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16/01/2013 Investment Presentation 1/18 An Explanation Of How To Invest For The Best Returns

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A Swallow Financial Planning Explanation of How to Invest for the Best Returns

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Page 1: Website presentation 16.01.2013

Investment Presentation16/01/2013 1/18

An Explanation Of How To Invest For The Best Returns

Page 2: Website presentation 16.01.2013

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Within this presentation we will Explain:

• Why we believe clients should invest in asset backed investments if they want the best long term returns.

• Why some asset classes tend to outperform others.

• Why we believe it is essential to diversify your investments.

• Why risk and return are always related and why we believe it is imperative to keep within your comfort zone.

• We will show that “risk” reduces over time and we will explain why we prefer passive funds.

Page 3: Website presentation 16.01.2013

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PreambleThroughout these notes we have tried wherever possible to use 20 years of data, starting in November 1992 and finishing in November 2012.

In November 1992:

• Inflation was standing at 3.02%

• Bank base rate was at 6.88%

• The FTSE 100 was at 2,759

In November 2012:

• Inflation is at 2.98%

• Bank base rate is at 0.5%

• The FTSE 100 is at 5,867

Back in 1992 if you used 10 year GILTS to generate £10,000 of income you would need (ignoring costs) £120,192. To achieve the same income using 10 year GILT yields in November 2012 you would need £502,513. This is equivalent to an annualised growth rate of 7.41%. Had the FTSE 100 grown by the same sum it would now be at 11,500.

(Bank of England, FTSE and Wren Research statistics).

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Why Invest in Assets Rather Than Cash?Over the longer term assets tend to perform better than cash or inflation:

19931995

19971999

20012003

20052007

20092011

0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

Asset Growth November 1992 to November 2012

FTSE 100

International Equities

Emerging Markets

Property

Global Bonds

Cash

RPI

Year

To

tal

Gro

wth

Page 5: Website presentation 16.01.2013

0% 5% 10% 15% 20% 25% 30% 35%0%

2%

4%

6%

8%

10%

12%

Standard Deviation Chart November 1992 - November 2012

FTSE 100

UK Small

International Equities

Emerging Markets

Property

Global Bonds

Cash

Annualised Standard Deviation

An

nu

alis

ed

Re

turn

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Are Some Asset Classes More Volatile (Risky) Than Others?

So UK Small has an average return above 10% but in any one year this varies between

-13.2% and + 33.6%. Cash averages at 4.4% but in any one year this varies between 2.2% and 6.6%.

Page 6: Website presentation 16.01.2013

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Asset Classes Tend to Outperform At Different Times

Empirical evidence has shown that if you combine asset classes the end result is greater than that of the composite parts. By choosing uncorrelated assets you can achieve reasonable returns in most markets as when some assets are going down, others normally rise.

A correlation of 1.0 indicates a perfect association, a correlation of 0 indicates no relation & a correlation of -1.0 is a perfect disassociation

12/1992 to 11/2012

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Different Asset Classes For Different RisksAt Swallow Financial Planning we categorise clients into one of 7 risk categories. These are based on your FinaMetrica score (1 to 100). If you want to know how we do this, please refer to our Risk Profile notes.

So the most cautious investor (i.e. with a FinaMetrica score of less than 20) is the wary one. On the other hand, the high risk investor (with a score of 90 +) is “Gung Ho”. holding the most volatile assets.

Investment option

Investor Type

FIXED/ CASH PROPERTY EQUITIES TOTAL

UK Intl UK Intl UK International

Core Value Small Main Markets

Emerging Markets

1 Wary 90.00% 10.00% - 100.00%

2 Cautious 60.00% 15.00% 10.00% 5.00% 10.00% - 100.00%

3 Prudent 30.00% 20.00% 15.00% 5.00% 15.00% 5.00% 10.00% 100.00%

4 Balanced 15.00% 10.00% 15.00% 10.00% 15.00% 5.00% 5.00% 20.00% 5.00% 100.00%

5 Adventurous 5.00% 5.00% 15.00% 5.00% 20.00% 10.00% 5.00% 27.50% 7.50% 100.00%

6 Speculative - - 10.00% 5.00% 23.00% 10.00% 10.00% 27.00% 15.00% 100.00%

7 High Risk - 10.00% 20.00% 20.00% 30.00% 20.00% 100.00%

Page 8: Website presentation 16.01.2013

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0%

100%

200%

300%

400%

500%

600%

700%

High Risk Portfolio v Asset Class November 1992 to November 2012

High Risk

FTSE 100

UK Value

UK Small

International Equities

Emerging Markets

Year

To

tal

Gro

wth

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Combining Assets Creates Better Returns With Reduced Volatility

The High Risk portfolio contains the other asset classes but has beaten all but UK Value and UK Small whilst generating far less volatile returns (total return over 20 years: 466%)

Page 9: Website presentation 16.01.2013

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120%

100%

200%

300%

400%

500%

600%

700%

800%

900%

Prudent Portfolio v Asset Class November 1992 to November 2012

Prudent

Global Bonds

Property

FTSE 100

UK Value

International Equities

Year

To

tal

Gro

wth

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Combining Assets Creates Better Returns With Reduced Volatility

Again the Prudent portfolio contains the other asset classes but has beaten all but Property and UK Value whilst generating far less volatile returns. (total return over 20 years: 340%)

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Different Asset Classes Reduce Risk

Risk, in investment terms, is usually different from what a lay person considers as risk. Most lay people consider a risk as the risk of losing the physical value of their money. In investment terms is not the physical risk to the initial capital value, but rather it is the risk the investment will perform better or worse than expected. This is also called the standard deviation to the norm. If we look at the returns for the above asset classes over 20 years we have a table as follows:

As you can see, the use of a mixture of assets overall generates better returns at lower risk than does an equivalent asset class.

