Investment Presentation Jan 2014

1. An Explanation Of How To Invest For The Best Returns Investment Presentation

2. Within this presentation we will Explain: • Why we believe clients should invest in asset backed investments if they want the best long term returns. • Why some asset classes tend to outperform others. • Why we believe it is essential to diversify your investments. • Why risk and return are always related and why we believe it is imperative to keep within your comfort zone. • We will show that “risk” reduces over time and we will explain why we prefer passive funds. Investment Presentation

3. Preamble Throughout these notes we have tried wherever possible to use 20 years of data, starting in November 1993 and finishing in November 2013. In November 1993: • Inflation was standing at 1.36% • Bank base rate was at 5.38% • The FTSE 100 was at 3,139 In November 2013: • Inflation is at 2.65% • Bank base rate is at 0.5% • The FTSE 100 is at 6,650 Back in 1993 if you used 10 year GILTS to generate £10,000 of income you would need (ignoring costs) £145,985. To achieve the same income using 10 year GILT yields in November 2013 you would need £348,432. This is equivalent to an annualised growth rate of 4.44%. Had the FTSE 100 grown by the same sum it would now be at 7,488. (Bank of England, FTSE and Wren Research statistics). Investment Presentation

4. Why Invest in Assets Rather Than Cash? Over the longer term assets tend to perform better than cash or inflation: Investment Presentation

5. Are Some Asset Classes More Volatile (Risky) Than Others? So UK Small has an average return around 10% but in any one year this varies between -13% and + 33%. Cash averages at 4.15% but in any one year this varies between 2.5% and 6.5%. Investment Presentation

6. Asset Classes Tend to Outperform At Different Times Empirical evidence has shown that if you combine asset classes the end result is greater than that of the composite parts. By choosing uncorrelated assets you can achieve reasonable returns in most markets as when some assets are going down, others normally rise. 11/1993 to 11/2013 A correlation of 1.0 indicates a perfect association, a correlation of 0 indicates no relation & a correlation of -1.0 is a perfect disassociation Investment Presentation

7. Different Asset Classes For Different Risks At Swallow Financial Planning we categorise clients into one of 7 risk categories. These are based on your FinaMetrica score (1 to 100). If you want to know how we do this, please refer to our Risk Profile notes. So the most cautious investor (i.e. with a FinaMetrica score of less than 20) is the wary one. On the other hand, the high risk investor (with a score of 90 +) is “Gung Ho”, holding the most volatile assets. Investment Presentation

8. Combining Assets Creates Better Returns With Reduced Volatility The High Risk portfolio contains the other asset classes but has beaten all but UK Small whilst generating far less volatile returns (Total return over 20 years: 397%) Investment Presentation

9. Combining Assets Creates Better Returns With Reduced Volatility Again, the Prudent portfolio contains the other asset classes and has matched or beaten most asset classes, whilst generating far less volatile returns. (Total return over 20 years: 296%) Investment Presentation

10. Different Asset Classes Reduce Risk Risk, in investment terms, is usually different from what a lay person considers as risk. Most lay people consider a risk as the risk of losing the physical value of their money. In investment terms it is not the physical risk to the initial capital value, but rather it is the risk the investment will perform better or worse than expected. This is also called the standard deviationfrom the norm. If we look at the returns for the above asset classes over 20 years we have a table as follows: As you can see, the use of a mixture of assets overall generates better returns at lower risk than does an equivalent asset class. Investment Presentation

11. Better returns mean higher volatility Wary has an average return of 4.5% with a best return of 8.5% and a worst return of 0%, whereas Speculative has an average return of 9.5% however its best return was 36.5% and it’s worst return in a year was -35%. If you don’t like the risk, choose a lower long term return. Investment Presentation

12. The Longer The Term The More Certain The Return If you look at the best and worst returns from a selection of our recommended portfolios you see the following: If you don’t need your money for 10+ years you can afford to take more risk knowing the return is more likely to be as expected. Investment Presentation

13. Passive Funds Will Generate Better Returns We explain our approach to investments in “Our Approach to Investment Management” notes. In brief, we believe investment returns in the future will (on average) reflect the inflation rate. If Inflation is low then an average passive fund with charges of 1% is bound to out perform an average managed fund with charges of 2.5%. £10,000 at a gross annual return of 5% over 20 years will grow to £26,500 with no charges, £21,911 in a passive fund or £16,386 in an active fund meaning the active fund has to grow by 30% better than the index just to keep pace with it. Investment Presentation

14. Managed Funds Do Not Beat The Index (Source: Lipper Hindsight growth total return, default tax rate, in £ to 31/12/2007) This schedule indicates the percentages of funds over 5 years which generate above average performances. With less than 5% of managed funds achieving a consistent return better than average, why take the risk? Investment Presentation

15. Do Not Time The Market! The Graham and Campbell study of 237 market timing newsletters showed that less than 25% of the “experts” predicted the right outcome once, let alone consistently. If we cannot get the asset timing right, we believe clients should remain invested in their optimum asset classes. Investment Presentation

16. Summary Within this presentation we have tried to show in graphical form why we believe clients should have a diverse range of investments set up according to how much they are prepared to see the capital value of their investments fluctuate in the short term. We have also tried to explain why you should choose different sectors of the market which may well perform better than others over the longer term. Finally we have touched on our reasons for using passive rather than active fund managers. So looking forward, what might the circumstances we find ourselves in now suggest that the next 20 years might bring? Well firstly fixed interest rate investments can only go one way. If the underlying interest rates now are effectively 0%, then the yield over the next 20 years can only go up (as most institutions and individuals will not want to pay people to hold your money it seems unlikely that interest rates will go significantly into the negative!). If yields go up, the capital value of fixed interest securities (i.e. Government gilts and corporate bonds) will fall. One could also argue that the long term outlook for commercial property is also somewhat subdued. If interest rates do rise then there will be some narrowing of the very wide risk margins we see now (typically yield to value are in the region 8% to 10% at present) but eventually the capital values will fall. Against this, however, there is the influence of new build costs to consider so there is always an element of inflation proofing over the longer term. The value of an equity is the value of its dividends over the life of the share, so if the outlook for certain markets is uncertain (i.e. the gradual lowering of western standards of living in comparison with those in developing countries) then one needs to be circumspect over where one invests on a macro level at least. But no one know what is going to happen! One thing we can be certain of is that if you want your investments to keep up with and hopefully beat inflation you will have to accept risk. Andrew Swallow November 2013. Investment Presentation

17. Disclosure and Fund Information The graphs and schedules within this presentation would not have been possible without access to the Dimensional Fund Advisors Ltd back tested database of funds. The funds we have used were somewhat restricted due to the desire to show 20 years performance (many indices are only 5 to 10 years old). The specific indices we have used are: In addition we have used Bank of England data concerning interest rates and related issues. Wherever possible we have included dividend income in the returns so as to compare all investments on a like for like basis. • We have taken no account of charges (except in our comments re active fund managers) although clearly charges have a major effect on long term performance. • We have taken no account of taxation within our figures. At present in the UK capital gains tax is at a maximum of 28% and income tax is at a maximum of 62%. This makes a colossal difference to the end return on your investments. • Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. • And finally, whilst we have tried our best to ensure that we have presented you with an accurate and well reasoned presentation any advice we give to clients must be client specific and not of a generalised nature. E.&.O.E. Investment Presentation