Paradigm Best Practice Workshop - Income Investing in the New World April/May 2014

2  Explain how longevity is a key issue for today's investor through demographic trends  Understand how UK investors feel about their financial future through insights from BlackRock's Investor Pulse Survey  Illustrate the different risks/reward profiles that each asset class has in the current environment  Describe how an equity income strategy can support clients' income needs both towards and at retirement Learning outcomes

Demographics in the spotlight

Retirement: An important market for all of us The global retirement population is rapidly increasing Planning for retirement will become imperative Source: United Nations as at 31 December ? 737 Mn people Global retirement population 4

What explains the increase in the ageing population? Source: UN estimates. Between 1950 and 2010, The United Nations estimate of Life Expectancy rose from 47 … …to 67 That’s a 43% increase

What is the life expectancy of a child born in the UK today? 1.76 years 2.77 years 3.80 years 4.83 years Source: UN, CIA World Factbook 6

Life expectancy and GDP growth Source: Gapminder as at 31 December 2012

Use your longevity Investors need to make their money last longer. Increasing life expectancy will require a more active approach to investment in retirement 8 Source: Annuity 2000 Mortality Table, Society of Actuaries. Figures assume non-smokers in good health. US Data.

What are investors thinking? BlackRock Investor Pulse Survey Source: BlackRock Investor Pulse survey, conducted in association with research agency Cicero Group in September 2013 amongst a nationally representative sample of 2,000 UK residents (of which 400 categorised as mass affluent) aged 25 to 74 years old. The results of this survey are provided for information purposes. The conclusions are intended to provide an indication of the current attitude of a sample of citizens in the UK to saving and investing and should not be relied upon for any other purposes.

Short-termism and risk aversion leading people to seek shelter in cash … 10 CASH: 68 % STOCKS: 13 % BONDS: 7 % PROPERTY: 6 % ALTERNATIVE INVESTMENTS: 2 % OTHER 2 %  68% of people’s investments are in cash, with a relatively small proportion dedicated to longer-term investments  46% intend to maintain the same level of cash over the next 12 months and 32% intend to increase it All UK residents Cash is king in UK portfolios

But what about affluent investors? 11  Affluent investors and people who have an adviser have a more diversified portfolio, but with cash still a major component STOCKS: 25 % BONDS: 12 % PROPERTY: 16 % ALTERNATIVE INVESTMENTS: 2 % OTHER 2 % CASH:42 % Mass affluent only Typical portfolio for an affluent investor

How people are planning to change their asset allocation over the next 12 months … and also to stay in a holding pattern with few changes in asset allocation 12 All UK residents

Cash still favoured as a source of income and growth 13 Protect against loss Protect against inflation Generate a regular income Grow savings/ investments Views from affluent investors on what asset classes / investments will help them with the following 4 financial goals:  People rightly see cash as a safe harbour but may be unaware of the effects of inflation  Many understand how dividend-paying equities can help generate an income, however a third of investors see cash as the best way to achieve this goal All UK residents

Yesterdays news, but still driving sentiment 14

Understanding risk and reward

The danger of ‘do nothing’ 16 Example investor asset allocation Assumptions for Bonds  Low inflation or even deflation  Interest rates stay the same or decline  QE programmes to remain indefinitely Capital Stability Assumptions for Bonds  Yield above inflation  Price volatility a secondary concern  High volatility in equity markets Assumptions for Cash  Interest rates above inflation  High volatility in markets Assumptions for Cash  Interest rates to rise  Outright economic deflation Income Generation Bonds Cash Equities Investors are positioned in cash and fixed income to meet two primary needs:

Cash: long-term effects of inflation erodes clients’ standards of living Time works against investors who rely on fixed amount of capital  Even a moderate rate of inflation can erode purchasing power  An inflation rate of 3% will reduce purchasing power by half in 25 years, assuming no interest is earned  Growing income streams have become necessary to preserve lifestyle during longer lives Source: BlackRock. Assumes constant annual inflation rate and no interest earned on investment. For illustrative purposes only.. 2% inflation 3% inflation 4% inflation Years

Source: BlackRock/OECD/Bloomberg as at 31 July Investors need to consider alternatives to fixed income 18 Economic Social Political Technological Environment of low inflation and falling interest rates since the 1980’s The world has changed and fixed income must change with it

~9.5% loss of capital Preserving capital: bond sensitivity Just a small change in BoE rates would cause a significant fall in capital for investors in UK 10-year gilts Source: UK 10-Year Gilt modified duration: 9.5%. Source: BlackRock / Bloomberg, data as at 16 January % rise in rates Expect volatility from any changes to interest rates and monetary policy 19

Why look to equity income?

