Trends in investment markets

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2 I ve been thinking about Trends in investment markets Paul Taylor - Head of Aust Equities, Fidelity International Todd Canter - MD, LaSalle Investment Management Scott Berg - Portfolio Mgr, Intl Equities, T.Rowe Price Dominic McCormick - CIO, Select Asset Management Tim Farrelly - Principal, farrelly s

3 Australian shares over the long term Portfolio Construction Conference Paul Taylor Portfolio Manager, Fidelity Australian Equities Fund August 2007

4 The outlook: a longer-term view Annualised real rates of return on major share markets from 1900 to 2006 (% pa) South Africa Australia Sweden Belgium Italy Germany France Spain Norway Japan Switzerland Ireland World (USD) Netherlands UK Canada Source: LBS Global Investment Returns Yearbook 2007, chart 14

5 Why Australia s share market has shone High population growth has underpinned economic growth Abundant natural resources gave us products to sell Good corporate governance gave people the confidence to invest There have been sound companies to invest in A culture of high dividend payouts forces companies to be disciplined

6 The correlation between equity returns and dividends Annualised dividend yield plus growth, compared with local returns from 1900 to 2004 (% pa) Belgium Italy Germany France Norway Spain Japan Switzerland Ireland Denmark Netherlands UK Canada US South Africa Sweden Australia Annualised real equity return Dividend yield plus real dividend growth Source: Dimson, Marsh and Staunton (London Business School) 2005

7 Disclaimer This document is issued by Fidelity Investments Australia Limited ABN , AFSL No ( Fidelity Australia ). Fidelity Australia is a member of the Fidelity group of companies ( Fidelity ), comprising Fidelity International Limited, a company established in Bermuda, and its affiliate FMR corp, a company established in the United States, and their respective subsidiary companies and affiliates. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information. You should consider the Product Disclosure Statements (PDS) for respective Fidelity Australia products before making a decision whether to acquire or hold the products. The relevant PDS can be obtained by contacting Fidelity Australia on or by downloading from our website at The issuer of the managed investment scheme(s) referred to in this document is Perpetual Trust Services Limited (ABN ). Details about Fidelity Australia s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website at This document is intended as general information only and does not constitute an offer for the sale or issue of any Fidelity product or a solicitation of such an offer. The information in this document is collated by Fidelity in its capacity as an investment manager and Fidelity may have already acted on such information for its own purposes. Fidelity makes no guarantee, representation or warranty and accepts no responsibility or liability as to the accuracy or completeness of any information in this document. The information in this document is derived from sources Fidelity reasonably believes to be reliable but which have not been independently verified. Reference to individual companies or financial products is included solely for the purposes of illustration and does not constitute a recommendation. Unless otherwise stated, $ means Australian dollars. None of Fidelity Australia or any other member of the Fidelity group of companies make any guarantee as to investment performance or the return of capital. Past performance is not indicative of future performance and the value of investments and income from them may go down as well as up. This document may not be reproduced or transmitted without the prior written permission of Fidelity. Fidelity Investments Australia Limited 2007

8 I ve been thinking about Trends in investment markets Scott Berg Portfolio Manager, Intl Equities, T.Rowe Price

9 A Snapshot of the World As of 30 June 2007 Share of Global Market Cap Share of Global GDP Share of Estimated 2007 Global GDP Growth Estimated 2007 GDP Growth Estimated 2007 EPS Growth Estimated 2007 Price-to- Earnings European Union 31% 22% 25% 2.7% 10.0% 14.3X North America 47% 29% 16% 1.9% 9.1% 16.0X Japan 9% 8% 5% 2.2% 11.6% 19.4X Emerging Markets 9% 27% 45% 7.0% 17.6% 14.9X Total $53.1 Trillion $51.5 Trillion 91 1 % 4.4% 11.6% 15.6X 1 Does not total 100% as residual percentage is derived outside regions that are shown. Source: MSCI, IMF and UBS. Presentation to PortfolioConstruction Conference 2007

10 I ve been thinking about Trends in investment markets Todd Canter Managing Director, LaSalle Investment Management

11 Long-Term Outlook for Property Securities Country Current Dividend L-T EPS Growth Change in Multiple L-T Expected Total Return Australia 6% 4% Flat to Down 10% U.S. 4.5% 5% to 6% Up from current levels 10% to 12% Global 4% 6% Up from current levels 10% to 12% xxxxxc03

