Commodities: A Strategic Asset Allocation?

FINANCE, INVESTMENT & RISK MANAGEMENT CONFERENCE 15-17 JUNE 2008 HILTON DEANSGATE, MANCHESTER Commodities: A Strategic Asset Allocation? John.McManus@union-investment.de Commodities: A Distinct Asset Class Valuation: bonds & equities (NPV) commodities (global demand & supply) ) Inflation: inflation is detrimental to equities & bonds, commodity prices are a source of inflation (Risk of) Disruption to Supply of Commodities: lead to commodity price increases, but tend to decrease the price of financial assets Short-term vs Long-term Expectations: commodities affected by short-term expectations bonds & equities affected by long-term expectations Convenience Yield 1

Performance of Commodities: (1959-2004) Source: Yale ICF Working Paper: Facts & Fantasies about Commodity Futures Correlation with Commodities: (1959-2004) Source: Yale ICF Working Paper: Facts & Fantasies about Commodity Futures Methods to gain exposure to Commodities Purchase of Physical Commodities in the Cash Market Purchase of Stock of Publicly-traded Resource Firms Commodity Hedge-Fund Passively-Managed Commodity Fund Actively-Managed Commodity Fund Structured Investment Vehicles (eg Guaranteed Products, CCO) 2

Agriculture Commodities Factors driving Agriculture Prices Supply (Acreage & Yield) Growth of Arable Land Urbanisation Land degradation Initiatives to counter deforestation Demand Food: Growth in world population Feed: Wealth Effect Fuel: Biofuels Change in Yields Crop Protection / Biotechnology Use of Fertilizer Water Availability Machinery Education Weather Conditions Supply: Limited Growth in Arable Land Global Arable Land & Permanent Crops 1.600.000 1,2% Arable Land (1000 Ha) 1.550.000 1.500.000 1.450.000 1.400.000 1.350.000 1.300.000 1,0% 0,8% 0,6% 0,4% 0,2% 0,0% -0,2% -0,4% Annual Growth in Arable Land 1.250.000 1961 1963 1965 1967 1969 1971 1973 1975 1977 World Arable Land & Permanent Crops 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003-0,6% Growth in Arable Land + Permanent Crops (% Change YoY) Source: FAO / Union Investment 3

Supply: Can South America keep up the pace? Annualised Growth Rate of Arable Land & Permanent Crops from 1990 to 2005 12% 1,5% % of World Arable Land & Perm. Crops 10% 8% 6% 4% 2% -0,4% 0,0% -0,6% 1,0% 0,0% 0,5% 0,3% -0,5% 1,0% 0,5% 0,0% -0,5% -1,0% -1,0% -1,1% Annulised Growth Rate 0% USA India Russian Fed Brazil Canada Argentina Mexico Weight Annualised Growth '90 to '05 Spain Poland Italy -1,5% Source: FAO / Union Investment Supply : Increases in Yield 10% Change in World Cereal Yields 8% 6% 4% 2% 0% 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004-2% -4% Demand for Food: Growth in Population (Fertility & Longevity) 4

Demand for Feed: Output Gap Still Exists 50,000 2006 GDP / capita, current prices (USD) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 United States United Kingdom Germany Russia Brazil China India Source: United Nations / Union Investment Demand for Feed: Buying the Western Diet Demand: China - The Dragon has re-awoken 18% China Imports of Soybeans as a Percentage of Total Production 16% 14% % Total Production 12% 10% 8% 6% 4% 2% 0% 1990/1991 1991/1992 1992/1993 1993/1994 1994/1995 1995/1996 1996/1997 1997/1998 1998/1999 1999/2000 2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 Source: USDA / Union Investment 5

Where are the Substitutes? 70 Stock-to-Use Rapeseed, Palm and Soybean Oil 60 50 Stock-to-Use (days) 40 30 20 10 0 1989/1990 1990/1991 1991/1992 1992/1993 1993/1994 1994/1995 1995/1996 1996/1997 1997/1998 1998/1999 1999/2000 2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 Oil, Rapeseed Oil, Palm Oil, Soybean Oil, Sunflowerseed Source: USDA / Union Investment Demand for Fuel: Drive for Biofuels 40% Percentage of US Corn used in Ethanol Production 35% 30% 25% 20% 15% 10% 5% 0% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: USDA / Union Investment Consumption exceeded Production in Recent Years 15% World Consumption & Production of Soybeans, Corn and Wheat 10% YoY Change 5% 0% 1986/1987 1987/1988 1988/1989 1989/1990 1990/1991 1991/1992 1992/1993 1993/1994 1994/1995 1995/1996 1996/1997 1997/1998 1998/1999 1999/2000 2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008-5% -10% Consumption Production Source: USDA / Union Investment 6

Higher Consumption has resulted in declining Inventories 180 World Supply Cushion for Corn, Wheat, Soybean Products 160 140 120 Stocks-to-use (days) 100 80 60 40 20 0 1964/1965 1966/1967 1968/1969 1970/1971 1972/1973 1974/1975 1976/1977 1978/1979 1980/1981 1982/1983 1984/1985 1986/1987 1988/1989 1990/1991 1992/1993 1994/1995 1996/1997 soybean meal soybean oil corn wheat 1998/1999 2000/2001 2002/2003 2004/2005 2006/2007 2008/2009 Source: USDA / Union Investment Recent decline in Inventory Levels has resulted in increased Grain Prices 350 Cumulative Performance of Wheat, Corn and Soybeans 300 Performance 250 200 150 100 50 Jun-90 Jun-91 Jun-92 Jun-93 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 wheat corn soybeans Source: Bloomberg / Union Investment Livestock Commodities 7

