The importance of Asset Allocation Mirko Cardinale Strategic Asset Allocation Specialist Milan, 8 November 2007

Strapline, Height: 1.6cm Width: 23.16cm Org chart colours 1 st Blue: White bold font 2 nd Blue: White bold font 3 rd Blue: Morley bold blue font 4 th : Morley bold blue font 0.75 pt outline text Diagram shapes & chevrons This document is for professional advisers and market counterparty or intermediate customers only. The content is not approved for use with private/retail investors or pension scheme members.

Strapline, Height: 1.6cm Width: 23.16cm Org chart colours 1 st Blue: White bold font 2 nd Blue: White bold font 3 rd Blue: Morley bold blue font 4 th : Morley bold blue font 0.75 pt outline text Diagram shapes & chevrons Agenda  Importance of Asset Allocation  Evolution of Tactical Asset Allocation  Morley’s Tactical Asset Allocation process  Current outlook and positions  Performance and risk  Summary  Q & A

Strapline, Height: 1.6cm Width: 23.16cm Org chart colours 1 st Blue: White bold font 2 nd Blue: White bold font 3 rd Blue: Morley bold blue font 4 th : Morley bold blue font 0.75 pt outline text Diagram shapes & chevrons Importance of Asset Allocation  Most significant driver of portfolio returns  Academic studies agree asset mix is crucial  Combines assumptions on expected returns, volatility, and correlations Asset allocation needs to exploit asset-class diversification Source:Morley/ Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, Determinants of Portfolio Performance, The Financial Analysts Journal, July/August 1986 Blake D, Lehmann, B Timmermann, A (1999) Asset Allocation Dynamics and Pension Fund Performance Journal of Business 72, Efficient Frontier Individual Asset Classes Expected Return Risk Correlation Time Efficient Frontier with Alpha

Strapline, Height: 1.6cm Width: 23.16cm Org chart colours 1 st Blue: White bold font 2 nd Blue: White bold font 3 rd Blue: Morley bold blue font 4 th : Morley bold blue font 0.75 pt outline text Diagram shapes & chevrons Page 5 Long-term beta-return forecasts  Long-term asset class returns are far more predictable  Fundamental economics & empirical research create building blocks of “sustainable returns” Source: Morley Strategy Team, June 2007 The content of this slide is designed to illustrate the results of a research strategy employed by Morley Fund Management Limited for its internal use only. It is not to be relied on by anyone else for their investment decisions. Sustainable returns vary significantly over time and assets

Strapline, Height: 1.6cm Width: 23.16cm Org chart colours 1 st Blue: White bold font 2 nd Blue: White bold font 3 rd Blue: Morley bold blue font 4 th : Morley bold blue font 0.75 pt outline text Diagram shapes & chevrons Sustainable returns combined with historical volatility Risk and return of conventional asset groups Source: Morley Strategy Team, illustrative example as at 18 September 2007 Japan Equities (hedged) Asia Pacific Equities (hedged) UK Corporates Global Aggregate Bonds UK Property Convertibles Commodities Global REITs EU Equities US Equities EM Equities UK Gilts UK Index-Linked Gilts Emerging Market US$ Debt (hedged) UK Cash Diversified Strategy Fund (beta only) Diversified Strategy Fund (incl. alpha) 3.5% 4.5% 5.5% 6.5% 7.5% 8.5% 9.5% 10.5% 2%7%12%17%22%27%32% Risk Return UK Equities Emerging Market Local Debt Sustainable returns demonstrate sensible order; but vary over time

Strapline, Height: 1.6cm Width: 23.16cm Org chart colours 1 st Blue: White bold font 2 nd Blue: White bold font 3 rd Blue: Morley bold blue font 4 th : Morley bold blue font 0.75 pt outline text Diagram shapes & chevrons Extending the asset allocation framework  Theory and practice show the benefits of a Strategic Asset Allocation framework  But is there any value in shorter-term market opportunities?  Incorporating short-term opportunities is known as Tactical Asset Allocation TAA exploits short-term asset allocation opportunities

Strapline, Height: 1.6cm Width: 23.16cm Org chart colours 1 st Blue: White bold font 2 nd Blue: White bold font 3 rd Blue: Morley bold blue font 4 th : Morley bold blue font 0.75 pt outline text Diagram shapes & chevrons Origin of Tactical Asset Allocation (TAA)  First used to inform “asset-timing” decisions in the 1970s  A “top down” investment process  Captures shorter-term opportunities TAA added “flexibility” to the strategic benchmark Bonds 30% Cash 10% Equities 60% Bonds 30% Cash 10% Equities 60%

