Contents

1. Contents 2001 Mid Year review Economic outlook A word about technology Long term scenario USA Europe Japan Market Valuation Investment Outlook Investment behavior Investor strategy Investment themes Sector allocation 1

2. US Industrial Production YOY 8 4 0 -4 Jan-90 Jan-93 Jan-96 Jan-99 US Corporate Profits % change 8 6 4 2 -2 -4 -6 -8 Jan-90 Jan-93 Jan-96 Jan-99 US Non-Res. Fixed Investment % Change annual* 2001 mid year review The Economy Ugly but according to plan... As the second quarter of 2001 draws to a close, the US economy appears to be hovering near its cycle lows in GDP growth, while Europe displays worrying signs of slowdown. A situation which has thus far supported our outlook for the year (see Investment Perspectives 2001). In our outlook for 2001 we significantly adjusted our growth outlook for the US economy downward after having taken into account the massive decline in Capital Expenditures and investments by business. The impact of the overbuild in technology has had a dramatic effect on the overall level of economic growth in the US and has since spilled over into Europe. After a 6 month delay and much to the apparent surprise of the ECB, Europe’s economies have started to slow significantly. In addition, the global economic situation has worsened, with Japan apparently falling back into recession conditions and the world’s emerging markets feeling the pains of their larger export markets. As US Corporate Profits dive… As the economy slowed from 8.7% (December quarter 1999) quarterly growth to probably flat slightly negative in the June quarter 2001, corporate profits were caught in the crossfire of falling revenues and sticky fixed costs. From initial estimates of 7-10% profit growth, S&P 500 profits are now expected to fall nearly 15% in 2001, rebounding in 2002 to a moderate 7% rate. And Capex falls... The sharp drop off in demand, couple with the boom in capacity build out from the late 1990’s has caused capacity utilization rates to fall of significantly. In fact, we have reached levels unseen since the early 80’s. Such a situation can only be corrected through a pick up in end demand, as even dramatic rate reductions will not entice a company to borrow money for investments that they do not need to make. 2

3. US Initial Jobless Claim 500 400 300 Jan-99 Jan-90 Jan-93 Jan-96 EU Business Climate 2 1 0 -1 -2 Jan-93 Jan-96 Jan-99 Jan-90 -3 EU Industrial Production Y-O-Y 10 6 2 -2 Jan-96 Jan-99 US Personal Spending YOY % Change 6 4 2 0 -2 Jan-90 Jan-93 Jan-96 Jan-99 Raising the risk of a viscous circle of layoffs and falling demand… The overbuild of the late 1990’s was not only a capex issue, but also a personnel issue. With demand seemingly insatiable (especially in technology) companies added workers at a dizzying pace, gearing up for growth. Now that this growth has all but disappeared, these extra layers of fat are being rapidly trimmed. The consequence of these layoffs may be to dent consumer confidence enough that spending drops off substantially, something that we have not seen up to this point. Unlike past recessions which were often lead by a fall in consumer spending, this one was lead by capacity overspend (mostly in the new economy), unsupported by long term market conditions. Should the second shoe drop (the consumer), we could be led into a new round of slowing, which could bring the global economy to a virtual standstill. Spilling over across the Atlantic (spillover) A dramatic slowdown in the US has already spilled over into the global arena. Some believed that Europe would be immune to a slowdown, due in part to its lower dependence on technology and the benefits of intra European trade brought on through the growth of the EU. Once again however, the theory of economic decoupling proved to be a farce. Business confidence has been falling steadily for months, while high energy prices and a strong dollar have taken their toll on spending and inflation. However, the slowdown in Europe has thus far been less drastic than that of the US. It’s economic growth was of course much lower on the way up and thus it is normal that the correction is less robust on the way down. It should be noted though that Non-US sales represents over 30% of S&P 500 companies sales, so more slowing will inevitably impact the bottom line of US companies. More importantly European companies which have seen their international business slow, are now bracing themselves for a slowdown in their home markets, making profit growth in Europe a difficult task for most. Should the slowdown in the US become a true contagion, like consumer spending it could drag the global economy to new depths. 3

