presentation - Legal & General

1PASSIVEINVESTING -Going under thebonnet (hard drive)!17 JULY 2013This is not a consumer advertisement. It isintended for professional financial advisersand should not be relied upon by privateinvestors or any other persons.

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 2LEARNING OUTCOME.• Understand regulatory pressures on pure passive investmentiisolutions• Be able to identify what markets/conditions suit a passiveiistrategy• See how passive strategies work in the Pensions, InvestmentiiBond (Onshore and Offshore) worlds• How simple blending can offer clients greater returns andiiadviser greater levels of income

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 3AGENDA.BackgroundRDR impactDoes market efficiency dictate investment stylePortfolio Planning application

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 4BACKGROUND.

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 5INDEX GROWTH.£57.4bnUK Tracker FUM88Tracker funds (IMA)8.7% UKTracking market share

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 6LEGAL & GENERALINDEX AND ACTIVE CREDENTIALS.• Largest owner of UK shares• UK’s largest manager of UK sourced pension assets.£440,000£400,000£360,000354,000371,200405,000£320,000£280,000£240,000£200,000£160,000£120,000£80,000£40,000£057,26443,44331,014 31,36135,63326,32322,13518,601 18,086 19,86612,413 13,275 15,767 21,308 30,94119931994199519961997296,64982,534232,969204,328315,101162,000147,000125,000264,228106,79788,65271,003162,47966,681135,33751,282110,804 113,115 113,992104,19543,290228,500 224,200 243,000214,115208,30435,891 34,860 37,13776,427 36,378161,966175,576137,64731,894111,19792,04767,817 74,913 78,255 76,85544,5331998Active FundsIndex Funds19992000Source: LGIM April 2013. Data correct to each year end 31 December200120022003200420052006200720082009201020112012

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 7HANDSET QUESTION.Typically what % of clients investments, across all taxwrappers, do you place in to passive funds?a) 0 - 10%b) 10 - 25%c) 25 - 50%d) 50 - 75%e) 75 - 100%

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 8AGENDA.BackgroundRDR impactDoes market efficiency dictate investment stylePortfolio Planning application

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 9BACKGROUNDRDR.

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 10BACKGROUNDRDR.

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 11AGENDA.BackgroundRDR impactDoes market efficiency dictate investment stylePortfolio Planning application

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 12MANAGING ASSETS.Is it possible tooutperform the market ?YESNOActiveIndex

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 13ACTIVE AND PASSIVECONCLUSION.• Index– No nasty surprises– Lower charges– M&A and takeovers– No star fund manager– Cannot take bets• Active– Flexibility– Reactive (news/trends)– Fund Manager’s experience andchoice– Picking the winners• Balanced approach• Black and white rarely succeed– Need for flexibility

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 14APPROACHES TO ANALYSIS.• Fundamental analysis• Technical analysis• Random Walk Theory

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 15FUNDAMENTAL ANALYSISTHREE LEVELS.EconomicIndustryCompany

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 16FUNDAMENTAL ANALYSISTHREE LEVELS.• Focus on economic indicators• Interest rates• GDP growth rate• Inflation• Purchasing power• Economic cycles• Sector rotationEconomicIndustryCompany• Individual stocks• Financial data

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 17TECHNICAL ANALYSIS.AdvantagesFocus on pricePictorial representationEasy to understandConcentrates on “whento buy and sell”DisadvantagesTechnique open tointerpretationPersonal prejudiceTime lagInvestment timing

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 18FUNDAMENTAL OR TECHNICALANALYSIS?

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 19RANDOM WALK THEORYTHE EFFICIENT MARKET HYPOTHESIS.Efficient Market Hypothesis(EMH)formulated by Eugene Fama‘At any given time, prices fully reflectall available information on aparticular stock and/or market. Thus,according to the EMH, no investorhas an advantage in predicting areturn on a stock price since no onehas access to information notalready available to everyone else’

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 20RANDOM WALK THEORYSOME THOUGHTS.Price movements do notfollow any trends orpatternsBuy and hold strategyoutperforms most attemptsto time the marketPrices move in arandom fashionFuture news is randomand unknowableNo way to profit frominefficiencies

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 21EFFICIENT MARKET HYPOTHESIS.

