“Whatever it Takes”Over the past couple of weeks we have seen a very strong and very welcome rally in equity markets.

On 25 July, the FTSE 100 closed below 5,500. On 9 August, it closed above 5,850, a rally of over 6% in little more than two weeks.

Much of this has been sparked by a change in rhetoric in Europe. The phrase “whatever it takes” has become the new European catchphrase from politicians and from the European Central Bank. Once again, it is what is being said as much as what is being done, that is driving markets.

Changes to discretionary portfoliosWith markets rising, we have taken the opportunity to make some changes to your portfolios.

Volatility Trading

We have sold the FTSE tracker that we bought when markets initially fell back in April. For most discretionary clients, we bought the HSBC FTSE Allshare Index fund when markets were around 5,630.

This was sold on 10 August at around 5,840. The actual gain on the fund in our standard portfolios was approximately 3.75%.

We felt it was time to reduce risk as markets have moved upwards quite quickly, and we are concerned they could fall back again in the short term.

This is the latest round of volatility trading we have carried out periodically over the past 18 months. The previous rounds are detailed below:

16/03/2011 - 07/07/2011

03/08/2011 - 21/02/2012

08/08/2011 - 18/10/2011

25/11/2011 - 01/12/2011

Return to date

HSBC FTSE All Share

7.81% 5.35% - - 13.16%

HSBS FTSE 100

- - 3.97% 7.29% 11.26%

Just prior to our first purchase, the FTSE 100 was at over 6,000 (on 3 March 2011). This volatility trade has been a way to try and make money in a sideways (actually slightly falling) market, and we are pleased that it has worked well to date.

Using the proceeds from this trade, in our model portfolios we are buying a new alternative equity fund, Troy Asset Management’s Trojan fund. This fund is relatively defensive and in the past has done well in falling markets, whilst providing some very good long term returns.

The fund has made money in every calendar year since its launch. Of course, there is no guarantee they can continue this impressive track record, but this is the sort of consistency of returns we like to see in this asset class.

We still hold around 5% in “tactical cash” for most clients, which means that if markets do drop back we are able to buy back into equities at a lower level.

Investment Newsletter August 2012

Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Services Authority. Equilibrium Asset Management is entered on the FSA register under reference 452261. The FSA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission

Investment Newsletter | August 2012

Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Services Authority. Equilibrium Asset Management is entered on the FSA register under reference 452261. The FSA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission

Other Changes

We have also recently sold the Midas Balanced Income fund, an alternative equity fund that has been underperforming for a while. We generally switched this into our UK Large Companies portfolio.

The Midas fund was our most adventurous alternative fund, whilst the UK Large funds are our most defensive equity holdings. The change in risk is therefore relatively minimal.

We want to see a high level of dividend income from our holdings at the moment, which provides some cushion against further volatility, as well as a good source of returns in its own right.

Finally, we have also used some of the cash we raised by selling out of property funds, to purchase additional fixed interest.

Whilst we don’t expect returns from fixed interest to be fantastic, we believe it should beat cash significantly.

Defined Returns UpdateThe Defined Returns products we bought in October last year should “kick out” in October this year, provided markets don’t fall back dramatically.

The Barclays product was purchased on 6 October 2011 and it will end, paying a 12.75% return, if the market is above 5,291 on 6 October 2012.

The HSBC product will end, paying 11.25%, if the FTSE is above 5,399 on 10 October. The Credit Suisse product will pay 11.05% if the FTSE is above 5,403 on 13 October.

If the products do not kick out, they will instead roll on another year and the same test is carried out in October 2013. There are six chances to get a return, and each time the return you get is multiplied by the number of years held.

However, if the FTSE has never risen at any anniversary then clients will get their money back unless it is down by more than 50% at that point. In that instance, clients lose 1% for every 1% the FTSE has fallen by.

Again, we think these products are a great way to make money in a sideways market.

Should they kick out in October, we may well look to invest in some similar products again. These will be unlikely to pay quite such attractive rates, since last October there was much higher perceived risk in banks. However, they will have a similar structure.

