Vanguard Symposium meetings Light at the end of the tunnel?

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1 Vanguard Symposium meetings Light at the end of the tunnel? November 2012 Peter Westaway Chief Economist Europe, Vanguard. The information on this presentation does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this presentation when making any investment decisions. The value of investments and the income from them may fall or rise and investors may get back less than they invested. For institutional investors only. Not for public distribution. Vanguard Investments Switzerland GmbH

2 Light at the end of the tunnel? 1. The outlook current risks 2. Europe The challenges The risks Alternative scenarios 3. Implications for Investors The benefits of a diversified portfolio 2

3 growth to remain subdued for some time Main growth comes from developing world Extracted 25/10/12 3

4 Equities recovering..but Europe still well down Extracted 25/10/12 4

5 yield curves are flat.. Policy rates expected to stay low for long Extracted 25/10/12 5

6 The macro risks 1. US growth and the fiscal cliff 2. A hard landing in China 3. Europe 6

7 % of GDP U.S. fiscal deficit: Looming fiscal cliff could harm growth Potential deficit reduction scenarios Default Grow your way out Belt tightening Inflate your way out Financial repression Fiscal adjustment ? Full reversal..3.9% of GDP CBO more likely alternative.. 0.9% Short-term deficit projections 26% 24% 22% 20% 18% 16% 14% CBO Spending Range Total deficit 9% Structural deficit 3 4% CBO Revenue Range Sources: The Vanguard group, Inc.'s Investment Strategy Group based on Congressional Budget Office The Budget and Economic Outlook: Fiscal Years 2012 to The CBO Spending Range in made up of spending under the Alternative Scenario (upper limit) and Baseline/Current Law Scenario spending (lower limit). The CBO Revenue Range is made up of revenue under the Alternative Scenario (lower limit) and Baseline/Current Law Scenario revenue (upper limit). 9% deficit was that realized in 2011 and the Structural Deficit represents the average of the deficit under the Alternative Scenario and Baseline/Current Law Scenario over the next 10 years. $1.2 trillion in spending cuts attributed to automatic sequestration procedure as of June 2012, allocated based on CBO analysis in Budget and Economic Outlook: An Update,

8 Will China slow down sharply? Monetary policy attempting to engineer soft landing with growth around 7-8% Extracted 25 Oct

9 A history of EMU in one chart! The past 20 years divide into three periods Sovereign 10-year yields, % Convergence Crisis Italy Spain Honeymoon Germany France Weak periphery /06/ /06/ /06/ /06/ /06/2009 Extracted 09/10/12 Source: Bloomberg generic sovereign 10-year yields Note: Weak periphery is the average of Greek, Irish and Portuguese yields where available for each country 9

10 The crisis was prompted by mounting debt problems Debt had been increasing for years in Greece and Portugal But the banking crisis caused problems for Ireland and Spain Even with austerity, debt ratio levels don t turn for some time Debt ratios for euro area as a whole not markedly high And even lower for Germany 10

11 Europe: How does it play out? The challenges The risks The long-run outcomes 11

12 The 5 Challenges Fiscal consolidation Growth Competitiveness Structural reform Banking repair 12

13 Challenge 1: Fiscal consolidation Achieved/required/forecast structural primary balance improvement (% GDP) Considerable fiscal adjustment challenges remain especially in Greece, Ireland, Spain and Italy Greece has already done a lot, contrary to popular opinion Portugal has done a lot of the work Source: IMF World Economic Outlook, October

14 Challenge 2: Growth Periphery in recession until 2014 and core is sluggish Euro area, core and periphery GDP growth, past and forecast (IMF), GDP continues to fall in the periphery, through 2013 in Greece, Portugal and Spain, maybe Italy French growth stays below 1% until German growth is modest, averaging around 1% through 2015 Euro area growth continues below trend 14

15 Cumulative Difference from Euro Area Average Labour Costs Since Q Challenge 3: Competitiveness Correction is well under way but the gap with Germany is still considerable 30% 25% 20% 15% Real exchange rate defined in terms of unit labour costs, relative to Eurozone Average Credit boom led some periphery countries to lose competitiveness Some are clawing back, notably Ireland, but Greece too 10% 5% 0% But Germany s performance is almost too good. -5% -10% -15% In absence of nominal exchange rate flexibility, internal depreciation is only option % France Germany Greece Ireland Italy Portugal Spain Notes: Figure displays the cumulative percentage difference from the Eurozone average in unit labour costs since Q Data from Q through latest available as of 31 October Source: Eurostat, via Thomson Reuters Datastream. Euro area competitiveness boosted by euro depreciation during crisis 15