12 Existing REIT Valuation Attractive Across the Globe Region Portfolio NAV Premium/Discount Globe -13.7% United States -17.8% Canada -13.4% Continent -6.4% Britain -28.9% Australia 1.7% Hong Kong 10.1% Singapore -9.2% Japan -3.4% REITs across the globe trading below long-term NAV average Strong net operating income (NOI) growth will help offset potentially higher cap rates xxxxxc03

13 Rental growth seen in nearly all regions Moscow, Washington DC Hong Kong Beijing Asia-Pacific Europe Americas Data is as of Q2:2007 Shanghai, Toronto Tokyo Singapore, New York, San Francisco London, Sao Paulo Delhi Madrid Sydney, Mumbai, Stockholm Paris, Warsaw, Boston, Los Hamburg, Munich Angeles Brussels Seoul, Frankfurt Chicago, Mexico City Amsterdam Rental growth slowing Rental growth accelerating Milan Rents falling Rents bottoming out Berlin xxxxxc03

14 Global Property Stocks: Added Return Without Added Risk 12.0% Optimal Mixed Asset Portfolio; Risk vs. Return 1990 to 2007 % Annual Total Return 10.0% 8.0% Global Equities and Global Bonds Global Equities, Global Bonds, Global Property Stocks Adding GPS would have increased portfolio returns by 200 bps 6.0% 3.4% 5.6% 7.9% 10.2% 12.4% 14.7% Risk (Annual Standard Deviation of Return) Source: JP Morgan Global Government Bond Index; MSCI World Index; UBS Investors Index January 1990 to January All returns in local currencies. xxxxxc03

15 Global Real Estate Securities in a Mixed-Asset Portfolio Attractive investment opportunity Strong growth prospects Ample market liquidity Value-added management They have earned their way into a portfolio Strong returns with lower volatility than broad market equities Low correlations with other asset classes Diversification benefits versus other asset classes Attractive current yields Effective and efficient method to secure a true globally diversified real estate portfolio xxxxxc03

16 I ve been thinking about Trends in investment markets Dominic McCormick -CIO, Select Asset Management

17 Presentation to PortfolioConstruction Conference 2007 The long-term return outlook for Fund of Hedge Funds Dominic McCormick Chief Investment Officer

18 Some common myths re the returns & risks of Fund of Hedge Funds (FoHFs) FoHFs are high risk you should expect high returns from FoHFs individual hedge fund blow ups and fund closures are always bad for FoHF investors fees are too high to achieve reasonable returns you need to fully understand the underlying strategies/managers before investing in FoHFs it is easy to select and manage a portfolio of hedge funds March August Page 18 1 / Section a

19 While many individual hedge funds are high risk most FoHFs are low risk! volatility of returns (typically 2-4% SD versus 10%+ for shares) drawdown periods (maximum drawdowns typically 2-5% versus 20-50% for sharemarkets) diversification (typically strategies and managers) return diversification in difficult times for mainstream markets Therefore (unleveraged) FoHFs can fit in the defensive component of portfolios March August Page 19 1 / Section a

20 If low risk what sort of return should one expect? (Medium-long term) more than cash and bonds (~6%pa) less than equities (with ERP of 5%-6%pa ~11-12%pa) less than higher risk alternatives infrastructure, private equity (~10%-13%pa) Fair expectation cash/bonds plus 2-4%pa = 8-10%pa March August Page 20 1 / Section a

21 Have FoHFs delivered this? Australian cash Diversified FOHF Conservative FOHF Mkt Neutral FOHF Difference over cash % pa 25% Average 3yr p.a. returns Jan-90 to Jun % 11.2% 8.3% +5.1% & +2.2% Average 3yr p.a. returns Jun-99 to Jun % 9.2% +3.8% 20% Rolling 3 year p.a. returns: % performance 15% 10% 5% 0% Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Australian cash rate Market Neutral Fund of Hedge Funds Diversified Fund of Hedge Funds Index Conservative FOHF Australian cash rate: UBS Australian Bank Bills Index, Diversified Fund of Hedge Funds: HFRI Fund of Funds Composite Index (hedged into AUD), Conservative Fund of Hedge Funds: HFRI Conservative Fund of Funds Index (hedged into AUD), Market Neutral Fund of Hedge Funds: Gottex Market Neutral Fund (Class C - AUD). Source: Bloomberg, Hedge Fund Research Inc (HFRI). March August Page 21 1 / Section a

