The Capital Preservation Challenge May 2006

%-20%-15%-10%-5%0%5%10%15%20%25%30%35% Market returns Wealth Utility Utility Happiness Disappointment Why is Capital Preservation relevant?

2 Are traditional top-down approaches still optimal? Reduced asset class return expectations –Return objectives can no longer be met by excessive beta exposure –Strategies with a greater degree of market neutrality need to be utilised 3.5% 4.5% 5.5% 6.5% 7.5% 8.5% 9.5% 10.5% 11.5% Private Equity EM Equity (unh) EAFE (hed) US Small Cap US Large Cap US High Yield REITS Directional HF (high vol) Non Directional HF (low vol) World ex US bonds (hed) US Treasury 2000 Current JPMorgan capital market return assumptions (10-15 yr)) Decreasing benefits of diversification in core asset classes –Increased intra-asset class correlation makes efficient portfolio construction difficult –Diversification needs to be sought outside of beta space

3 Historically 90% of portfolio returns and risk dependent on strategic asset allocation Portfolios have historically been too dependent on a small number of decisions Traditional approach to building portfolios Large/ small cap Value/ growth Cyclical/ defensive Beta /low beta Volatility Industrial sector Geographic region Industrial sector CreditDurationCurrency EquitiesBonds Investments ’s No. of decisions To increase returns, investors have had to increase exposure to high volatility asset classes Portfolios have been built from asset class choices. So alpha has been hostage to beta

4 If securities are held for index-relative reasons opportunities for active management are reduced 50% of global equity index is in 8% of the companies Focuses investments on relative size Focuses too much on the past May not reflect the best investment criteria Cumulative market-cap distribution of MSCI World ranked by size* * Source: Datastream (%) Number of companies Alpha is hostage to beta buckets

5 The case for a total return approach At its purest level the principal objective of our industry should be to achieve the highest risk adjusted total return for our clients Investors have an asymmetric approach to risk – the real risk is losing money Investors care increasingly less about index benchmarks In a low nominal return environment, alpha is more important than beta (choice of assets) Active management … the challenge is obvious, the question is how to achieve it…

6 Traditional total return was fixed income oriented Source: MacData, JPMAM Past: During declining inflation and yields, bonds exhibited an attractive total return profile Now: Interest rates low, credit spreads have narrowed Equity dividends should increase

7 How do we define total return investing? Risk is defined in terms of capital loss rather than benchmark relative performance Return objective is set independently of asset class - i.e. Cash plus More upside capture / less downside capture. Optionality Portfolios managed as one unit rather than subdivided into component parts Management is active and flexible Transparent in process and holdings... investors have an asymmetric attitude to risk and return

8 Total return: a flexible solution Characteristics of Benchmarking Returns closely track index Always fully invested Risk is relative Only a small percentage of active positions Inability to use all available investment tools Characteristics of Hedge Fund Investing Star Fund Manager culture Strategy risk Short risk Leverage Liquidity constraints Limited transparency Total Return: Concentrated portfolio of best company specific ideas Ability to use all available investment tools Market risk reduced/controlled Lower volatility Can hold cash Within the regulations of UCITS

9 Total return positioning Performance & Diversification Correlation with markets (R 2 ) 0 Alpha Absolute return strategies ‘Conventional’ Active Funds Index Funds The Total Return opportunity set - We choose the correlation with the market 100 Unconstrained investing using a broad range of investment tools Concentrated in our best company specific ideas Flexible market exposure

10 The building blocks for managing total return funds Agnostic to choice of investment assets Top down/bottom up Identify sources of return –sectors –regions/countries –themes –equities –bonds –convertibles –currencies... effective management of downside risk Active risk control –economic factors –security specific factors –market and security exposures –diversification –“Value at Risk” –stress testing –hard controls

11 Allocation to different asset classes * Money Market Funds and FRN ** Equity specific risk from stock and convertibles

12 Recommended objectives and portfolio characteristics Performance targetCash +3% Benchmark Cash ProcessBottom-up with Dynamic Asset Allocation Alpha SourceBest Investment Ideas Equities0 - 30% Convertible Bonds0 - 50% (part of 30% total equity risk budget) Straight Bonds % Cash % Derivatives Optional, no leverage Expected VolatilityLow Currency HedgingYes A core low risk holding

13 Summary Target capital preservation with a multi-asset approach to get desired asymmetric risk/return profile Top down themes combined with bottom up security selection Alpha combined with modest levels of beta (beta arises solely from active positions, not from benchmarks) Flexible active management Transparency in process and holdings … objective best risk adjusted return

14 Any forecasts or opinions expressed are JPMorgan’s own at the date of this document and may be subject to change. The value of investments and the income from them may fluctuate and your investment is not guaranteed and investors may not get back the full amount invested. Past performance is not a guide to future performance. Exchange rates may cause the value of underlying overseas investments to go down or up. Investments in smaller companies may involve a higher degree of risk as they are usually more sensitive to market movements. Investments in emerging markets may be more volatile than other markets and the risk to your to your capital is therefore greater. Also, the economic and political situations may be more volatile than in established economies and these may adversely influence the value of investments made. Telephone lines are recorded and may be monitored for security and training purposes Olivia Mayell - Client Portfolio Manager, Global Multi Asset Group Tel +44 (0)