Zenith Investment Research Premium Wealth Management Annual Conference Presented by:David Wright, Director 17 April 2012 Team up with an experienced, independent and incisive research provider

Disclaimer simplifyingRESEARCH This presentation has been prepared exclusively for the Premium Wealth Management Conference. The presentation contains recommendations and advice of a general nature and does not have regard to the particular circumstances or needs of any specific person who may read it. Each client should assess either personally or with the assistance of a licensed financial adviser whether the Zenith recommendation or advice is appropriate to their situation before making an investment decision. The information contained in the presentation is believed to be reliable, but its completeness and accuracy is not guaranteed. Opinions expressed may change without notice. Zenith accepts no liability, whether direct or indirect arising from the use of information contained in this presentation. No part of this presentation is to be construed as a solicitation to buy or sell any investment. The performance of the investment in this presentation is not a representation as to future performance or likely return. The material contained in this presentation is subject to copyright and may not be reproduced without the consent of the copyright owner. Zenith usually receives a fee for assessing the fund manager and product(s) described in this document against accepted criteria considered comprehensive and objective.

Agenda simplifyingRESEARCH The old news – portfolio construction since GFC Developments in portfolio construction Understanding Portfolio Risk Portfolio Construction – where to from here?

Portfolio Construction since the GFC simplifyingRESEARCH Common portfolio construction practices A big move from active to passive managers A move from managed to direct in Australian equities Strong demand for tactical asset allocation approaches Investors satisfied with term deposit rates ACTIVE PASSIVE

Portfolio Construction since the GFC simplifyingRESEARCH A reduction in portfolio diversification caused by: Confusion in the use and allocation of: Global Equities & hedged and unhedged weightings REITs – Australian & Global Polarised use of alternatives asset classes & strategies Long / short Australian Equities CTA’s & global macro funds

Portfolio Construction since the GFC simplifyingRESEARCH In conclusion, many advisers continue to build portfolios for “fair weather” investment market conditions waiting for markets to improve. Very overweight Australian equities High levels of cash and term deposits Very low levels of diversification Market Conditions to Improve

Portfolio Risk simplifyingRESEARCH What is it? The potential for capital loss The potential not to reach your investment goals (e.g. Underfunded retirement savings) Uncertainty of investment outcome

Developments in Portfolio Construction simplifyingRESEARCH Page 8 Objective based investing Risk targeted investing Inflation plus return targets Target date / Life stage funds Annuity / Insurance policy funds

Developments in Portfolio Construction simplifyingRESEARCH Page 9 Risk targeted investing Objective is to manage portfolio to a specific risk (volatility) target with the return being an “outcome” (e.g. Investment Science SRA 4, 9, 16 Funds) Characteristics of this approach Tends to provide more certain volatility outcome Over long term returns similar magnitude to “old fashioned” diversified funds (e.g. Conservative, Balanced, Growth) but with lower volatility over short term periods Outperform in poor market conditions, Underperform in bull market conditions Underlying asset allocation ranges are non existent or very wide

Developments in Portfolio Construction simplifyingRESEARCH Page 10 Inflation Plus target investing Objective is to manage portfolio to a specific inflation plus return target (e.g. Schroder’s Real Return Fund – Inflation Plus 4.0% p.a.) Characteristics of this approach Seeking to retain the real rate of return (investor’s purchasing power) above inflation Not a specific absolute return target but linked to level of inflation. When inflation high, absolute return level is high and vice versa Tend to outperform traditional diversified funds in high inflation environment, possibly underperform in lower inflation environments Underlying asset allocation ranges are non existent or very wide The approach lends itself best to a single manager fund

Developments in Portfolio Construction simplifyingRESEARCH Page 11 Target Date / Lifestage Funds Objective is to manage portfolio to a specific risk date Characteristics of this approach In US typically offered as retirement date or target date in 5yr increments (e.g. 2015, 2020, 2025) In UK default age based offerings – switch at birthdays by plan sponsor Driven by “glide path” approach to asset allocation. That is, asset allocation is “calibrated” by vintage of fund. Can be more easily managed by a single manager rather than multi-manager approach.

Developments in Portfolio Construction simplifyingRESEARCH Page 12 Glide Path – Target Date / Lifestage Funds

Developments in Portfolio Construction simplifyingRESEARCH Page 13 Glide Path - Target Date / Lifestage Funds

Developments in Portfolio Construction simplifyingRESEARCH Page 14 MySuper Implications Pressure on super fund trustees to do more for apathetic members than place them in default “balanced” investment option Q-Super looking to collect financial data (salary, super balance, years to retirement) on members to assist in determining appropriate investment option for members This is essentially fund level financial planning and is likely to become more common

Developments in Portfolio Construction simplifyingRESEARCH Page 15 After Tax returns will become greater focus by the industry After tax returns are determined by the asset allocation approach and manager selections At the fund research level, Zenith considers the impact of the following factors : Portfolio Turnover Carried Forward Losses Impact of Currency Hedging & derivatives TOFA Rules

Portfolio Construction – Where to from here? simplifyingRESEARCH Attempt to build portfolios with more certain outcomes Understand where the risks in the portfolio are Demonstrate and report value add to clients Increased use of model portfolios

Balanced Model Portfolio Forward Looking Annualised Return Projections simplifyingRESEARCH Page 17 Cash Expectation 3.59%

Balanced Model Portfolio Projections Expected Value of $1 Million investment simplifyingRESEARCH Page 18

Balanced Model Portfolio Projections Probability of Capital Loss simplifyingRESEARCH Page 19

Understanding Portfolio Risk Balanced Portfolio Asset Allocation simplifyingRESEARCH Page 20

Understanding Portfolio Risk Balanced Portfolio Risk Allocation simplifyingRESEARCH Page 21

Return Forecast Component Example simplifyingRESEARCH Page 22

Reporting for Advisers – Fund Contribution simplifyingRESEARCH Page 23 Reporting will highlight the individual contributions of each fund to overall portfolio performance

Reporting for Advisers - Portfolio Attribution simplifyingRESEARCH Page 24 Attribution analysis is different to contribution analysis

Reporting for Advisers - After Tax Analysis Income Distribution Yields to June-11 simplifyingRESEARCH Page 25

Portfolio Construction – Where to from here? simplifyingRESEARCH In an uncertain environment we need to build “all weather” portfolios. Increase diversification and seek as many sources of uncorrelated returns as possible thereby not relying on one or two engines for growth. This includes active use of: A more complete range of asset classes; and Alternative investment strategies

Portfolio Construction – Where to from here? simplifyingRESEARCH If the global environment doesn’t get better, cash rates in Australia will be lower. Path dependency a real issue Start or re-instate client’s investment strategy by “averaging in” over a period of time

Questions simplifyingRESEARCH

Zenith Investment Research Premium Wealth Management Annual Conference Presented by:David Wright, Director 17 April 2012 Team up with an experienced, independent and incisive research provider