4. US Consumer Confidence 140 120 100 80 60 40 Jan-90 Jan-93 Jan-96 Jan-99 US New Home Sales 1000 800 600 400 Jan-90 Jan-93 Jan-96 Jan-99 US Construction Spending YOY % Change 20 10 0 -10 -20 Jan-90 Jan-93 Jan-96 Jan-99 Exacerbating the global situation... Taken together,a broken consumer and greater EU slowing make the possibility of a truly global recession (not just slow growth) a real one. Should this occur, it could trigger more selling in equity markets and lead to a viscous economic spiral making no sector safe from the bear market. However some bright spots do exist... At the doorstep of further weakness and with the threat of global recession ever looming, positive data does however point to potential recovery. While the industrial sector continues to have difficulties, many indicators are starting to show signs of life. On the services side conditions have deteriorated less and show signs of recovery, while the consumer remains a resilient force within the US economy. Where a robust consumer is holding steady... On the demand side, the consumer, although faced with a continuous stream of bad news has remained relatively optimistic. Consumer confidence in the US has certainly fallen - that much is clear, it has however remained at relatively high levels, with the expectations component showing growth over the past few months. The consumer is in fact not really acting as though we are headed for a protracted slowdown. While consumer spending has slowed, it remains positive (over 4% YOY) and is near its ten year average. Moreover spending patterns show few classic signs that consumers are worried. Purchases of durable goods such as autos, white goods and furniture continue to show positive trends. In addition to this new home sales and housing starts continue to run at near record levels, and as a result construction spending continues to be robust. As a leading indicator of future spending patterns these figures do provide some reason for optimism. The employment environment remains historically robust... We have also seen a slowdown in job cut announcements and weekly jobless claims which appear to have stabilized (albeit at a high level). And while the unemployment rate is clearly well off its lows, at 4.6% it remains significantly below the “theoretical” full employment level which many were still concerned about only a few years ago. Unemployment Rate US 4

5. 1997 1998 1999 2000 Fed Fund Rates 9 7 5 3 Jan-90 Jan-93 Jan-96 Jan-99 US Gasoline Price 130 110 90 70 50 Mar-00 Jul-00 Nov-00 Mar-01 Jul-01 Growth Spread by Sector Sales Growth - Capex Growth US Commercial Credit Seasonally Adjusted YOY Growth 40% 30% 20% 20% 10% 10% 0% -10% 0% -20% -30% Technology Basic Industrials Consumer -10% Jan-76 Jan-84 Jan-92 Jan-00 Materials Cyclicals Where fiscal, monetary and energy price may bring some relief... While probably nearing its end, monetary easing has helped the consumer both psychologically - knowing that the fed is on alert, and economically - as mortgage rates have fallen, refinancing have put on average $700 per year into the budget of the average home owner. In addition as global growth has slowed, and the electricity crisis has disappeared form the front pages, final energy prices have fallen significantly. Finally, over the next few weeks and for the first time since 1975, the mail out of tax refunds will begin, putting $300-$600 into the pocket of every US tax payer. The tax cut will put approximately $38bln of fresh money into the US economy and will most likely be spent immediately providing an at least temporary boost to consumer sales across the country. More importantly, permanent tax cuts (which have been shown to be more impactful) have been enacted which will impact the American consumer for some time to come. Especially to the “Old Economy” While we would agree that rate cuts in an environment of overcapacity is like pushing on a string, we do feel that these substantial cuts will have some impact on the manufacturing sector of the old economy. During 1999 and 2000 the Fed tried in vain to slow a technology and equity boom by raising interest rates. Unfortunately the only sector truly punished was the old economy manufacturers. Unlike their technology brethren, these companies had existing debt, real businesses and were impacted by consistently rising rates. Today, as rates drop, it may have little impact upon a debtless tech companies operating at 30% capacity, however we believe that it will eventually drive growth in the old line manufacturing economy, where rate cuts have traditionally aided in re-igniting growth six to nine months after their introduction. Corporate borrowing has not yet turned negative… In fact, over the past five years, Capex growth in the traditional economy has significantly lagged sales growth. Over the longer term, this dichotomy will correct itself, and we think that it will be these sectors which will lead investment over the coming months. Their capacity situation is not nearly as disastrous as that of the technology sector, and they may benefit more readily from falling interest rates. 5