16 Challenge 4: Structural reform Europe faces a legacy of many too-long-ignored problems... Structural reform gaps Labour market inefficiency Business regulations Network regulation Retail sector regulation Professional services regulation Institutions and contracts Human capital Infrastructure Innovation Heat map of structural reform gaps selected euro area economies and comparators Selected euro area economies Selected others GRE ITA POR SPA AUS FRA BEL FIN GER IRL NED JAP US SWE UK DEN Structural policies are weak in Greece, Portugal, and Spain and Italy: This spans labour, product, and service markets; and Institutions, human capital, infrastructure, and innovation also show weakness Ireland s policies, by contrast, are markedly better. The corollary is that the reforms being enforced have much scope: However they will take time to have an effect. Note: the darker the shading the greater the weakness Source: IMF (2010) Lifting Euro Area Growth: Priorities for Structural Reforms and Governance 16

17 % Change in OECD reform responsiveness indicator Challenge 4: Structural reform Some progress is being made OECD structural reform process from 2008/9 to 2010/11 Most progress made in programme periphery countries Encouraging, but those are places where most work to do Notes: Figure shows the percentage change in the OECD s reform responsiveness indicator, which is based on a scoring system for identifying progress on structural reform policies. For details see Chapter 1 of the OECD s Going for Growth Report, available at: Source: OECD (2012), Economic Policy Reforms 2012: Going for Growth, OECD Publishing. 17

18 Challenge 5: Repair the banks Banks play a crucial role in the euro area transmission mechanism Peripheral debt held by European and US banks (total claims as % of tangible common equity, end-2011) 50% 40% 30% 20% 10% 0% Greece Italy Ireland Portugal Spain US Banks European Banks Source: BIS, through Bloomberg (incl. public sector, banks, private sector) Bank fortunes intertwined with sovereigns Greece: sovereign exposure has sunk banks Ireland: bank travails have undermined sovereign Regulatory agenda compounds need to recapitalise and deleverage Bank balance sheets vulnerable to macroeconomic weakness (eg Spain) Bank credit is typically the engine of growth in euro area Banking union still lacking. Agreement to use ESM funds to recapitalise banks is a crucial step. 18

19 The risks Market scepticism Lack of policy commitment/bailout fatigue Austerity fatigue 19

20 Eventually, private markets must finance euro area countries Beyond the weak periphery, financing needs are considerable Estimated euro area sovereign issuance needs ( bln) 235(581) 221 (562) 2012 (rem.) 132 (357) (189) 2015 Given ongoing needs for the strong periphery (Italy, Spain) and the weak core (France, Netherlands), it is vital market access is retained at reasonable interest rates It is possible that the firewall of 500 from the ESM will need to be bolstered by more European funds or from the IMF. Note: Number at top of bars shows financing needs for each country for the remainder of 2012 and Number in brackets show estimated financing needs to the end of Source: Bloomberg and IMF Extracted 09/10/12 20

21 If they don t, policymakers must (continue to) bridge the gap Policy response from EU governments and ECB may need to step up EU/IMF funds committed under lending programmes ( bln) Greece (1) Greece (2) Ireland Source: European Commission Website Portugal Considerable funds have already been promised to weak periphery under existing programmes.. But firewall debate suggests appetite is dwindling ECB have stepped in with support for sovereigns and banks.. But ECB have made clear that it is not their responsibility alone to save the euro. The fix?...ecb OMTs linked to ESM funds with conditionality is potentially decisive step Extracted 25 Oct

22 In the end, political will matters most EMU was borne out of politics and could fail if commitment falters Greece: Rejection of austerity measures could cause coalition to collapse>>grexit? Negotiations over easing of bailout package critical..but no more money on table Ireland: Good progress but questions over treatment of banks? Portugal: Market access in 2013 possible..psi or more EU funds? Spain: Austerity/reform fatigue and regional tensions may derail efforts Italy: Political vulnerabilities may undermine fiscal/structural challenges France: President Hollande s tax-heavy budget may harm the economy Netherlands: Like Belgium, fractious coalition but fiscal challenge manageable Germany: Will euro paymaster run out of patience? Benefits from crisis too 22

