Active SRI: sustainably better returns?

1. Active SRI: sustainably better returns? Institutional Breakfast Seminar Thursday, 18 November 2010 Paul Udall Investment Director, GAM

2. Funds with an environmental or sustainability strategy focus on deliverables Unprecedented convergence of concerns over effects of resource depletion, high energy prices and the risk of climate change Massive infrastructure demand driven by rapid industrialisation and urbanisation of developing economies Replacement cycle in the developed world due to existing dilapidated infrastructure Led by China and America, support for clean tech is rapidly becoming one of the biggest industrial-policy efforts ever. Cash strapped municipal governments are driving privatisation of water and energy assets  Increasingly stringent regulatory environment driving adoption of clean technologies Macro investment drivers present a compelling opportunity to generate returns 2

3. So, what are investors looking for in an SRI portfolio? • Meet ESG/ethical criteria (“mission-based” investing)? • Positive impacts? • Positive returns? • Long term growth? But have SRI funds achieved any of these in the past?

4. The traditional approach to SRI investing Sustainable growth? Traditional SRI funds often characterised by: • A negative screening approach • Bypassing global sustainability issues by over investing in financials, telcos and media • A lack of clear investment strategy / cohesion Have they really made any difference? • Several studies have shown that so-called SRI or sustainable funds have produced similar (sometimes worse) returns than regular funds • Not surprising given the number of mainstream stocks that could be found in both regular and sustainable investment funds • So-called SRI funds often holding names such as BP, Lloyds, Shell, Vodafone, BG Group…

5. Is this what SRI investors are looking for? Top holdings of traditional SRI funds • Fund B: Global • Underlying fund size £55 million • Fund A: UK • Underlying fund size £525 million The fund is described as: • “an investment medium for people who do not regard financial gain as the sole criterion for investment but look to wider issues” • “concentrated in UK companies whose products and operations are considered to be of long-term benefit to the community both at home and abroad” The fund is described as: • “expected to conform to social and environmental criteria” Source: * as at 31 August 2010 ** as at 30 September 2010

6. UK SRI/Ethical funds’ exposure to banks and telecoms • ‘Old’ SRI hides away from sustainability issues by over weighting media, telecommunications and financials • New SRI does not invest in these sectors Source: Holden & Partners, 2008 Guide to Climate Change Investment. GAM GEO Model Portfolio added for comparison purposes. Note: This table just covers UK funds, where the sector bias is particularly marked.

7. Active SRI – the modern alternative A positive approach to SRI investing • Bottom-up approach focussing on environmentally-related companies • Sustainable companies providing sustainable solutions • Companies providing a positive environmental impact • Considers environmental opportunities and catalysts • Key areas of sustainable growth: • Alternative energy • Clean transport • Energy efficiency • Water conservation • Emerging markets • Meaningful and integrated investment approach A sustainable approach capturing the secular growth from environmental opportunities

8. Big picture on energy demand Resources are exhaustive, a clear mis-match between future needs and current production levels • What happens when 1.3 billion Chinese become American? • Car ownership would rise from 45m to 800m, requiring 80m barrels of oil a day (equal to current global production) • China would become the second largest consumer of oil, importing 50% • China would become the largest aviation market by 2020, with 1 billion people flying • Unprecedented growth in Chinese CO2 emissions and energy use • 64% of increase in yearly energy consumption and 71% in CO2 emissions since 2000 from China • Estimates for 2010 energy consumption made in 2002 were exceeded in 2005 • Estimates for 2020 were exceeded in 2009 Currently 12% of the world’s population consume 75% of the world’s energy resources Note: Country size is proportional to the percentage of world energy consumption “Shell estimates that after 2015 supplies of easy to access oil will no longer keep up with demand. As a result, society has no choice but to add other sources of energy.” Jeroen van der Veer, CEO, Shell, letter to employees, 22 January 2008 Source: The Economist, Time Magazine

9. There is no alternative to alternative energy • Steroids driving alternative energy supply and demand • There is no magic bullet and all alternatives will be used • Environmental issues accelerating • Climate change, pollution, water shortages, food prices • Energy efficiency solutions will play a major role • The internetization of energy as smart grids enable demand management • Electrification of transport infrastructure • Driving demand for mass transit, high speed trains and electrical vehicles • 50% energy lost through the build environment provides huge opportunity China’s CO2 emissions as a % of global targets 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2001 2004 2007 2010 2013 2016 2019 2022 2025 2028 Annual global energy related CO2 emissions under 450ppm scenario Annual CO2 emissions by China if growth rate in emissions halves to 5% Source: IEA, IPCC, CLSA Asia-Pacific Markets

10. Growth in renewable energy Driven by structural shift away from fossil fuels • Considerable growth in renewable energy generation forecast • Expected to rise to between 20% and 40% of total global electricity generation by 2030 European electricity generation (by source in TWh) 2009 generation 3,263 3,021 2000 generation -123 Coal 24 Coal . . . and 58% of net new generation in 2010-2020 -82 Oil -5 Oil 444 Gas Gas 216 -37 Nuclear -75 Nuclear Renewables = 46% of net new generation since 2008 365 Renewables 111 Renewables 11 Other Other 3 2020 generation 3,263 3,883 2009 generation 2,600 2,800 3,000 3,200 3,400 3,000 3,200 3,400 3,600 3,800 4,000 Source: IEA/Bernstein Research