Investors may need to broaden their search for yield Source: BlackRock, DataStream, Bloomberg. Data as at 31 December Cash represented by the JP Morgan Cash Total Return Index, UK government bonds represented by 10-year gilts, UK corporate bonds represented by the BarCap Sterling Aggregate Corporate Index, global high yield represented by the BarCap Global High Yield Index, emerging market debt represented by the JP Morgan Emerging Market Bond Index, UK equities represented by the FTSE All-Share Index (total return), global equities represented by the MSCI AC World Index (total return), global high dividend equities represented by the MSCI World High Dividend Yield Index (total return). Diversify your income Yield comparisons as at

22 Real Returns to the FTSE All Share (Since 1962) 10 year annual average real return to FTSE All Share (Ending Year) 5 year annual average real return to FTSE All Share from subsequent 10 year periods with 0 or negative returns (Starting Year) Source: Thomson Reuters Datastream. Data from 31 December 1962 to 31 December FTSE All Share Index (total return). Inflation is represented by the Retail Price Index. All returns are in sterling terms %-5%-4%-3%-2%-1%0%1%2%3%4%5%6%7%8%9%10%11%12%13%14%15%16%17%18%19%20% %-5%-4%-3%-2%-1%0%1%2%3%4%5%6%7%8%9%10%11%12%13%14%15%16%17%18%19%20%

Negative growth Annualised returns: 10/90–6/91, 6/00–1/02, 9/07–6/09 High growth Annualised returns: 9/93–2/95, 2/96–6/00,1/02–8/02, 7/09–9/10 Equity income strategies have outperformed in a low growth environment Source: BlackRock, Bloomberg and Barclays. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any Blackrock fund. Past performance does not guarantee future results. Annualized returns based on Global Equities Equity income investing is well suited to current economic conditions Low growth Annualised returns: 1/88–10/90, 6/91–9/93, 2/95–2/96, 8/02–9/ % -8.0% -4.0% 0.0% 4.0% 8.0 % 12.0% All equity High dividend equity IG Corp. HY Corp % -8.0% -4.0% 0.0% 4.0 % 8.0% 12.0% All equity High dividend equity IG Corp. HY Corp. All equity High dividend equity IG Corp. HY Corp % -8.0% -4.0% 0.0% 4.0% 8.0% 12.0% 23

 Europe offers yield investors much more choice than the UK  In Europe, the top 10 dividend payers represent only 29% of all dividend income**  In the UK, the top 10 dividend payers represent 51% of all dividend income** No. of stocks yielding > 4.0% with market cap over EUR1 bn* Europe equities offer a yield premium from high quality, market leading businesses European income investing offers more choice *Source: Citigroup, Data to 31 October 2013 * based on stocks above EUR1bn market cap and with a dividend yield >4.0%. **Source: Citigroup, Data to 31 December

Trailing 12M net distribution yield of 3.8% 2 Realised beta since launch: BlackRock Continental European Income Fund performance to 31 March Absolute Returns (%)6 months Since Inception Since launch (ann.) BLK Continental European Income Fund (£) FTSE Europe ex UK (net) (£) FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 1 Source: BlackRock, as at Realised ex-post beta since launch versus the FTSE World Developed Europe ex UK index was Calculation based on monthly returns. 2 Source: BlackRock. BlackRock Continental European Income Fund A Inc Units,12 month trailing yield, net of withholding tax as at : 3.8%. Source for performance data: BlackRock. Fund inception date: 6 May Fund’s cumulative performance shown in Sterling on a NAV price basis with income reinvested, A Accumulation Unit, net of fees, as at

Summary  Longevity means investors may need to plan for a third phase of life in retirement  Investor sentiment is still largely driven by fear and caution  Cash continues to dominate investors’ portfolios  But the risks associated with cash and fixed income are changing  Investors need income but traditional sources are not delivering  Equity income offers a potential solution for investors seeking yield  The current environment is supportive of equity income strategies  Europe offers a fertile hunting ground for the income investor 26

27  Explain how longevity is a key issue for today's investor through demographic trends  Understand how UK investors feel about their financial future through insights from BlackRock's Investor Pulse Survey  Illustrate the different risks/reward profiles that each asset class has in the current environment  Describe how an equity income strategy can support clients' income needs both towards and at retirement Learning outcomes

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