23 What does it take to fix the euro area? Short-term measures to ensure countries stay on track ECB OMTs and ESM provide financing if markets lose faith Subject to conditionality on continuing fiscal consolidation and structural reform Long-term roadmap of how institutions need to evolve Roadmap set out by EU Presidents in June 2012 Fiscal/economic/banking/political union Eurobonds :Note: OMTs are Outright monetary transactions involving ECB sterilised purchases of periphery sovereign bonds 23

24 All eyes are now on Spain Yields in Spain and Italy lower since September on expectation of ECB/ESM action (%) Extracted 17/10/12 24

25 Europe: Possible scenarios? 1. Benign scenario (15%?) Short-term: ESM-ECB bring yields down Medium-term: Fiscal consolidation and reforms on track, growth recovers Long-term: Fiscal/banking/political union/eurobonds 2. Muddle-through scenario (65%?) Short-term: Temporary respite but sustainability questions persist Medium-term: Stuttering progress on fiscal, structural reform; OSI on Greek debt, eventual growth recovery Long-term: Slow adherence to fiscal compact, move to eurobonds 3. Malign scenario (20%?) Short-term: Adverse events prompts Grexit, deposit runs elsewhere Medium-term: Countries leaving EMU suffer deep recession, banking sector credit crunch in Europe, global recession Long-term: Euro only survives in stronger union of northern Europe 25

26 Summary on European crisis Even three years into the crisis, we still are uncertain as to which scenario will unfold. Our modal scenario is still one where the euro survives, most likely with its current membership... But a highly disruptive disintegration of the euro area is still possible......with adverse consequences for the European and global economy if it were to happen. 26

27 So how should investors react to this uncertainty? Diversified work well portfolios for long-run investors returns are likely to recover Bond returns likely to be below historical average But bonds provide valuable diversification Especially global bonds 27

28 Price over 12-month Trailing Earnings Perspective on starting valuation and return - Equities PE ratios in the UK suggest a positive outlook for equities Average since 1970 = As of 31 October 2012 = Notes: Figure displays Price over 12-month trailing earnings for the MSCI UK index from Jan.1970 to Jan.1993 and for the FTSE All Share index. Data through 31 Oct Source: MSCI and FTSE, via Thomson Reuters Datastream. 28

29 Realised 10-year Annualised Return on UK Equities Perspective on starting valuation and return -- Equities Strong relationship over longer horizons..suggests equity returns will improve UK Returns vs. Initial Valuation P/E as of 31 October Initial P/E Ratio Notes: Figure displays the realised 120-month annualised returns ended Dec through Oct. 2012, relative to the initial price over 12-month trailing earnings from Dec.1969 through Oct UK equity index defined as MSCI UK from Dec.1969 through Dec.1985 and the FTSE All Share thereafter. Returns are in local currency terms, with income reinvested. Data as of 31 Oct Source: MSCI and FTSE, from Thomson Reuters Datastream. 29

30 Realised 10-year Annualised Return on UK Fixed Income Perspective on starting valuation and return -- Bonds Low current yields correlate with low expected returns UK Fixed Income Returns vs. Initial Yield % 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% Yield as of 31 October % 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% Initial Yield on 10-year Gilt Notes: Figure displays the realised 120-month annualised returns ended Jan through Oct. 2012, relative to the initial yield on the 10-year UK zero coupon gilt from Jan.1976 through Oct UK fixed income index defined as FTSE UK Government Index Feb.1976-Feb.2000; Barclays Sterling Aggregate Index thereafter. Returns are in local currency terms, with income reinvested. Data as of 31 Oct Source: FTSE, Barclays, and Bank of England. 30

31 Difference in Annualised Volatility Relative to the Market Monthly Correlation to Market Why fixed income makes sense in any macro environment Diversification benefits act as a hedge against macro uncertainty, despite low yields 0% US Fixed Income Euro Area Fixed Income UK Fixed Income % % -15% % -12% -11% % % Volatility Reduction from Equities Correlation to Equities Notes: Displays the difference in annunalised monthly volatility for each fixed income market relative to the global equity market, and the correlation of monthly returns relative to the global equity market over the period Jan Sept equity market defined as the FTSE All World, US fixed income defined as the Barclays US Aggregate, Euro Area fixed income defined as the Barclays Euro Aggregate, UK fixed income defined as the Barclays Sterling Aggregate. All returns are measured at a monthly frequency, in local currency terms, with dividends reinvested. Sources: Vanguard, based on data from FTSE and Barclays. 31