Livestock: Beef, Pork and Poultry Meat Producers are incurring negative profit margins primarily because of their inability to pass on high grain and soybean meal price to Packers. Producers are responding by reducing meat production which will have a negative impact on prices in the near-term Lower overall production coupled with strong demand (domestic / export demand) will result in price increases in the medium term Export demand supported by: - Population growth - Income growth -Weak USD - Recovery in confidence in US beef following the BSE cases in Dec. 2003 Improved Production Techniques / Biotechnology Environmental Implications Livestock Price Forecasts Energy Commodities 8

Energy Overview While high Fossil Fuel Prices and Environmental Concerns support expanding the use of Nuclear Power and Renewable energy sources to generate electricity, this will not occur in the short-term. Most rapid growth in energy demand in the future is projected to come from non- OCED countries where robust economic growth is expected to continue Non-OPEC Production has been plagued by delays making OPEC (Saudi Arabia) the Marginal Producer Exploration and Production Costs have increased dramatically in recent years Canadian Alberta Oil Sands: Cost of Production: 75 USD / barrel Low Spare Production Capacity in a Geo-politically unstable Environment Source: US Department of Energy Middle Distillate Demand driving the Oil Complex higher Current Supply of Middle Distillates not satisfying Demand Non-OECD Subsidies delaying Middle Distillate Demand-Destruction Ethanol Production adding to Gasoline Inventories Low Refinery Profit Margins resulting in relatively low Refinery Utilization Source: Norwegian Energy 9

Industrial Metals Excess Demand has resulted in relatively low Inventory Levels 1,200 LME Copper Inventory Levels & Price Evolution 9,000 1,000 8,000 7,000 '000 Metric Tons 800 600 400 6,000 5,000 4,000 3,000 USD / MT 200 2,000 1,000 0 0 Aug/ 98 Aug/ 99 Aug/ 00 Aug/ 01 Aug/ 02 Aug/ 03 Aug/ 04 Aug/ 05 Aug/ 06 Aug/ 07 Total LME Cu Stock Pric e Source: Bloomberg / Union Investment Conclusions Commodities are a distinct asset class that investors should consider when making asset allocation decision Commodities have historically offered diversification benefits to most portfolios There are many ways of investing in commodities which offer significantly different risk-return profiles. Great care must be taken when investing in Structured Products. Government Intervention and new players in Commodity Markets will lead to increased volatility From a fundamental perspective, the Outlook for most Commodities Sectors remains positive 10

Disclaimer This advertising material is intended only for professional clients as described in section 31a, paragraph 2 of the German Securities Trading Act (WpHG). The present document has been prepared and issued by Union Investment Institutional GmbH. The document does not constitute a binding offer. Union Investment does not assume any obligation or liability for this document. The document is no substitute for the individual advice by Union Investment Institutional GmbH. Union Investment Institutional GmbH is not responsible for disadvantages that may arise directly or indirectly from the distribution of this document or its contents. For extensive product-specific information and details of the opportunities and risks presented by the respective fund, please refer to the latest sales prospectus, the Bank's terms and conditions or the annual and half-yearly reports that can be obtained free of charge from Union Investment Institutional GmbH, Wiesenhüttenstrasse 10, 60329 Frankfurt am Main, Germany, telephone +49 (0)69 25670. These documents constitute the sole legally binding basis for the purchase of fund units. Origins of Data: Despite our effort and care no liability or guarantee can be assumed for the timeliness, accuracy or completeness of the data provided. The data shown in the document is to some extent sourced from external data distributors and publicly available data which are believed to be reliable. However, data contents from external data distributors can be deficient and we therefore can not be responsible for external data. Furthermore during data transmission, data input or data processing errors can arise for which no liability can be assumed. Historical performance: No responsibility can be assumed for the performance figures mentioned in the documents. Performance data shown is historical. Past performances can not be taken as a reliable guide for future investments. Performances are subject to fluctuation which can affect the value of the investment. Compliance with Global Investment Performance Standards (GIPS ) and the BVI-Rules of Conduct: Union Investment claims of compliance with GIPS has undergone the verification process and has been verified by an independent thirdparty verifier. The Composite-Performance calculation and presentation comply with the GIPS guidelines. The composite allocation of individual funds, or all Composites complying with GIPS are available upon request. Union Investment Institutional GmbH has committed to comply with BVI s code of conduct. In consequence, Union Investment Institutional GmbH employs the code's standards for performance illustrations. Cases of deviation will be individually indicated. Future assessment: Any opinion expressed in this document (including estimates and forecasts) is solely for information purposes and does not constitute an individual offer or a guarantee for future performance. Any opinion contained herein was given at the date of publication and may be subject to change without notice. Portfolio and performance simulation: The portfolio simulations contained in this documents are based on selected portfolios, which may be subject to change at any time. These portfolios are no forecasts and are merely shown to illustrate the development of parts of the portfolio. They do not substitute comprehensive investment advice and do not constitute investment recommendations or a guarantee for future performance. 11