Jersey Investment Briefings - November 2010 Tristan Hanson November 2010 Structural Themes & Asset Allocation Update

Jersey Investment Briefings - November 2010 Overview  Structural Themes: I.Quantitative Easing and implications for asset prices II.Equities: the most attractive major asset class III.Contrasting fortunes: emerging vs developed economies IV.Uncertainty is unavoidable  Asset Allocation update

Jersey Investment Briefings - November 2010 Theme 1: The goals of QE  Higher asset prices  Bond yields down (prices up)  Other asset prices rise (corporate bonds, equities, property)  Wealth effect on spending  Lower cost of borrowing  Influence expectations

Jersey Investment Briefings - November 2010 Source: Ashburton, S&P, Bloomberg Implied equity risk premium is high US: Implied Equity Risk Premium (%) Based on 12mth forward earnings per share Sep-89 Sep-94 Sep-99Sep-04 Sep-09 % US: Implied Equity Risk Premium Based on Trend EPS Dec-69 Dec-79 Dec-89 Dec-99 Dec-09

Jersey Investment Briefings - November 2010 Equity valuations imply attractive relative returns Source: Ashburton, Factset, Bloomberg Expected long-term real returns (local ccy) US 10yr Govt GER 10yr Govt JAP 10yr Govt SA 10yr Govt US IG Corp US HY Corp US Equity EY GEM Equity EY EU Equity EY SA Equity EY %

Jersey Investment Briefings - November 2010 Corporations are in good shape Source: Deutsche Bank, Barclays Capital US Average Corporate Bond Yield Jan-90Jan-95Jan-00Jan-05Jan-10 % US Corporate Leverage (Ex-Financials)

Jersey Investment Briefings - November 2010 Corporations are in good shape European EBIT Margins %

Jersey Investment Briefings - November 2010 Theme 3: Structural divergence in growth rates Source: IMF Industrial Production Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jan 2007 = 100 Retail Sales Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jan 2007 = 100 Emerging economies World Advanced economies

Jersey Investment Briefings - November 2010 EM: lower debt levels & improved fundamentals Source: IMF, WB Russia Indonesia Mexico Turkey Poland Brazil China India Korea South Africa Germany Singapore UK USA Japan Private + Public Debt 2008 % of GDP Private Public

Jersey Investment Briefings - November 2010 US Household Balance Sheet Source: Bloomberg, Federal Reserve 0% 100% 200% 300% 400% 500% 600% 700% 800% Mar-57Mar-67Mar-77Mar-87 Mar-97 Mar-07 % of disposable income Assets/Income Net Worth/Income Debt/Income 50% 70% 90% 110% 130% 150% Dec-80Dec-85Dec-90 Dec-95Dec-00 Dec-05 % of disposable income Debt/Income

Jersey Investment Briefings - November 2010 European sovereign risk will not disappear Source: Barclays Capital GermanySpainFrancePortugalIrelandItalyGreece Government Debt/GDP (%)

Jersey Investment Briefings - November 2010 Theme 4: Uncertainty  Policymakers and investors in uncharted territory  Quantitative easing & experimental monetary policy  Public debt levels & sovereign debt crises  Global coordination/global rebalancing  Perceived large tail-risks  How quickly things can change: “In due course, however, as the expansion matures the Federal Reserve will need to begin to tighten monetary policy conditions to prevent the development of inflationary pressures ”. Ben Bernanke, “Federal Reserve’s exit strategy”, speech 10 th February, 2010

Asset Allocation Update November 2010

Jersey Investment Briefings - November 2010 Asset Allocation Source: Ashburton fixed income range 0% - 80% Equity range 0% - 50% Replica Asset Management Fund Asset Allocation (21/10/10) Equities - US Equities - EU Equities - Japan Equities - Asia ex-Jap Corporate Bonds DM - Government Bonds EM - Government Bonds Cash/Equivalents

Jersey Investment Briefings - November 2010 Asset Management Funds: asset allocation update  Equity exposure has been effectively at limit since end-August  Equity exposure diversified globally; high exposure to China  Government bond exposure concentrated in long-end US, UK curves to exploit term premia  Long-dated TIPS exposure closed out in October following decline in real yields  High correlations and volatility make currency markets challenging. Long-term belief that the euro will decline from current levels against a currency basket.

Jersey Investment Briefings - November 2010 US/UK 30yrs: risk premium is high Source: Bloomberg US 30yr yield less 10yr yield Mar-96Mar-99Mar-02Mar-05Mar-08 % UK 30yr yield less 10yr yield Mar-96Mar-99Mar-02Mar-05Mar-08 %

Jersey Investment Briefings - November 2010 Equities: EM re-rating argues for global diversification DM cheap EM cheap Source: JP Morgan, Datastream, MSCI

Jersey Investment Briefings - November 2010 Conclusion  Global equities are priced to deliver attractive returns. We maintain diversified exposure across DM and EM.  Bottom-up corporate fundamentals strong  Macro/policy risks likely to cause periodic volatility & trading opportunities – be sceptical of extreme views/price action  Relative value in long-dated US and UK government bonds

Thank you Active Investment Managers

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