Page 11: Website presentation 16.01.2013

Wary

Cautious

Prudent

Balanced

Adventurous

Speculative

High R

isk

40 ( .00%)

30 ( .00%)

20 ( .00%)

10 ( .00%)

-

10.00%

20.00%

30.00%

40.00%

50.00%

Highest and Lowest returns, Swallow Portfolios November 1992 to November 2012

Average

Portfolio

Ret

urn

16/01/2013 Investment Presentation 11/18

Wary has an average return of 4.8% with a best return of 8.6% and a worst return of 0.9%, whereas Speculative has an average return of 10.2% however its best return was 36% and it’s worst return in a year was -35%. If you don’t like the risk, choose a lower long term return.

Better returns mean higher volatility

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The Longer The Term The More Certain The Return

If you look at the best and worst returns from a selection of our recommended portfolios you see the following:

Best / Worst Returns

Annual: 12/1992 - 11/2012; Default Currency: GBP

Wary Prudent Balanced High Risk

If you don’t need your money for 10+ years you can affird to take more risk knowing the return is more likely to be as expected.

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Passive Funds Will Generate Better ReturnsWe explain our approach to investments in “Our Approach to Investment Management” notes. In brief, we believe investment returns in the future will (on average) reflect the inflation rate. If Inflation is low then an average passive fund with charges of 1% is bound to out perform an average managed fund with charges of 2.5%.

£10,000 at a gross annual return of 5% over 20 years will grow to £26,500 with no charges, £21,911 in a passive fund or £16,386 in an active fund meaning the active fund has to grow by 30% better than the index just to keep pace with it.

Active Versus Passive Investment: The Effect of Charges

£10,000

£15,000

£20,000

£25,000

£30,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Years

Va

lue

No charges

Passive

Active

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Sector Total Number of Funds

Funds producing above average returns for:

31st December 2007

3 consecutive years 5 consecutive years

Funds % Funds %

UK All Companies 346 38 10.98% 13 3.76%

UK Corporate Bond 121 15 12.40% 5 4.13%

North America 90 10 11.11% 1 1.11%

Europe (x UK ) 110 14 12.73% 3 2.73%

Pacific (x Japan ) 75 13 17.33% 2 2.67%

Japan 63 3 4.76% 0 -

(Source: Lipper Hindsight growth total return, default tax rate, in £ to 31/12/2007)

This schedule indicates the percentages of funds over 5 years which generate above average performances. With less than 5% of managed funds achieving a consistent return better than average, why take the risk?

Managed Funds Do Not Beat The Index

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Do Not Time The Market!

The Graham and Campbell study of 237 market timing newsletters showed that less than 25% of the “experts” predicted the right outcome once, let alone consistently. If we cannot get the asset timing right, we believe clients should remain invested in their optimum asset classes.

FTSE 100 UK Value UK Small International Equities Emerging Markets Property Global Bonds Cash

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SummaryWithin this presentation we have tried to show in graphical form why we believe clients should have a diverse range of investments set up according to how much they are prepared to see the capital value of their investments fluctuate in the short term. We have also tried to explain why you should choose different sectors of the market which may well perform better than others over the longer term. Finally we have touched on our reasons for using passive rather than active fund managers.

So looking forward, what might the circumstances we find ourselves in now suggest that the next 20 years might bring? Well firstly fixed interest rate investments can only go one way. If the underlying interest rates now are effectively 0%, then the yield over the next 20 years can only go up (as most institutions and individuals will not want to pay people to hold your money it seems unlikely that interest rates will go significantly into the negative!). If yields go up, the capital value of fixed interest securities (i.e. Government gilts and corporate bonds) will fall.

One could also argue that the long term outlook for commercial property is also somewhat subdued. If interest rates do rise then there will be some narrowing of the very wide risk margins we see now (typically yield to value are in the region 8% to 10% at present) but eventually the capital values will fall. Against this, however, there is the influence of new build costs to consider so there is always an element of inflation proofing over the longer term.

The value of an equity is the value of its dividends over the life of the share, so if the outlook for certain markets is uncertain (i.e. the gradual lowering of western standards of living in comparison with those in developing countries) then one needs to be circumspect over where one invests on a macro level at least.

But no one know what is going to happen! One thing we can be certain of is that if you want your investments to keep up with and hopefully beat inflation you will have to accept risk.

Andrew Swallow January 2013.

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Disclosure and Fund Information

The graphs and schedules within this presentation would not have been possible without access to the Dimensional Fund Advisors Ltd back tested database of funds. The funds we have used were somewhat restricted due to the desire to show 20 years performance (many indices are only 5 to 10 years old). The specific indices we have used are:

Citigroup World Government Bond Index 1-30+ Years (hedged)Dimensional Global Short-Dated Bond Index (gross of fees, hedged in )Dimensional Small Cap IndexDimensional Value IndexFTSE 100 IndexFTSE All-Share IndexMSCI Emerging Markets Index (gross div.)MSCI World ex UK Index (gross div.)S&P Global Property Index (gross div.)S&P Global REIT Index (gross div.)One-Month Treasury BillsRetail Price Index

In addition we have used Bank of England data concerning interest rates and related issues. Wherever possible we have included dividend income in the returns so as to compare all investments on a like for like basis.

• We have taken no account of charges (except in our comments re active fund managers) although clearly charges have a major effect on long term performance.

• We have taken no account of taxation within our figures. At present in the UK capital gains tax is at a maximum of 28% and income tax is at a maximum of 62%. This makes a colossal difference to the end return on your investments.

• Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

And finally, whilst we have tried our best to ensure that we have presented you with an accurate and well reasoned presentation any advice we give to clients must be client specific and not of a generalised nature. E.&.O.E.