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

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

Climate Change – South African Conferences 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

Climate Change – South African Conferences 2009 % Growth 1 Year5 Years Multi Asset Funds Replica Sterling Asset Management Sector Average Replica Dollar Asset Management Sector Average Replica Euro Asset Management Sector Average Equity Funds Dollar International Equity MSCI World CR USD Fixed Income Funds Dollar Managed Income Fund Sector Average Investment Performance - as at 30 April 2009 Source: Lipper

Climate Change – South African Conferences 2009 A world upside down

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’

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

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

Climate Change – South African Conferences 2009 World Equity Markets (USD) 30 April 2008 to 30 April 2009 Index% change USAS&P % UKFTSE % FranceCAC % GermanyDAX-41.88% JapanNikkei % Hong KongHang Seng-39.40% AsiaASX200 Index-48.05%

Climate Change – South African Conferences 2009 MSCI World 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

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??

Climate Change – South African Conferences 2009 Nikkei Index Since Jan-70 Jan-74 Jan-78 Jan-82 Jan-86 Jan-90 Jan-94 Jan-98 Jan-02 Jan-06

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 months according to Church Bishops Look at the thoughts of two analysts who have assessed the link between grief and market behaviour

Climate Change – South African Conferences 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

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

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

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

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?"

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

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?

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.

Climate Change – South African Conferences 2009 Post 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

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”

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

Climate Change – South African Conferences 2009 MSCI World 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

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

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

Climate Change – South African Conferences 2009 Economic outlook

Climate Change – South African Conferences 2009 A very severe global recession Annualised rates of economic contraction: Q % 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

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?

Climate Change – South African Conferences Comparison with the Great Depression Industrial Production: vs Months US Japan Germany US: Aug Mar 1933

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:

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 Months Index US (Dec ) US (Aug Aug 1932) Lehman/AIG collapse

Climate Change – South African Conferences 2009 US Treasury Secretary Mellon ( ): 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):

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:

Climate Change – South African Conferences 2009 China – a source of growth: Source: IMF Share of World Growth (volume) % 0% 10% 20% 30% 40%

Climate Change – South African Conferences 2009 Reasons to be cheerful - 1 Source: Bloomberg US$ 3-mth Interbank Lending Rates - normalising /200707/200701/200807/200801/2009 % Credit markets easing

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

Climate Change – South African Conferences 2009 Reasons to be cheerful - 3 Source: Bloomberg China - Bank Lending Growth Nov-99Nov-00 Nov-01Nov-02Nov-03Nov-04Nov-05Nov-06 Nov-07Nov-08 % (YoY)

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 ?

Climate Change – South African Conferences 2009 Reasons to be cheerful - 5 Source: Bloomberg Copper Price ($) May-08 Aug-08 Nov-08 Feb-09 MSCI World Equity Index ($) May-08 Aug-08 Nov-08 Feb-09 Sentiment improving

Climate Change – South African Conferences 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

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

Climate Change – South African Conferences Ashburton Investment Strategy

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

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

Climate Change – South African Conferences 2009 Equities for the long-run? More relevant now… Source: Bloomberg S&P Index Dividends per share $8 $12 $16 $20 $24 $28 $32

Climate Change – South African Conferences 2009 Equities – low P/E ratio by historical standards Source: Bloomberg, Ashburton calculations US: cyclically-adjusted PE ratio

Climate Change – South African Conferences 2009 Equities – highest equity risk premium since 1970s Source: Bloomberg, Ashburton calculations US: Implied Equity Risk Premium (%)

Climate Change – South African Conferences 2009 Corporate Bonds – spreads narrowing but remain high Source: Cazenove, iBoxx 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

Climate Change – South African Conferences 2009 Sterling – cheapest major currency Source: Bloomberg Dec-88Dec-92Dec-96Dec-00Dec-04Dec-08 Sterling versus US dollar

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

Climate Change – South African Conferences 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

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 Feb-92 Feb-94 Feb-96Feb-98Feb-00Feb-02 Feb-04 Feb-06Feb-08 MSCI World Equities

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

Climate Change – South African Conferences 2009 Q&A

Thank you Active Investment Managers

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