22 Can they keep delivering returns? The fee hurdle For FoHF to achieve 6% 8% 10% 12% 14% Return needed from underlying hedge fund manager 12.3% 15.1% 17.9% 20.6% 23.4% Assumes: 1.5% and 20% at underlying fund level 1.5% & 10% at FoHF level March August Page 22 1 / Section a

23 Can they keep delivering returns? some strategies returns correlated to economic/financial market activity essential to avoid underperforming strategies and major fund blowups shakeout/closure of some funds could reduce competition for investment ideas periods of market stress/dislocation create better opportunities for future returns March August Page 23 1 / Section a

24 Hedge fund performance following crisis 40% Global Equity Markets Hedge Funds Hedge Funds Trailing 6 months Hedge Funds Trailing 12 months 30% 10 months 20% % performance 10% 0% -10% -20% -30%? -40% -50% -60% UK Currency Crisis (Sep- 92 to Oct- 92) Mexican Peso Crisis (Oct-94 to Dec-94) Asian Stock Market Crisis (Oct- 97) Russian Debt Default / LTCM (Aug-98 to Sep-98) Dot-Com Bubble Burst (Apr- 00 to May- 00) September 11 (Sep-01) October 2002 Market Correction (Oct-02) Equity Bear Market (Apr-00 to Mar-03) Amaranth Collapse (Sep-06) Sub-prime crisis (Jun- 07 to Jul-07) Global Equities: MSCI World Index in USD terms, Hedge Funds: HFRI Fund Weighted Composite Index (USD). Source: Bloomberg, Hedge Fund Research Inc (HFRI). March August Page 24 1 / Section a

25 Why active & experienced management is necessary to achieve these returns complexity of many strategies and funds avoidance/minimisation of fund blow ups key value add of FoHFs as with conventional funds some individual hedge funds become too large/complacent industry is very dynamic new opportunities in strategies and managers emerging To get access to the best hedge funds at the right times you need to invest in the best FoHFs March August Page 25 1 / Section a

26 FoHF products/strategies that may not measure up (in my view) passive investable indices hedge fund replication products many structured capital guaranteed FoHF products heavily leveraged FoHFs direct gearing into FoHFs March August Page 26 1 / Section a

27 Investors/advisers who shouldn t (or wouldn t) invest in FoHFs those who can successfully run a diversified portfolio of hedge funds/specialist investments themselves those happy with cash/term deposit returns (or with investment horizon <2-3 years) realists who can handle 15-40% drawdowns (more if geared) and extended periods of poor returns from a fully invested equity portfolio optimists who expect 15%-20% pa equity and property returns indefinitely with little risk those who believe in the Efficient Market Theory March August Page 27 1 / Section a

28 EBI Inefficient Markets in Practice (10 Days: 26 July 8 August 2007) EBI & All Ords Series Proposed Buy-back announcement Next trade $ July NTA announcement $ Next trade $2.88 (29% discount) Performance from 31 July close to 6 August open EBI -11.3% 8500 All Ords -2.2% EBI closed at 3.42 (15.5% discount) Performance from 6 August low EBI +18.1% All Ords +1.2% Volume Jul Jul Jul Jul-07 1-Aug-07 2-Aug-07 3-Aug-07 6-Aug-07 All Ords EBI Price Volume 7-Aug-07 8-Aug-07 Shares traded 2 7 August 12,157,800 $38 million value March August Page 28 1 / Section a

29 Contact Details Dominic McCormick Chief Investment Officer Robert Graham-Smith Portfolio Manager Stephen Barbarich Investment Specialist Disclaimer This presentation has been provided by Select Asset Management Limited ( SELECT ) ABN , AFSL on the basis that it is for general information and educational purposes only. It was prepared without taking into account any person's particular investment objectives, financial situation or particular needs. Investors should seek their own financial and taxation advice before investing or changing their investment. The information contained in the presentation is derived from sources considered and believed to be reliable and accurate. SELECT, its employees, consultants, advisers and officers are not liable for any opinion expressed or for any error or omission that may have occurred in this presentation. Any forecasts included are reasonably believed to be reliable based on current information but due to our inability to predict future events they cannot be guaranteed. Past performance is not a reliable indicator of future performance. Select Asset Management. All rights reserved. Select Asset Management Level 10 2 Bulletin Place Sydney NSW 2000 Phone: Fax: Web: AFSL No March August Page 29 1 / Section a