6. Real interest rates (US) 12% 8% 4% 0% -4% Mar-67 Mar-76 Mar-85 Mar-94 NAPM Non-Manufacturing 65 60 55 50 45 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Phili Fed Business Outlook 40 20 0 -20 -40 Jan-90 Jan-93 Jan-96 Jan-99 -60 NAPM Backlog 60 50 40 30 Jan-93 Jan-96 Jan-99 While corporate borrowing has fallen significantly in the past year, it has not fallen as precipitously as in past recessions. We suspect that given that this spread in sales to capex growth, it is the traditional economy that is starting to borrow at these now attractive rates. And with M3 growing strong and real interest rates nearing negative territory, once borrowing demand heats up, investment should begin to resume. While the services sector turns early… Throughout this slowdown, the services sector has held up far better than manufacturing. Early evidence may point towards a firmer environment for services. Given that services represent over 70% of the US economy, this may prove key to any potential recovery. And economic indications while murky point to recovery in manufacturing... At the other end of the spectrum is the producing economy, where over capacity, falling demand, and excess inventories have led to a massive cut in output over the past year. This is the sector of the economy, that although many say only represents 20-30% of US GDP, indirectly supports a far greater portion of the economic well being of the country. Industrial production in the US has fallen precipitously and while no clear indications of a turnaround are yet present, we have witnessed the very early signs of what we believe is the bottom in the manufacturing industry and thus GDP. Leading indicators have shown a slight up tick over the past few months, while business outlook has improved significantly since its bottom. In addition key components of the important NAPM index give some reason for optimism. Backlog, Order growth, and production all seem to be making recoveries from their lows of early this quarter. The significant inventory overhang seems to be working itself off as witnessed by the wholesale inventory index, and while some pockets of inventory remain troublesome (still problematic in the technology/communications equipment area), we think that much of the traditional economy is back to comfortable inventory levels. 6

7. NAPM New Orders 65 55 45 35 Jan-90 Jan-93 Jan-96 Jan-99 US Wholesale Inventories Y-O-Y 12 8 4 0 Jan-90 Jan-93 Jan-96 Jan-99 US Yield Curve 11/07/01 5.50% 4.50% 02/01/01 3.50% 2.50% 0 5 10 15 20 25 30 US Leading Indicator Y-O-Y 4 2 0 -2 -4 Jan-90 Jan-93 Jan-96 Jan-99 Supported by certain market indications... In addition to economic indicators, it seems that financial markets may also be indicating that the bottom is near. The yield curve, which was for a time inverted last year, has steepened significantly over the past few months, indicating that investors believe that the economic situation is improving. In addition as in innumerable recessions in the past, the stock market is acting in a peculiarly classic way, with many cyclical sectors until recently outperforming the rest of the market. If the markets are as in the past accurate indicators of economic conditions, they are currently telling us that the economic outlook is improving. Which make us optimistic for the economic future... On the basis of these early indications, we believe that the economy is likely to bottom in the early part of Q3. While continued weakness is possible, we think that the worst is nearly behind us. The confluence of a series of early economic indicators in manufacturing and services sectors along with liberal monetary policy and fiscal stimulus give us some confidence in this outlook. And for the markets... Historically speaking the markets in nearly every recession have bottomed well before confirmation of an economic bottom. In many cases the market moves strongly from its lows 3 months before the economic bottom, and then gives back up to 15% as it awaits confirmation from the economy. It tends to trade sideways in a range thereafter for a few months until that confirmation arrives and then proceeds to continue the up move along with growth in corporate profits. So far, we have seen such a pattern, leading us to believe that the lows touched in April may provide good long term support to the equity markets. But not un-aware of the risks... Our optimism does not remain unbridled however. Earlier we spoke of the risk to the consumer and the second shoe in Europe and Global trade. At the same time, developments in Europe and around the world pose a major threat to our outlook. Should economic conditions in these areas continue to weaken significantly, our scenario may be in jeopardy. 7