32 Distribution of Monthly Returns Why fixed income makes sense in any macro environment Fixed income provides downside protection to equities, no matter which direction yields move 10.0% 5.0% 0.0% -5.0% Clear downside protection during equity market downturns Downside protection, even when yields are increasing -10.0% -15.0% Equities Bonds Equities Bonds During Worst Months of Returns During Worst Months of Bond Returns Notes: Displays the 5 th /25 th /median/75 th /95 th distribution of monthly returns for both global equities and global bonds, during a 10 th percentile or worse month for either the global equity market or global fixed income market. equity market defined as the FTSE All World and global bond returns are defined as the Barclays Aggregate. All returns are measured with currency impact removed, assuming income is reinvested. Sources: Vanguard, based on data from FTSE and Barclays. 32

33 Annualised Volatility Maturity extension to increase yield? Upward-sloping yield curves reflect interest rate risk 10.0% Average volatility, % 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1-3yr 3-5yr 5-7yr 7-10yr 10+ yrs UK Fixed Income Euro Area Fixed Income US Fixed Income Notes: Displays the average annualised volatility of monthly returns for each maturity band across each market. Each market is represented by: Barclays Sterling Aggregate, Barclays Euro Aggregate, and Barclays US Aggregate. Returns are measured in local currency terms, with income revinvested. Sources: Vanguard, based on data from Barclays. 33

34 Average Monthly Correlation to Market EM/Credit Tilt to increase yield? EM bonds are not a substitute for diversified fixed income exposure Correlation to global equities, EM Fixed Income Corporate Fixed Income Diversified Fixed Income Notes: Displays the average correlation of monthly returns for each fixed income sector to the global equity market. equity market is defined as FTSE All World index, EM Fixed Income is defined as the JP Morgan Emerging Markets Bond Index, corporate fixed income is defined as the Barclays Aggregate Corporate index, and Diversified global fixed income is defined as the Barclays Aggregate index. All returns are in US dollars with income reinvested, and the allocations are in hedged terms (the EM index covers only USD issues, so hedging is not applicable). Sources: Vanguard, based on data from Barclays, JP Morgan, and FTSE. 34

35 Annualised Volatility (%) Beta to Borad UK Stock Market Be wary of a focus on yield Focusing on yield alone ignores the risk impact on a portfolio 25 Volatility, Beta to UK Stocks, UK REITs Lower Yield Stocks Higher Yield Stocks Broad UK Stocks 50/50 Portfolio UK Bonds 0.0 Lower Yield Stocks Broad UK Stocks Higher Yield Stocks UK REITs 50/50 Portfolio UK Bonds Notes: Left-hand figure displays the annualised standard deviation of monthly returns from Jan Oct Right-hand figure displays the slope coefficient of a regression of the returns of the stated asset class on the returns of the broad UK stock market from Jan.1990 t-oct UK stocks defined as the FTSE 350 index, Lower Yield stocks defined as the FTSE 350 low yield index, higher yield stocks defined as the FTSE 350 high yield index, UK REITs defined as the FTSE EPRA/NAREIT UK Index, UK Bonds defined as the FTSE UK Government Index Jan Feb.2000; Barclays Sterling Aggregate Index thereafter. 50/50 portfolio is defined as 50% FTSE 350, 50% UK bonds, rebalanced monthly. All returns displayed in local currency with income reinvested. Source: FTSE, Barclays, via Thomson Reuters Datastream. 35

36 Cumulative Return Since 31 October, 2007 A balanced global approach has fared well (GBP) 30% Balanced portfolio performance since October % 10% 0% -10% -20% -30% -40% -50% Oct-2007 Apr-2008 Oct-2008 Apr-2009 Oct-2009 Apr-2010 Oct-2010 Apr-2011 Oct-2011 Apr-2012 Oct % Stocks / 40% Bonds 60% UK Stocks / 40% UK Bonds 100% UK Stocks Notes: Reflects the cumulative return of various allocations to the Barclays Aggregate index (Hedged to GBP), the FTSE All World index (unhedged in GBP), the FTSE All Share index, and the Barclays SterlingAggregate. Portfolio is re-balanced to target allocation monthly, at month end. Returns are in sterling terms, with income reinvested, through 31 Oct Source: Vanguard, based on Barclays Capital, FTSE, 36