30 I ve been thinking about Trends in investment markets Tim Farrelly Principal, farrelly s

31 Presentation to PortfolioConstruction Conference 2007 Long term forecasting August 2007 farrelly s

32 Which portfolio is most like the one you use? 1. The traditional 2. Income seeker 3. The contrarian 4. New Breed 5. The patriot Australian Equities 35% 38% 22% 24% 47% International equities 20% 5% 32% 24% 5% Listed property 10% 25% 9% 8% 10% Hedge Funds 0% 0% 15% 40% 5% Fixed Interest 25% 20% 18% 3% 25% Cash 10% 12% 4% 1% 8% Total 100% 100% 100% 100% 100% farrelly s

33 Long run returns-an example EPS PE Price Contribution $ $ %pa Income + Income Growth + PE effect 5%pa Total farrelly s

34 Long run returns-an example EPS PE Price Contribution $ $10.00 $ $ %pa +7%pa Income + Income Growth + PE effect 12%pa Total farrelly s

35 Long run returns-an example EPS PE Price Contribution $ $10.00 $ $20.00 $ $ %pa +7%pa +7%pa 19%pa Income + Income Growth + PE effect Total farrelly s

36 Long run returns-an example EPS PE Price Contribution $ $10.00 $ $20.00 $ $ %pa +7%pa -7%pa 5%pa Income + Income Growth + PE effect Total farrelly s

37 I ve been thinking about movement of markets DEBATE Au EPS

38 I ve been thinking about Inputs Australian Equities: Real EPS growth 1 Long term average 0.9%pa 1 Last decade 7.9%pa

39 Can this go on? Australian Profit Share Of GDP % OF GDP Mar-60 Mar-65 Mar-70 Mar-75 Mar-80 Mar-85 Mar-90 Mar-95 Mar-00 Mar-05 Mar-10 farrelly s

40 I ve been thinking about movement of markets DEBATE Int l EPS

41 I ve been thinking about Inputs Australian Equities: Real EPS growth 1 World Equities Real EPS growth 1 Long term average 0.9%pa 1 0.8%pa 1 Last decade 7.9%pa 5.1%pa

42 US GDP v EPS Growth 14% 12% 10% 8% 6% 4% 2% 0% Nom GDP Growth EPS Growth farrelly s

43 I ve been thinking about movement of markets DEBATE Au & Int l PEs

44 I ve been thinking about Inputs Long term average Last decade Current Australian Equities: Real EPS growth 1 0.9%pa 1 7.9%pa Na World Equities Real EPS growth 1 0.8%pa 1 5.1%pa Na Australian PE ratios 14.2x x 16.0x US PE ratios 14.1x x 15.6x

45 Where will PE s be in 2017? Australian Equities-PEs vs Inflation All Ords PE Australian inflation -5% 0% 5% 10% 15% 20% farrelly s

46 US PE vs Inflation S&P500 PE % 2% 4% 6% 8% 10% 12% 14% US inflation farrelly s

47 I ve been thinking about Inputs Long term average Last decade Current Australian Equities: Real EPS growth 1 0.9%pa 1 7.9%pa Na World Equities Real EPS growth 1 0.8%pa 1 5.1%pa Na Australian PE ratios 14.2x x 16.0x US PE ratios 14.1x x 15.6x Australian LPTs : Real dividend growth -0.5%pa %pa na

48 I ve been thinking about Inputs Long term average Last decade Current Australian Equities: Real EPS growth 1 0.9%pa 1 7.9%pa Na World Equities Real EPS growth 1 0.8%pa 1 5.1%pa Na Australian PE ratios 14.2x x 16.0x US PE ratios 14.1x x 15.6x Australian LPTs : Real dividend growth -0.5%pa %pa Na Australian LPTs : Yields 8.4%pa 3 7.1%pa 5.6x

49 I ve been thinking about Inputs Long term average Last decade Current Australian Equities: Real EPS growth 1 0.9%pa 1 7.9%pa Na World Equities Real EPS growth 1 0.8%pa 1 5.1%pa Na Australian PE ratios 14.2x x 16.0x US PE ratios 14.1x x 15.6x Australian LPTs : Real dividend growth -0.5%pa %pa Na Australian LPTs : Yields 8.4%pa 3 7.1%pa 5.6% Hedge Fund of funds : Return vs cash +4.5%pa %pa na

50 Hedge funds finding the going tougher Rolling Five Year DHFOF v Cash 10% 5% 0% D-94 D-97 D-00 D-03 Source : Hedge Fund Research data farrelly s

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