8. 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Gold Price 410 370 330 290 250 Jan-91 Jan-94 Jan-97 Jan-00 CRB Index 275 225 175 Nov-93 Nov-96 Nov-99 Negative developments on these two fronts in our opinion, could plunge us into an economic malaise far more serious than any we have witnessed for decades. Thankfully, the US financial system is in relatively good shape, and we do not expect to see a financial crisis develop. However the same cannot be said of other developing areas, nor of the recent dramatic rise in the hedge fund industry where the systemic risk inherent to their now enormous weighting in financial markets is at this stage un-measurable. Nor the consequences of the aggressive moves on the part of central bankers and federal policy makers… Going forward, one risk as of yet unmentioned is that of inflation. Current capacity utilization levels and a slowing of global growth do not lend themselves to inflationary forces in the short term. However the actions of monetary and fiscal authorities in the US has certainly created the potential for rising prices over the next 18 months. Although energy prices have declined, it would not be unfathomable that they climb again along with economic growth. After such aggressive monetary growth and fiscal stimulus one cannot help but wonder what medium term repercussions will result. Moreover, should growth not recover as we hope, the potential for stagflationary conditions do become real. In Europe this possibility is ever looming, as high energy prices and a weak Euro have conspired to raise inflation levels just as those economies slow. Such a situation would make cash the only safe bet, as equities and bond holdings would be seriously impacted. We are at a crossroads in the global economy. While we are painfully aware of the risks to growth, we feel that many indicators in the world’s leading economy (the US) are starting to turn in the right direction. We would therefore ascribe a 70% chance that this scenario plays out more or less as we expect. That does however leave a 30% chance of significant economic deterioration, in which case a very defensive investment policy would be required. We think that the turning point will come late in Q3 and will monitor consumer spending, industrial production and company guidance as key factors in the turn around. If meaningful positive change is not seen, it may place in jeopardy the economic recovery, causing us to review our position. Money Supply (US) 8

9. A word about technology The last 15 months have seen the virtual decimation of the technology sector, especially in the sub sector of communications.. An over build in technology capacity that ran near double that of other sector in the period 1995 to 2000, has left us with significant over capacity, especially in the communications space. Sales have plummeted, inventory has been built and profits have all but disappeared. Market sentiment has turned particularly bearish of this sector, and has all but written off the underlying fundamentals of the group. And mention of it in most reports is conspicuously absent. However while the near term future of the fundamental business are not bright, the long term remains positive, and we would not be so quick to write it off completely. The internet is dead. Is it? The internet is a revolution and is here to stay. While the normal process of industry maturation is taking place at the company level, the internet itself continues to grow at a rapid pace and continues to transform communications, business process and human interaction. It is here to stay and while growth has slowed, massive opportunities do exist and will finally prove to be profitable. The hardware market is dead. Is it? The number one concern of businesses today is productivity and they believe that technology represents a viable way to increase it. While PC growth has slowed over 100 million continue to be sold every year, with some growth markets on the cusp of increasing volume (ie. China). The PC will mutate that much is sure, however the best companies will adapt and new companies will emerge. 9

