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• FELIX STEPHEN
• Senior Investment Strategist
• Advance Investment Solutions
• April 2008

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Agenda

• What Causes bouts of market turmoil?
• Lessons from history and Japan
• Similarities and differences between the present
  US situation and the Japanese crisis of the
  1980s
• Global economic outlook
• Asset Allocation
• Performance
• Financial market outlook

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What causes bouts of market turmoil?

• Dishonesty
• UK railroad bubble 1840
• Japanese bubble 1980s
• Fraud
• Enron Dec 2001
• WorldCom 2002
• Tyco 2002
• Adelphia June 2002
• Peregrine systems May 2002
• Greed
• Dutch tulip bubble 1637
• Securitisation and Leverage

• Cheating
• Sub-prime mortgages
• Lack of transparency in the financial system
• Negligence
• Lack of supervision
• Accountability and controls Asian crisis 1997
• LTCM, and now (credit/housing)
• Shocks
• Unanticipated events (war, famine, epidemics)

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The inverted pyramid of global liquidity

Source Bank for International Settlements,
Independent Strategy Advance Investment
Solutions.
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Lessons from history and Japan

• Monetary policy during a balance sheet recession
  The fallacy of composition effect and steep
  yield curves
• Fiscal policy during a balance sheet recession
  Upholding domestic aggregate demand
• The need for tax-payer funded bailouts The
  moral hazard argument

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Other initiatives - historical

• The creation of Home Owners Loan Corporation
  June 1933 to 1951
• The handling of the collapse of Continental
  Illinois Bank Trust Co 1984 FDIC Bank of
  America
• The issuance of Brady Bonds March 1989 Latin
  American Banking Crisis Treasury Sec. Nicholas
  Brady
• The creation of Resolution Trust Corporation
  1989 US Savings Loan Crisis
• Japan 1996 the establishment of the Housing
  Loan Administration Corporation and Resolution
  and Collection bank

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Other initiatives - current

• Baling out LTCM and Bear Stearns
• The use of Federal Home Loan Mortgage
  Corporation - 1970 ( Freddie Mac) and Federal
  National Mortgage Association 1938 (Fannie Mae)
  to support mortgage related debt
• Initiatives to re-structure owner occupied home
  mortgages in order to delay or defer foreclosure
  and default
• A steep bond yield curve and low to negative real
  yields
• The possibility of an establishment with deep
  pockets being formed to absorb impaired assets

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Similarities between the present US situation and
the Japanese crisis of the 1980s

• The rapid expansion of credit and real estate
  prices
• Questionable financials and balance sheet
  management
• The narrow concentration of lending to real
  estate
• Rapid innovation in financial markets
• Poor regulation and supervision
• Changes to bankruptcy laws

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Differences between the present US situation and
the Japanese crisis of the 1980s

• Healthy Corporate balance sheets in the US
• Perilous state of US household balance sheets
• Rapid fiscal response from US authorities
• The Feds innovative response
• Weak US dollar vs. strong Yen
• Other measures being deployed by the US to put a
  floor under housing and credit defaults

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The Bank of Japans monetary policy response
Source Bloomberg Advance Investment Solutions.
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The US Federal Reserves monetary policy response
Source Bloomberg Advance Investment Solutions.
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• Global Economic Outlook

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The size of the world - 2006
Source Goldman Sachs, Bloomberg, Advance
Investment Solutions.
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Global industrial productioneconomic
de-coupling is realhowever.
Forecast
EM contributions Asia
EM contributions Asia
EM contributions Americas
Forecast
EM contributions Americas
25
25
Developed world
EM contributions Europe
EM contributions Europe
Developed world
20
Emerging world
20
Emerging world
15
15
10
10
5
5
0
0
-5
-5
-10
-10
Source DataStream, Credit Suisse Advance
Investment Solutions.
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The profile of global growth
Source IMF, Bloomberg, Goldman Sachs, Credit
Suisse Advance Investment Solutions.
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Risks to the current consensus outlook

• A European financial/banking crisis
• Escalation of geopolitical uncertainty
• Sticky, elevated food and energy prices
• Rising headline inflation
• The emergence of a tougher financial regulatory
  regime
• Restricted capital and trade floors due to
  regulation and embargoes or a further
  deterioration in liquidity supplies
• Bottlenecks to deleveraging
• Increased financial market volatility and risk
  aversion
• Central Banks running out of options
• A sharp depreciation of the US dollar

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Early signs of sovereign risk aversion in Europe
Source Bloomberg Advance Investment Solutions.
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The SP 500 Volatility Index (VIX Index)
Source Bloomberg Advance Investment Solutions.
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Headline inflation
Non-cyclical Inflation
Source Credit Suisse Advance Investment
Solutions.
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Things to watch closely

• Where is the liquidity going? Is it going to
  cause another bubble?
• The US Presidential election in November 2008
• The post-election re-alignment of global
  political forces
• Developments in emerging economies
• Japanese initiatives to tackle demographic and
  growth obstacles
• Financial market activities of Sovereign Wealth
  Funds
• The possible regulation of financial institutions
  and markets

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Advance Multi-Blend Balanced Fund Strategic
Asset Allocations 2006 Vs 2007
Source Advance Investment Solutions.
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Strategic Vs Tactical Asset Allocation June
quarter 2008 (Balanced - risk profile)
Source Advance Investment Solutions June 2008
Quarterly Strategy Report.
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Advance Diversified Multi-Blend Performance Vs
Peer Group (All Fund Median)
Source as at 31 March 2008 - Mercer/Morningstar
(before tax and after wholesale management fees).
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Advance single sector Performance Vs Benchmark
March 2008
Source Advance Investment Solutions DataStream.
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Short to medium term market outlook(3 months to
2 years)
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Investor risk appetite and Equity market trends
Panic
Panic
Source Credit Suisse Advance Investment
Solutions
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The Equity market rally to be led by Financials
Source Bloomberg Advance Investment Solutions
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US Index Outlook
Dollar Index spot
Source Bloomberg, DataStream Advance
Investment Solutions.
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Our strategic initiatives pipeline

• The introduction of an active currency overlay
  strategy on International Equities (Tuesday, 8th
  April 2008)
• Blending of Domestic and International Fixed
  Income portfolios
• Selective introduction of Global Equity
  Strategies
• Selective introduction of global absolute
  /alternative strategies
• The creation of a Beta Neutral absolute return
  fund

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Our strategic initiatives pipeline

• Dishonesty has been discovered at the tail end of
  just about every bubble ever recorded. At the
  core of every bubble is immoral human behaviour
  that is likely to be repeated over and over again
  in the future.
• Efficient portfolio diversification and nimble
  portfolio management, although not the perfect
  answer, offers the best solution towards
  capital/wealth preservation and enhancement.
• Thank you

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