37 Cumulative Return Since 31 October, 2007 A balanced global approach has fared well (EUR) 20% Balanced portfolio performance since October % 0% -10% -20% -30% -40% -50% -60% -70% Oct-2007 Apr-2008 Oct-2008 Apr-2009 Oct-2009 Apr-2010 Oct-2010 Apr-2011 Oct-2011 Apr-2012 Oct % Stocks / 40% Bonds 60% Euro Stocks / 40% Euro Bonds 100% Euro Stocks Notes: Reflects the cumulative return of various allocations to the Barclays Aggregate index (Hedged to EUR), the FTSE All World index (unhedged in EUR), the Eurostoxx equity index, and the Barclays Euro Aggregate. Portfolio is re-balanced to target allocation monthly, at month end. Returns are in euro terms, with income reinvested, through 31 Oct Source: Vanguard, based on Barclays Capital, FTSE. 37

38 Cumulative Return Since 31 October, 2007 A balanced global approach has fared well (GBP) 40% Balanced global portfolio performance since October % 20% 10% 0% -10% -20% -30% -40% -50% Oct-2007 Apr-2008 Oct-2008 Apr-2009 Oct-2009 Apr-2010 Oct-2010 Apr-2011 Oct-2011 Apr-2012 Oct % Stocks / 70% Bonds 50% Stocks / 50% Bonds 70% Stocks / 30% Bonds 100% Stocks Notes: Reflects the cumulative return of various allocations to the Barclays Aggregate index (Hedged to GBP), and the FTSE All World index (un-hedged in GBP). Portfolio is re-balanced to target allocation monthly, at month end. Returns are in sterling terms, with income reinvested, through 31 Oct Source: Vanguard, based on Barclays Capital and FTSE. 38

39 Cumulative Return Since 31 October, 2007 A balanced global approach has fared well (EUR) 30% Balanced global portfolio performance since October % 10% 0% -10% -20% -30% -40% -50% -60% Oct-2007 Apr-2008 Oct-2008 Apr-2009 Oct-2009 Apr-2010 Oct-2010 Apr-2011 Oct-2011 Apr-2012 Oct % Stocks / 70% Bonds 50% Stocks / 50% Bonds 70% Stocks / 30% Bonds 100% Stocks Notes: Reflects the cumulative return of various allocations to the Barclays Aggregate index (Hedged to EUR), and the FTSE All World index (unhedged in EUR). Portfolio is re-balanced to target allocation monthly, at month end. Returns are in euro terms, with income reinvested, through 31 Oct Source: Vanguard, based on Barclays Capital and FTSE. 39