10. Keep in mind however that it will not happen over night, PC’s, laptops and servers will continue to be sold in their present form for quite some time, and given that a large amount of hardware was sold in 1998-1999, a hardware upgrade cycle is probably not that far off. The communications market is dead. Is it? In contrast to other sub sectors of technology, the greatest overcapacity was built into this communications. While it will take longer to burn off, it will eventually happen, and when it does it will likely give way to enormous pent up demand. The implementation of broadband to the home and the continued growth of data traffic at over 40% per year will create a need to use up this spare capacity. We therefore remain positive of the long term potential of the technology sector. As an economically sensitive group, it will respond to the economic cycle. The near term continues to be weak, and earnings growth will lag the rest of the market. But for the long term investor a few years hence, the current situation may be looked back upon as a rare buying opportunity - something most investors today do not care to even think about. 10

11. The Economic Cycle USA Europe 9% Japan 6% 3% 0% Dec 99 Dec 00 Dec 01 Dec 02 Our long term scenario • The economy bottoms in early Q3, and goes on to post a slow recovery into 2002. • The economy stabilizes at growth levels more in line with the long term average. • European economies, less dependent upon new economy industries, have lagged US trends by one to two quarters and therefore the slowdown that has developed in Europe will be likely followed by an upturn into late 2002. • The Japanese economy’s slow climb out of recession falters in 2001, resuming again in mid 2002 as the global economies find common ground for growth • US growth will bottom at -1.5% in Q3 and stabilize in 2002 but at a much lower rates than 1999. • Secular global growth will trend down to historical levels. 11

12. USA The Economy Economy bottoms in early Q3, as YOY growth figures and other economic indices hit their lows. Profits at US companies pick up in late Q3 early Q4, on the heels of the economic recovery. Recovery is U rather than V shaped however, as over-capacity in technology and weak export markets keep a lid on a faster growth. The consumer maintains moderate levels of spending growth, allowing the industrial sector the time to recover on the back of falling interest rates and a steep inventory correction. Interest rate cuts begin to spur economic growth in the traditional economy starting in late Q3, as corporate profits turn up and Capex spending slowly recovers. End product energy prices continue to decline along with the growth rates in the global economy. The long term outlook is for more moderate growth as technology spending settles to more historical levels. Productivity growth wil resume, as companies trim excesses from their business and benefit from the upturn into 2002. Confusion on the political front may add instability to the economy and volatiility to the markets. The Market Earnings outlook improves, comparisons become favorable as we move into the second half of 2001 and 2002. Overall market valuations are attractive, with earnings revisions bottoming and expectations set very low. Fed rate cutting is near its end, and we could begin to see talk of rate rises by early next year. Select technology, cyclical consumer, and industrials should out perform in the second half. The market should begin a relatively strong move before the end of Q3. Technology valuations still imply relatively high levels of growth - which may still be a few quarters away. Technology remains a differentiated market, with early cyclicals such as PC’s semiconductors and software companies providing the most potential in the near term. The Dollar should lose its upward momentum, and begin to trade down over the coming months. Interest rates bottom in Q3 at the short end. 2001 Stock Index Performance* DOW JONES -2.6% S&P 500 -7.27% NASDAQ 100 -21.86% *in local currency, to June 30, 2001 *Bloomberg Data, Federal Bureau of Economic Analysis 12

13. Europe • The Economy • Energy price declines and strengthened Euro remove pressure on consumer prices, allowing the central banks the space to ease rates in Q3/Q4 2001. • Euro remains stable to strong in the 2nd half of 2001. • Business investment falters, while investment in IT slows its pace of decline. • Unemployment levels off, ending the long downward trend at least temporarily. • Consumer spending slows as unemployment and negative sentiment dampen the outlook. • Slowing rates of growth continue until early 2002, as US rebound spurs global growth. • Interest rates in Europe begin a slow trend downward. • The Market • The Euro may strengthen going into the 2nd half of the year and into 2002. • End to rate hikes make bonds more attractive than short term paper. Rates have likely peaked, making longer term bonds more favorable. • Earnings outlook continues to deteriorates in early 2001. • Earnings comparisons in 2001 are very difficult, causing year over year growth to slow. • Valuations have come down in most markets although growth rates for 2002 still have room for downward revision. • We remain defensive on European equities, where a move to more aggressive cyclical stocks may come in late 2001. 2001 Stock Index Performance* CAC 40 -11.83% SMI -11.00% DAX -5.83% FTSE -4.52% *in Euro to June 30, 2001 *Bloomberg Data, Federal Bureau of Economic Analysis 13