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 22EFFICIENT MARKET HYPOTHESIS.STRONG FORMAll information in the market, whether public or private, is accounted for ina stock price. Not even insider information is of value.SEMI-STRONG FORMAll public information is calculated into a current stock’s share price.Neither fundamental nor technical analysis is of value.WEAK FORMAll past prices and data of a stock are reflected in today’s price. Therefore,technical analysis cannot be used to predict and beat a market.

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 23EFFICIENT MARKET HYPOTHESIS.STRONGthe market's pricing of anitem is the best estimateof its valueWEAKprices have no memory andyesterday is unrelated totomorrow

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 24EFFICIENT MARKET HYPOTHESISASSIMILATING INFORMATION.

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 25REACTION TO NEW INFORMATION.

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 26REACTION TO NEW INFORMATION.

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 27MANAGING ASSETS.Does the Random WalkTheory work ?YESNOIndexActive

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 28MANAGING ASSETS.Is it possible tooutperform the market ?YESNOActiveIndex

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 29MARKET EFFICIENCYNORTH AMERICA.S e c t o r A ve1yrM S C I U S A TR GB P0% 5% 10% 15% 20% 25%US equity marketappears to be veryefficient5yrsS e c t o r A v eM S C I U S A TR GB P0% 20% 40% 60% 80%Style – Index10yrsS e c t o r A veM S C I U S A TR GB P0% 30% 60% 90% 120%Source: Lipper for Investment Management. Pastperformance is not a guide to future performance.MSCI USA TR (GBP) and and Sector Ave bid tobid basis, net income reinvested. 30/4/12 – 30/4/13,30/4/08 – 30/4/13, 30/4/03 – 30/4/13

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 30MARKET EFFICIENCYJAPAN.1yrSector AveFTSE Japan GBP0% 5% 10% 15% 20% 25% 30%Japanese equitymarket appears to beinefficient in short tomedium termSector Ave5yrsFTSE Japan GBP0% 5% 10% 15% 20% 25% 30% 35%Style – Active short tomedium term, butindex longer termSector Ave10yrsFTSE Japan GBP0% 20% 40% 60% 80% 100% 120%Source: Lipper for Investment Management. Pastperformance is not a guide to future performance.FTSE Japan TR GBP and Sector Ave bid to bidbasis, net income reinvested. 30/4/12 – 30/4/13,30/4/08 – 30/4/13, 30/4/03 – 30/4/13

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 31MARKET EFFICIENCYUK.1yrS e c t o r A v eF TS E A ll- S ha re TR0 % 10 % 2 0% 3 0% 40 %UK equity marketappears to befairly efficientmedium to longterm5yrs10yrsS e c t o r A v eF TS E A ll- S ha re TR0% 10 % 2 0 % 3 0% 4 0 %S e c t o r A v eF TS E A ll- S ha re TR0 % 4 0 % 8 0 % 12 0 % 16 0 %Style – Index maybe best medium tolong term butactive over shorttermSource: Lipper for Investment Management. Pastperformance is not a guide to future performance.FTSE All-Share TR and Sector Ave bid to bid basis,net income reinvested. 30/4/12 – 30/4/13, 30/4/08 –30/4/13, 30/4/03 – 30/4/13

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 32MARKET EFFICIENCYUK SINCE 31 DECEMBER 1985.Sector AveFTSE All-Share TR0% 200% 400% 600% 800% 1000% 1200%The very long term would suggest Index offers best valueSource: Lipper for Investment Management. Past performance is not a guide to future performance. FTSE All-Share TR and Sector Ave bid to bid basis, net income reinvested.31/12/1985 – 30/4/13