40 Tactical strategies are difficult (UK Perspective) Europe ex North Un-hedged Hedged Hedged Un-hedged Emerging Emerging Emerging Emerging Emerging Emerging Emerging Euro ex UK UK America Euro Euro UK Linkers Bonds Bonds Bonds Bonds 39.8% 16.7% 37.9% 37.3% 74.4% 11.3% 8.3% 10.7% 38.5% 19.3% 51.1% 21.0% 37.4% 45.1% 62.5% 23.6% 20.3% North America North America Europe ex Euro ex UK Growth Developed Value Asia Emerging UK Bonds Euro Europe ex Euro ex UK Developed Asia Europe ex Euro ex UK Euro Hedged Bonds Europe ex Europe ex Euro ex UK Euro ex UK 37.5% 11.7% 36.7% 28.3% 71.0% 10.1% 5.2% 9.2% 30.3% 15.3% 36.8% 18.4% 18.5% 7.6% 30.5% 22.8% 13.5% North Hedged Europe ex Europe ex Un-hedged Emerging Developed UK Euro Euro America Growth UK Bonds UK Linkers Euro ex UK Euro Euro ex UK Growth UK Bonds UK Asia Bonds Bonds 23.9% 11.0% 27.6% 26.8% 42.4% 9.9% 4.8% 8.4% 29.4% 13.7% 34.7% 16.8% 12.1% 4.4% 30.1% 21.3% 6.4% Hedged North Un-hedged Un-hedged Europe ex North Hedged Value Developed Value UK UK Linkers America UK Bonds UK UK Euro ex UK UK Linkers Growth America Asia Bonds Bonds Bonds Bonds 20.9% 8.6% 23.6% 19.9% 25.4% 9.2% 4.3% 5.3% 25.3% 12.8% 24.9% 16.8% 10.8% 3.5% 21.0% 19.1% 5.8% Un-hedged Bonds UK Bonds Value UK Bonds UK UK Linkers UK Linkers Emerging Value Value Growth Value UK Linkers Developed Asia Euro 20.3% 7.4% 20.1% 19.5% 24.2% 4.2% -0.9% -15.1% 21.4% 11.9% 24.0% 9.4% 8.3% -13.2% 18.4% 16.4% 1.2% Europe ex Un-hedged North Value Value Developed Developed Value Value Growth UK Linkers Growth Euro Euro ex UK UK Euro Growth America UK Asia Asia Bonds 19.9% 6.3% 19.9% 15.0% 20.8% 1.5% -6.7% -17.3% 20.9% 11.5% 22.2% 3.7% 7.6% -13.3% 18.3% 16.1% -3.5% Hedged Europe ex Europe ex North Hedged North Value Value Value Euro ex UK UK Bonds UK Euro ex UK Euro America Growth UK Linkers UK America UK Growth Bonds Bonds 19.3% 4.0% 14.8% 13.8% 18.8% 1.4% -10.8% -20.9% 19.5% 8.3% 22.0% 3.3% 6.8% -15.6% 14.8% 14.5% -5.4% Europe ex North Europe ex North Hedged North Un-hedged Value Developed Developed Value Euro Growth UK Linkers Euro ex UK America UK Euro ex UK America America UK Linkers Growth Asia Asia Bonds Bonds 17.9% 2.8% 13.9% 13.0% 16.7% -0.5% -13.3% -21.6% 16.4% 8.0% 20.2% 2.6% 6.6% -20.9% 13.6% 8.9% -6.2% Hedged Hedged Europe ex North Hedged Europe ex Europe ex Value UK Bonds UK Linkers UK Euro ex UK UK UK Linkers UK Bonds UK Linkers America Euro ex UK UK Linkers UK Linkers Euro ex UK Bonds Bonds Bonds 16.5% 2.7% 11.8% 12.6% 4.3% -5.9% -18.9% -22.7% 6.8% 6.7% 9.9% 1.7% 5.8% -25.1% 6.4% 8.8% -12.0% UK Linkers Emerging Un-hedged Bonds Un-hedged Bonds Hedged Bonds Growth Euro Euro Hedged Bonds Growth UK Bonds UK Bonds North America Euro Hedged Bonds Growth UK Bonds UK Bonds North America Developed Asia 11.9% -2.7% 7.3% 12.0% 1.1% -17.1% -20.1% -28.3% 5.5% 4.6% 8.3% 0.6% 5.6% -26.2% 5.3% 7.9% -12.6% Un-hedged North North Un-hedged Hedged Developed Emerging Developed Developed Developed UK Bonds Growth America UK Bonds America UK UK UK Bonds Euro Asia Asia Asia Asia Bonds Bonds Bonds 2.6% -5.4% -17.2% 3.1% -1.0% -20.0% -21.3% -29.5% 3.5% 4.1% 6.8% -0.2% 5.3% -29.9% 3.3% 4.8% -16.6% Emerging Developed Asia Developed Asia Emerging Un-hedged Bonds Emerging Developed Asia Growth Un-hedged Bonds Un-hedged Bonds Hedged Bonds Un-hedged Bonds UK Bonds Emerging Un-hedged Bonds Euro 0.5% -18.4% -21.8% -23.5% -1.8% -27.2% -22.9% -32.8% 1.2% 1.9% 5.8% -6.5% 3.4% -34.8% -4.8% -0.5% -18.4% UK equity defined as the FTSE All Share index, Euro defined as the FTSE Eurobloc index, Europe ex Euro ex UK equity defined as the FTSE Europe ex Eurobloc ex UK index, Developed Asia equity defined as the FTSE Developed Asia Pacific index, North America equity defined as the FTSE North America index, Emerging equity defined as the FTSE Emerging index, Growth and Value equities are defined as the FTSE World Growth and FTSE World Value indices. UK Bonds are defined as the Citi WGBI UK index from and the Barclays Sterling Aggregate from Hedged and unhedged global bonds are defined as the Barclays Aggregate. UK Linkers are defined as the Barclays UK Inflation Linked Index. Returns are denominated in sterling and include reinvested dividends and interest. 40 Emerging

41 Conclusions The economic environment is more uncertain than usual. Benign and malign scenarios could result that make a difference even to the long-term investor..risky to build portfolio around central case assumptions High-yielding alternative assets may not deliver in future as they have in past Equities should deliver returns for the long term Bonds provide diversification benefits Stay diversified...stay the course 41

42 Important information The opinions expressed in this presentation are those of individual speakers and may not be representative of Vanguard Investments Switzerland GmbH. The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. Issued by Vanguard Investments Switzerland GmbH Vanguard Investments Switzerland GmbH. All rights reserved. VISG