Strapline, Height: 1.6cm Width: 23.16cm Org chart colours 1 st Blue: White bold font 2 nd Blue: White bold font 3 rd Blue: Morley bold blue font 4 th : Morley bold blue font 0.75 pt outline text Diagram shapes & chevrons Evolution of Global Tactical Asset Allocation (GTAA) TAA becomes a broader, standalone investment Empirical studies highlight asset class inefficiencies Single country TAA Cheap index futures available Futures markets broader and more liquid Multi-country models find regional inefficiencies Multi-country GTAA Currency market predictability found Multi country / currency GTAA Pooled funds developed under UCITS III 1980s1990s2000s

Strapline, Height: 1.6cm Width: 23.16cm Org chart colours 1 st Blue: White bold font 2 nd Blue: White bold font 3 rd Blue: Morley bold blue font 4 th : Morley bold blue font 0.75 pt outline text Diagram shapes & chevrons A modern GTAA process  Diversified range of long/short positions  Exploits market inefficiencies  Cheap and efficient execution  Low correlation with traditional asset classes Bond Market Selection Equity Market Selection Asset Class Selection Currency Selection Global TAA has become more diversified and consistent Source: Morley as at 30 th September 2007.

Strapline, Height: 1.6cm Width: 23.16cm Org chart colours 1 st Blue: White bold font 2 nd Blue: White bold font 3 rd Blue: Morley bold blue font 4 th : Morley bold blue font 0.75 pt outline text Diagram shapes & chevrons Characteristics of GTAA returns Can be considered as a way to reduce overall fund volatility or boost returns Interest in GTAA driven by surge in demand for uncorrelated returns Uncorrelated, absolute returns Correlation of GTAA Returns Data uses >8 years of performance data from MPPL Balanced Managed Overlay (Q4 98-Q2 07) Risk Return Efficient Frontier with TAA Efficient Frontier without TAA Initial portfolio with optimised strategic allocation Improved return expectations for the same level of risk Improved risk profile for an identical level of return

Strapline, Height: 1.6cm Width: 23.16cm Org chart colours 1 st Blue: White bold font 2 nd Blue: White bold font 3 rd Blue: Morley bold blue font 4 th : Morley bold blue font 0.75 pt outline text Diagram shapes & chevrons Philosophy  Inefficiencies between markets more significant than those within markets  Inefficiencies are persistent & exploitable, from  Investor sentiment  Structural anomalies between markets  Non profit-maximising participants  Transactions in futures and forward markets are quick and cheap enough to exploit these opportunities Morley’s process can exploit these opportunities with the high degree of consistency that our clients desire

Strapline, Height: 1.6cm Width: 23.16cm Org chart colours 1 st Blue: White bold font 2 nd Blue: White bold font 3 rd Blue: Morley bold blue font 4 th : Morley bold blue font 0.75 pt outline text Diagram shapes & chevrons Investment process A robust process that aims to deliver consistent, excess returns Economic scenario analysis Forecasting returns Optimal portfolio analysis Portfolio selection Implementation

Strapline, Height: 1.6cm Width: 23.16cm Org chart colours 1 st Blue: White bold font 2 nd Blue: White bold font 3 rd Blue: Morley bold blue font 4 th : Morley bold blue font 0.75 pt outline text Diagram shapes & chevrons Why asset allocation?  Asset allocation is the most significant driver of portfolio returns  GTAA takes advantage of short-term asset allocation opportunities  Generates returns from diversified long/short positions across global equity, bond, and currency markets Represents an excellent source of uncorrelated absolute-returns

Strapline, Height: 1.6cm Width: 23.16cm Org chart colours 1 st Blue: White bold font 2 nd Blue: White bold font 3 rd Blue: Morley bold blue font 4 th : Morley bold blue font 0.75 pt outline text Diagram shapes & chevrons Q&A

Strapline, Height: 1.6cm Width: 23.16cm Org chart colours 1 st Blue: White bold font 2 nd Blue: White bold font 3 rd Blue: Morley bold blue font 4 th : Morley bold blue font 0.75 pt outline text Diagram shapes & chevrons Important information This document is intended for institutional or professional investors and experienced advisers only. Except where stated as otherwise, the source of all information is Morley as at 31 October Where past performance has been illustrated it is not intended to be a guide to the future. The value of an investment and any income from it may go down as well as up, and the investor may not get back the original amount invested. Any future returns and opinions expressed are based on our internal forecasts and should not be relied upon as indicating any guarantee of return from an investment with Morley. No part of this document is intended to constitute advice of any nature nor should any part be construed as a recommendation to purchase or sell stocks. Morley is a business name of Morley Fund Management Limited, registered in England No Registered Office: No. 1 Poultry, London EC2R 8EJ. Authorised and regulated in the UK by the Financial Services Authority and a member of the Investment Management Association. Morley Fund Management is also a business name of Morley Fund Services Limited and Morley Fund Management International Limited. All are Aviva companies. Contact us at Morley Fund Management Limited, No. 1 Poultry, London EC2R 8EJ. MFM 07/941