11. Surging demand for power and water from China, India and Brazil • China has become dominant player in the wind industry • Providing big opportunities for technology leaders • There are around 100 interior cities in China where economic growth is only just taking off Power consumption per capita – Higher in Shanghai than Italy Chinese wind market now ranking no. 1 globally in new installed capacity 7 16 6.0 13.8 14 6 5.7 5.4 12 4.8 5 4.6 4.5 4.3 4.2 9.9 10 3.8 4 8.5 8 MWh pa 3 6.2 6 5.2 2 4 3.5 3.3 China 2.5 2.4 2.5 2.2 1 US 1.9 1.8 1.8 1.7 2 1.6 1.7 1.6 1.3 Spain 0.5 Germany 0 0 2009 Shanghai UK Italy Zhejiang Portugal Tianjin Jiangsu Beijing Hungary 2005 2006 2007 2008 Source: NBS, CEIC, CIA World Fact Book

12. Transformative shift in transport infrastructure and policy Creates stock picking opportunities World Bicycle and Passenger Car Production, 1950-2007 140 • World bicycle production climbed to 130m by 2007 • Governments are devising a myriad of incentives to encourage bicycle use • China, with 430m bikes, has the world’s largest fleet, but ownership rates are higher in Europe • The Netherlands has more than one bike per person while Germany and Denmark have just under one bike per person 120 100 80 Million Units 60 40 20 Bicycles* 0 Cars** 1950 1958 1966 1974 1982 1990 1998 2006 Source: Compiled by Earth Policy Institute with bicycle data compiled by Gary Gardner for "Bicycle Production Reaches 30 Million Units," in Worldwatch Institute, Vital Signs 2009 (Washington, DC: 2009), pp. 53-54; car production for 1950-1970 from Worldwatch * Bicycle data includes electric bicycles. **Car data does not include commercial vehicles.

13. Applying active SRI to secular themes • The consequences of the transformative change in how energy, resources and materials are developed and consumed are not accurately being reflected in stock prices • This can result in undervalued structural growth opportunities which can be exploited • Sustainability issues can impact a company’s ability to generate returns • Must be fully integrated with rigorous and disciplined fundamental research to uncover opportunities • Clean technology • Alternative energy • Energy efficiency • Environmental conservation • Food/water shortages • Infrastructure • Clean transport

14. Identifying trades In-depth fundamental analysis • Traditional financial analysis focused on financial statements, broker research, trade journals and forums • Global reach with focus on rapidly growing environmental markets • Many funds have a Euro-centric focus 14 14

15. Example trades Positive and sustainable environmental impact Example A Example B LONG POSITION Jain IrrigationMktCap $600m Manufactures micro-irrigation systems, plastic pipes and plastic sheets, as well as processes horticulture in India. Sector: Water LONG POSITION Giant Manufacturing MktCap $800m The Company's products include mountain bicycles, lightweight aluminium material bicycles, racing bicycles. Sector: Clean Transport • Drivers: Agri productivity, water scarcity, food security • Market share 3x competition, with 2x margin levels • Strong distribution network, local govt & farmer links • Downside risk: Country risk, subsidies • Drivers: Energy prices, urbanization, health, carbon • World leader with 10% market share • Low cost manufacturing, undervalued • Downside risk: Raw materials price (AU) Source: GAM For illustrative purposes only. Reference to a security is not a recommendation to buy or sell that security.

16. Shorting can be positive too! A long/short approach to active SRI • Strong evidence that environmental factors are having a significant impact on share prices both positively and negatively • Additional alpha opportunities arise from shorting over-owned stocks with poor or deteriorating fundamentals • Also provides some protection from market declines and volatility

17. Example short trades Example A Example B SHORT POSITION Toray (3402 JP) MktCap $5bn Manufactures carbon fibre, synthetic fibres, and man-made leather used as apparel and industrial materials. Sector: Clean Transport SHORT POSITION Aixtron (AIX GR) MktCap $2bn Provides capital equipment for the LED lighting and laser industry. Sector: Energy Efficiency • Drivers: Lighter materials improving efficiency • Carbon Fibre business is nascent with high exposure to R&D budgets • Downside risk: Large contract wins • Drivers: Mass adoption of LED lighting • 30% market share in LED equipment sector • Large capacity increases coming on stream • Trading at peak margin valuations Source: GAM For illustrative purposes only. Reference to a security is not a recommendation to buy or sell that security.

18. Summary • Significant cyclical and secular opportunity for environmentally-focused strategies • Active SRI has a positive, investment focus which can generate better opportunities and alignment than traditional, negative approaches • Active SRI can tap into broad areas of sustainable growth: from Alternative Energy to Water Conservation • Breadth of opportunity focus helps create well diversified portfolios and specialisation can enhance returns • Shorting can be included to take advantage of deteriorating fundamentals or over-owned stocks

19. Appendix

20. Paul Udall Investment Director Paul Udall is an Investment Director managing a Global Equity based strategy using environmental and sustainable investment themes. Prior to joining GAM in May 2010, Paul spent two years managing long/short equity environmental funds for Climate Change Capital, and prior to that he worked for both Tudor Investments and Morley Fund Management managing long/short and absolute return strategies. Before joining Morley, Paul was a global equity analyst at AXA Investment Managers. Paul holds an MSc in Investment Management from the University of Stirling, a BSc in Accounting and Finance from the University of East Anglia and is an associate member of both the CFA institute and the UK Society of Investment Professionals. He is based in London.

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