14. Japan • The Economy • Corporate earnings continue to rise, even though economy begins to falter. • Corporate Investment slips as bad debt provisions rise and causes industrial production to continue its fall. • Unemployment has bottomed, setting the stage for a consumer recovery beginning near the end of 2001. • Consumer spending continues to slow throughout the year. • Yen remains weak as government debt and weak economy remains key concern. • Economy should begin to show signs of slow growth in 2002. • The Market • Corporate restructuring no longer the watchword, earnings, growth and management become key in stock selection • Market valuation has entered more reasonable levels, as earnings slowly rise. • Defensive stance in equity markets as economic rebound still some quarters away. • Exporters, pharmaceuticals and consumer staples remain best investments for the near term. 2001 Stock Index Performance* Nikkei -5.92% Topix -2.32% *in Yen to June 30, 2001 14

15. Regional valuations Changes (from Jan’01) EPS ‘01 ‘02 PEGrowth Old New Old New Europe 21 18 6% 3% 16% France 23 21 6 6 Germany 18 18 8 2 Sweden 18 21 3 -5 Italy 23 18 5 2 Nether. 15 14 5 2 UK 21 19 7 4 10 Switz. 19 17 5 5 12 Japan 48 40 10 15 19 USA 23 29 6 0 18 Est. from Morgan Stanley Dean Witter research Market Valuation • Regional Valuations Valuations in Europe on a PE basis have fallen considerably since last January. The table shows current year PE estimates for Europe have fallen approximately 12% and appear attractive on a PEG basis. On this basis, France and Switzerland are the most attractive, with France potentially providing more upside, should the US economy and tech stocks rebound (given its high TMT weighting). While Europe’s overall PEG ratio appears attractive, it would seem that there is significant room for next years estimates to come down. If as we believe, the EU economies will continue to contract into 2002, there will certainly be some revision of these numbers, removing to some degree the attractiveness of aggressive positions on the continent. In the US earnings have been severely impacted by the recession and as such are reflected by a relatively high current PE. We think that investors have priced in the worst for the US market and are awaiting confirmation that next year’s earnings will improve as expected. These estimates have increased over the past few months as pessimism has reduced this years outlook to 0% growth, thus creating the leverage for a stronger up move in 2002. Given the likelihood of earnings disappointments in Europe and a much lower chance of that in the USA (based on our economic outlook) , we would remain defensive in EU equities while becoming more aggressive in US stocks. 15

16. Implied Growth Analysis 30% 26% 25% 20% 20% 16% 15% 13% 10% 5% 0% Implied Estimate Implied Estimate Technology Non-Tech • Sector Valuation US - what’s implied? • Analysis of current market valuations in the US shows a dichotomy between implied and expected growth in the broader and technology sectors. As the chart shows, the broader S&P 500 non-technology sectors appear to have approximately 13% growth built into their valuation (based upon dividend discount modeled valuation), while IBES estimates reflect an expectation for 2002 of 16-18% growth. Given that downward earnings revisions appear to be slowing, and based upon our belief that the US economy may be turning, we believe that the market may be slightly undervalued at these levels. • On the technology side however, there is a slight overvaluation built into the model. At approximately 25% implied growth, the market is priced well above the 20% IBES estimates for long term growth in technology. This casts some doubt on the ability of the technology group as a whole to mount a significant and sustained rally, unless analyst estimates begin to rise again. That said, the spread is significantly below where it was in early 2000, when the implied growth rate was closer to 60% and IBES estimates were near 30%. Growth Expectations ‘02 LTG Oil Services 50 30 Technology 18 20 Telecom Svc. 7 17 Cons. Staple 24 17 Healthcare 15 16 Capital Goods 19 15 Cons. Cyclical 25 15 Financials 18 13 Energy (ex-OSX) -12 10 Utilities 13 12 Basic Mat. 15 11 Transportation 20 11 S&P 11 16 *I/B/E/; S&P; Prubache Estimates PEG by Sector ‘01 ‘00 Jun Jan. Mar. Technology 1.9 1.5 2.5 Basic Mat. 2.5 1.4 1.3 Capital Goods 1.6 1.3 1.2 Telecom Svc. 1.3 1.4 1.7 Cons. Cyclical 1.6 1.3 1.3 Cons. Staple 1.9 1.8 1.7 Energy 1.1 1.2 1.4 Oil Services 0.7 1.0 1.7 Financials 1.3 1.3 1.2 Healthcare 1.5 1.6 1.5 Transportation 2.1 1.5 1.1 Utilities 1.8 1.6 1.9 S&P 1.4 1.5 1.9 *I/B/E/; S&P; Prubache Estimates 16

