Portfolio construction & stocks to watchDate 12 April 2011

2

Disclaimer

The information in this presentation is of a general education nature only. It does not take into account the investment objectives, financial situation or needs of any individual investor. Before making an investment decision we recommend that you consult a professional advisor.

The Bell Direct service is provided by Third Party Platform Pty Limited trading as “Bell Direct” (ABN 74 121 227 905) an Australian Financial Services licensee (AFSL314341) and a Participant of the ASX Limited Group.

3

Portfolio construction

• Choose assets which work together• About managing risk• Valuation, timing important• Have a view

4

The point of diversification

100% Australian

50% Mix

100% International

14.70%

14.90%

15.10%

15.30%

15.50%

15.70%

15.90%

16.10%

14.80% 15.80% 16.80% 17.80% 18.80% 19.80% 20.80%

Return

RiskSource: IRESS, XAO, MSCI 1984- 2001

5

Looking at risk

• Risk as standard deviation or tracking error

6 Return

Pro

babi

lity

9.80%

Average (mean)Mean: 9.8%

Standard deviation: 22.11%

31.95%-12.27%

–1 deviation +1 deviation

–34.39% 54.06%

–2 deviations +2 deviations66%

95%

Distribution returns All ords: 1980-2010

Source: IRESS, XAO, 1980-2011

7 Return

Pro

babi

lity

8.74%

Mean: 9.8%Standard deviation: 22.11%

31.95%-12.27%–34.39% 54.06%

Distribution returns All ords: 1980-2010

Source: IRESS, XAO, 1980-2011

8

Valuations are crucial for performance

Source: IRESS, PERXAO 1981-2011

9

Performance over last 2 years, up 28%

RIO up 85% BXB up 40% WBC up 20% ORG up 10%

WES up 70% ANZ up 40% MQG up 15% WOW up 10%

NCM up 45% SUN up 30% CSL up 15% AMP up 10%

CBA up 40% WDC up 20% FGL up 15% QBE flat

BHP up 40% WPL up 20% NAB up 10% TLS down 10%

Source: IRESS

10

Benjamin Graham

“The individual investor should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for

his purchase .”

11

What affects performance?

• Not return on equity• Not forecasts• Overriding is low valuations measured by P/E• Best return over 3 years is on cheap valuations

12

P/E studies

• Low P/E stocks tend to outperform• Overreaction, Under-reaction and the Low P/E

effectDreman in 1995 paper – Low P/E stocks have greater returns

• Earnings surprises affect stocks in an asymmetric manner which favours “worst” stocks.

• High P/E = overly optimistic• Low P/E = overly pessimistic

13

Sector valuationsSector P/E Sector P/E

Utilities 15 Materials 15

Industrials 21 Telecom 11

Energy 26 Staples 17

Financials 13 Healthcare 20

Consumer Discretionary

14 Property 13

Source: IRESS 31 March 2011

14

What sectors are likely to outperform?

Discount to 2 yr P/E averageMaterials sector: 15% Staples sector 6%Utilities sector – 6%Financial sector -8%

15

Why income investing?

Tax effective

PerformanceASX 200 57.9%ASX 200 AI 148%

Source: IRESS

16

Top 5 industries

Industry Dividend yield

Telecom 9.6%

Utility 7.0%

Financial 5.5%

Staple 4.5%

Source: IRESS

17

Sustainability

Dividend payout ratioIncreasing earningsPast dividend history

18

Scanning for income

Current dividend yield greater 5%5 year dividend growthEPS growth greater than 5%Debt to equity ratio less than 100%Market capitalisation greater than 5 billion

19

Scanning for income

NAB 5.7%

CBA 5.7%

ASX 5.2%

CNA 4.7%

WOW 4.4%

CCL 4.1%

TLS 9.8%

MAP 7.1%

WDC 6.9

CFX 6.8%

QBE 6.8%

SGP 6.1%

Source: IRESS

20

Exchange Traded Funds (ETF)

S&P/ASX High Dividend:IHDSYIRDV

21

Market index – ETF

S&P ASX 200 IOZ, STWS&P ASX 50 SFYS&P ASX 20 ILC

ASX 200 Financials QFNASX 200 Listed Property SLFASX 200 Resources QRE

22

Market index – ETF

23

Growth screening

Strong historical earnings growthStrong forecast earnings growthHigh return on equityCapacity to expand

24

• Quarter earnings positive and growing faster than

a year agolast 3 quartersover the last 3 years

• Annual earnings higher for the past 5 years• Sales growing as fast or faster than earnings• To cut out anomalies, P/E must be 5-43

Growth screening

25

Growth stocks

ASX ASX Limited Diversified financial

SGP Stockland Property development

FRI Finbar Property investment

DTL Data 3 Info tech company

BSA BSA Limited Telecommunications

SGH Slater & Gordon

Legal services

26

Cyclical stocks

• Stocks whose performance is directly affected by the business cycle

• Out-perform in boom times• Under-perform in bust times • Includes Financial, Industrial and Discretionary• Overweight these stocks in good times• Underweight in bad times

27

Currency and commodities move together

28

Summary

• Valuations are fair value• Stock-picking important• Diversification to manage risk