.8% GlaxoSmithKlinePharmaceuticals£77bn4.2% VodafoneMobile Telecoms£74bn4.0% Royal Bank of ScotlandBanks£63bn3.4% BarclaysBanks£47bn2.6% HBoSBanks£43bn2.3% AstraZenecaPharmaceuticals£42bn2.3% Anglo AmericanMining£37bn2.0% TOTAL38.9% FTSE All Share market capitalisation = £1.85 trillion Source: Citigroup. As at 31 December 2006

3. 2 n\uk\2007\g07\InvestmentWeek-0307.ppt UK market performance since 1995 Mid-caps have significantly outperformed Source:Datastream Total Returns in Sterling rebased to 100. FTSE100 has lagged the FTSE 250 in recent years

4. 3 n\uk\2007\g07\InvestmentWeek-0307.ppt Megacaps have been a drag on market performance Megacap returns have disappointed Source:Citigroup (01.01.2006 to 31.12.2006) Based on Top 10 stocks at the start of 2006 rebased to 100. FTSE 100 impacted in 2006 by poorly performing Megacaps

5. 4 n\uk\2007\g07\InvestmentWeek-0307.ppt Megacaps have underperformed the FTSE 100 Megacap returns have disappointed Source:Morgan Stanley. Rebased to 100. Performance of Megacaps relative to FTSE 100 (excl. top 10 stocks)

6. 5 n\uk\2007\g07\InvestmentWeek-0307.ppt Megacaps have become more dominant Source:Citigroup Concentration rose dramatically in the late 90’s Top 10 stocks as a percentage of the FTSE All Share %

7. 6 n\uk\2007\g07\InvestmentWeek-0307.ppt Why have they underperformed? Source:Citigroup based on 12 month forward earnings. Megacaps are now more attractively valued Megacaps trade at a discount to the rest of the market Price/Earnings Valuations were too expensive in 2000 11x 18x 14x 27x

8. 7 n\uk\2007\g07\InvestmentWeek-0307.ppt Why have they underperformed? Source:Citigroup. % of index acquired M&A has helped drive FTSE 250 outperformance Merger & Acquisition activity focused in mid-caps %

9. 8 n\uk\2007\g07\InvestmentWeek-0307.ppt Why have they underperformed? Source:Citigroup. Sales exposure to key regions. US$ exposure has also been an issue Megacap earnings have not been supportive Disappointment from some stocks: % Earnings downgrades (HSBC) Poor newsflow (BP) US dollar exposure (GlaxoSmithKline)

10. 9 n\uk\2007\g07\InvestmentWeek-0307.ppt Megacap performance has been mixed Megacap performance in 2006 (%) % Stock specific issues have driven performance Source:Datastream. Price returns for 2006.

11. 10 n\uk\2007\g07\InvestmentWeek-0307.ppt Performance driven by fundamentals Barclays was a strong performer in 2006 Low valuation – 9x Price/Earnings Upgrades to earnings forecasts Strength at BGI and Barclays Capital offset concerns about rising default rates at Barclaycard Analysts forecasts were too pessimistic Barclays share price in 2006 Source:Datastream. pence Interim results beat the market’s expectations

12. 11 n\uk\2007\g07\InvestmentWeek-0307.ppt Megacaps now look cheap Megacaps are now more attractively valued Megacaps trade at a discount to the rest of the market Price/Earnings Source:Citigroup based on 12 month forward earnings. 11x 14x

13. 12 n\uk\2007\g07\InvestmentWeek-0307.ppt Can Megacaps ever perform? Earnings Growth Forecasts 20072008 Megacaps-2%4% FTSE 100 ex Megacaps 9%6% FTSE 25011%10% Lower earnings growth forecast for Megacaps Source: Citigroup and Henderson Global Investors Valuations are cheaper Balance sheets are stronger Larger M&A deals... … but earnings remain under pressure

14. 13 n\uk\2007\g07\InvestmentWeek-0307.ppt Can Megacaps ever perform? especially if …… Mid-cap M&A slows Stop producing disappointing news Become more shareholder friendly YES

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