17. Investment Outlook Capital Goods Consumer Durables Discretionary Luxury Goods Regional Banks Transports Commodities Industrials Technology Technology Investor Behavior • Under certain circumstances investors will be willing to look over the valley and disregard a forthcoming slowdown. • The degree to which they will anticipate and discount the future depends upon a number of factors • Anticipated length of the cycle • Anticipated depth of the cycle • Valuation (investors will place a floor on prices) • Investor confidence in consensus numbers. • The market tends to react ahead of the economic indicators. The lag between business fundamentals improvement and market movement can be anywhere from 3 to 9 months • We believe that this slowdown will be longer than expected, lasting between 9 and 12 months and will show signs of outright contraction. • Investors will be attracted to valuations in various sectors and supported by the relative moderation of this cycle will remain positive on the investment outlook as a whole. Relative Market performance and a classic economic cycle Select Consumer Energy Chemicals Global Banks Consumer Staples Pharma Current Position in US Cycle 17

18. Investment Strategy • (Recessionary Phase) Slowing US economy into 2001: • Short term rates (US) have peaked and even started going down. • Fundamental business impact across the board is negative. • Cyclical- Fixed cost industries suffer most in this period i.e.. Consumer Durable, Housing, Capital goods. Due to lingering impact of high cost of capital and the invariability of their cost base. • (Trough) Bottoming out of slowdown in Mid/late 2001: • As trough is reached, consumers feel more comfortable in their economic future and begin to make more discretionary purchases. When interest rates bottom businesses see opportunity to begin expansion anew. • Fundamental business impact is positive for Consumer discretionary (retailers) and certain Financials (Lending banks). • Re-acceleration of growth in late 2001: • As the economy begins to re-accelerate, firms that reduced inventories during recessions must increase production, resulting in an improved outlook for both employees and business. • Consumers, spurred by low interest rates and increased confidence, begin to consider purchase of larger ticket items. • Fundamental business impact positive for Consumer durables, industrials and capital goods • Confirmed growth pattern 2001/2002 • Having reached maximum capacity companies are obliged to increase capital expenditure to meet new increased demand. • Increased economic activity begins to have impact on demand for commodity goods and deep cyclical products. • Fundamental business impact is positive for chemicals (late stage cyclicals) and energy. The Business Cycle While the study of the business cycle aids in the development of an investment outlook, caution is required. Rarely does a cycle repeat itself exactly, and its impact on broad sectors is difficult to pinpoint. This study therefore acts as general guidelines for such analysis. Relative Business performance and a classic economic cycle Select Financials Consumer Staples Consumer Discretionary Select Financials Consumer Durables Energy Telecom Services Software Semiconductors PC’s Chemicals Capital Goods Pharma 18