We have carried out some analysis of past returns of the FTSE 100 Index to look at how frequently we would have got our money back in year one, year two etc, how many times we would have just got our money back, and how many times we would have made a loss. The results are shown below:

In the past, we would have got our return in year one 78% of the time. Only 4% of the time would we not have made a gain. There have been no instances of capital losses.

Of course, this is just historic data and it may not be repeated in the future, but it shows that the risk of loss due to the equity link of these products, is relatively low.

However, the real risk of these products is default risk. If the bank goes bust, we lose our money and the Financial Services Compensation Scheme does not apply, as those who held products backed by Lehman Brothers found out to their cost.

We therefore are very choosy about which banks we use, and would rather get a lower return from a more secure bank, than go for a very high return from a risker institution.

We remain very positive about equity markets in the long term and these products are an innovative way to profit but without taking the same level of market risk as buying equities directly.

Mike Deverell Investment Manager

* Source: Thomson Reuters Datastream. Analysis of each six year period of the FTSE 100 index beginning each month,

backtested to 1 February 1978.

Investment Newsletter | August 2012

Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Services Authority. Equilibrium Asset Management is entered on the FSA register under reference 452261. The FSA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission

Equilibrium Asset Management LLP Brooke Court Lower Meadow Road Handforth Dean Wilmslow Cheshire SK9 3ND United KingdomVisit us at www.eqasset.co.uk t : +44 (0)161 486 2250 f : +44 (0)161 488 4598 e : askus@eqasset.co.uk

78.2%

7.7%

2.0%4.7% 2.7% 0.7%

4.0%0.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

KO after Year 1 KO after Year 2 KO after Year 3 KO after Year 4 KO after Year 5 KO after Year 6 No Capital Gain Capital Loss

Defined Return Pay-out Analysis: FTSE 100 Autocall with 50% barrier*

These represent Equilibrium’s collective views. There are no guarantees. We usually recommend holding at least some funds in all asset classes at all times and adjust weightings to reflect the above views. These are not personal recommendations so please do not take action without speaking to your adviser.

General Economic OverviewEuropean debt issues have abated somewhat but have not gone away, and we expect these to continue to weigh on markets for some time.

Global economic growth is muted with UK in recession, and Europe likely to be in recession when the next figures are announced. We are expecting central bank stimulus to continue until stronger growth returns.

Inflation is falling back globally, however stimulus could eventually lead to this rising significantly.

Market Views | August 2012

Equity Markets

We remain very positive taking an 18 month view, based on valuations such as the Price/Earnings ratio. However, with recent recovery we could easily see some short term moved downwards. We particularly favour the UK market although most markets show some value.

Fixed Interest

Interest rate risk has receded for the short term but inflation could hurt bonds in the long term. Corporate Bonds still provide reasonable yields and could do ok in this environment. We are avoiding Gilts whose values have been inflated due to recent risk aversion.

Commercial Property

Whilst the rental yield on commercial property remains attractive at over 6%, this is diluted by high levels of cash in property funds. We can foresee some capital losses although we believe these will be small and that overall returns will probably be positive, but low.

Residential Property

We believe prices are likely to remain flat over 18 months.

Cash

With interest rates remaining at record lows, returns on cash could remain below average for some time. However, there is a short term safe haven appeal.

Balanced Asset Allocation

For a typical balanced portfolio we are overweight equity and cash, neutral fixed interest and hold no property.

A neutral score (=) means we expect the asset class to move in line with our long term assumptions: 10% pa for equity, 7% for property, 6% for fixed interest, 5% for residential property, and 3% for cash. A +5 score means we think the asset class could outperform by 50% or more. A -5% means we think it could underperform by 50%. A negative score does not necessarily mean we think the asset class will fall.

+4

=

-5

-5

-5

Asset class key+ positive - negative = neutral (normal behaviour)

+5 strongly positive-5 strongly negative

Outlook