19. Investment Themes • Interest rate Cycle: • Slowing EU growth and falling US rates favour Large Cap, Global financial names (Citibank, Zurich Insurance). As the economy progressively picks up speed in late 2001, a move into regional consumer banks would be likely. • We think that select US industrials now look attractive, as valuations have bottomed, rates are falling and investors look over the valley (GE, 3M) . • Weakened Asian economies, slowing EU growth and lower energy prices support reducing exposure to oil stocks. • Continued restructuring and focus of companies on core business support further gains in business services/outsourcing companies (Flextronics, Adecco). • US Recovery: • At this stage of the cycle, economic recovery favours cyclical consumer companies such as Home Depot, Best Buy, Whirlpool, General Motors, Gap. • Mixed bag of growth places focus on regional differences. • In Europe defensive consumer and select industrials should outperform. • In the US we focus on consumer discretionary and economically sensitive. • Lack of consumer follow through in Japan makes consumer area unattractive. • Technology, & Life Sciences Growth: • Fed easing and Tax cuts make cyclical recovery more likely • Capital Investment continues to favour IT spending in the long run. • However build out in communications industry slowing significantly. • Focus on interest rate sensitive Telecom services, Semiconductors and PC producers as well as value added software and optical technology. (Worldcom, Vodaphone, Apple, JDS Uniphase, Applied Materials) • Aging population and medical technology advances spur life sciences growth. Pharma group provides less out-performance potential after strong move in 2000, look to focus on Biotechnology ( Pfizer, Ares Serono, Aventis, Amgen). Growth & Technology At FFG our investment focus is based on growth. We search out those stocks and sectors that will maintain sufficient growth over the long term to outperform the market. This philosophy has lead us to focus upon a number of sectors most notably of which is technology. 19

20. Sector Allocation • TMT 23% • Why Technology: • Competitive pressures • Economic rebound • Solid long term EPS Growth • Reasonable valuation • Favorable long term timing • Focus on: • Interest rate sensitive • Semiconductors, PC makers, Telecom services • Software • Internet infrastructure - B2B • Risks: • Wireless equipment - could see short term weakness in sector before 3rd generation build out begins. • Economic downturn more severe than expected • Margin squeeze more serious than expected • Telecom services meltdown has farther reaching impact on infrastructure build out than expected. Life Sciences 12% • Why Life Sciences: • Earnings to outperform broader market • Aging population • Technology enhanced productivity • Consolidation potential • Genome advances creating new product cycle in biotech • Focus on: • Biotech • Mid sized take over targets • Accelerating EPS with limited patent Expiry • European Pharma • Risks: • Political environment risk (Medicare changes, democratic senate, lack of FDA president. • FDA approval process lengthening and becoming more strict • Generic drug competition 20

21. Financials 21% • Why Financials: • Steepened US yield curve • Sector Consolidation • Recovery of insurance sector • Economic recovery in late 2001 • Focus on: • Global reach • Brokers and European take over candidates • European Insurance • Risks: • Economic downturn more severe than expected - credit risk • Financial market weakness may hurt investment gains • Lending volumes have peaked with economic growth • Trading income slows with equity markets Consumer 25% • Why Consumer: • Bottoming US economy favours more cyclical consumer names. • Long term Tax cuts • European employment on the rise • Attractive valuation • Focus on: • Defensive US names should no longer be favoured • European defensives • US discretionary companies • Global Brands & Global Reach in distribution • Still early for luxury goods but shift to consumer durables. • Risks: • US recovery slows • Unemployment rises • Margin pressure and over capacity grows • European slowdown deeper than expected • Significant emerging market slowdown 21

22. Industrial/Energy 20% • Why Cyclicals: • US economic bottom • Interest rate driven market recovery • Oil price moderation • Increased oil E&P activity (benefits services, engineering & construction firms) • Aging infrastructure across many industries will require upgrade over the coming years. • Focus on: • Infrastructure • Business Services • Energy defensive and infrastructure. • Basic Materials • Value Added Chemicals • Risks: • U shaped recovery has longer bottom than expected • Emerging market slowdown • Oil price weakness negative for Energy sector. • Capacity utilization rates continue to fall 22