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 33MARKET EFFICIENCYSUMMARY.Sector1 yrStyle5 yrsStyle10 yrsStyleAsia Pacific Ex JapanA/IIIEurope Ex UKAA/IA/IGlobalIIIEmerging MarketsA/IIIJapanAAIUSIIIUKAA/IISource: Lipper for Investment Management. Past performance is not a guide to future performance. All indexes and Sector Avebid to bid basis, net income reinvested. 30/4/12 – 30/4/13, 30/4/08 – 30/4/13, 30/4/03 – 30/4/13

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 34AGENDA.BackgroundRDR impactDoes market efficiency dictate investment stylePortfolio Planning application

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 35BLENDING.• Reducing portfolio costs• Managing risk• Exposure to inactive markets• Reducing volatility

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 36TRACKER AVAILABILITYINVESTMENTS – ANNUAL CHARGES.FundCollectivesAMCPortfolioBondSelectPortfolio BondSelect Portfolio Bond(Wealth Managers)UK Index0.15%1.3%0.33%0.25%US Index0.15%1.3%0.44%0.26%Europe EX UK Index0.15%1.3%0.48%0.28%Japan Index0.15%1.3%0.46%0.32%Pacific (ex Japan) Index0.15%1.8%0.48%0.25%Global 100 Index0.25%1.3%0.77%0.35%Sterling Corporate Bond Index0.15%1.3%N/AN/AGlobal Emerging Market Index0.25%N/AN/AN/AUK 100 Index0.15%N/AN/AN/AAll Stocks Gilt Index0.15%1.3%N/AN/AAll Stocks Index Linked Gilt Index0.15%1.3%N/AN/AIndex funds could lower overall averageportfolio costs in core/satellite approach

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 37WRAPPER IMPACTPRICING ANALYSIS.Amount £Onshore BondOffshore Bond(Initial)Offshore Bond(T’ Life)£75,000£2,625£6,310£6,8735 Yr£150,000£250,000£5,250£8,750£9,010£11,735£9,010£11,310£500,000£17,500£21,110£21,360Amount £Onshore BondOffshore Bond(Initial)Offshore Bond(T’ Life)£75,000£5,250£10,370£13,74510 Yr£150,000£250,000£10,500£17,500£15,020£17,745£18,020£24,720£500,000£35,000£36,220£42,720Source: L&G own products (Select Portfolio Bond Wealth Managers, International Portfolio Bond) April 2013

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 38TRADITIONAL FUND BLENDING.FundInvesco Perpetual IncomeArtemis IncomeNeptune IncomeAll stocks bought with the intention ofproducing capital profitsAim to deliver above average yield with L-T capital appreciationEach stock meets both growth andyield criteria of the fundMethodologyYield created by buying companies that areexpected to increase their dividends over 3yrsOverseas weighting mainly OECDPortfolio diversified across from micro tomega caps (c.80%)Overseas exposure low & normally inEuropeStocks reflect best qualifying globalsector ideas in steady eddies,recovery and tactical including EMexposureStyleTraditionalBarbellGlobalMarket CapPredominantly large-capLarge, mid and small-capLarge-cap bias, no small-capSectorsTypically more defensiveMore aggressiveDictated by market cycle &global sector analysisHoldingsHigh (70+)High (70+)Low (33)FeesIncomeIncomeCapitalYield4.2%5.1%4.9%

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 39TRADITIONAL FUND BLENDING.FundInvesco Perpetual IncomeArtemis IncomeNeptune IncomeAll stocks bought with the intention ofproducing capital profitsAim to deliver above average yield with L-T capital appreciationEach stock meets both growth andyield criteria of the fundMethodologyYield created by buying companies that areexpected to increase their dividends over 3yrsOverseas weighting mainly OECDPortfolio diversified across from micro tomega caps (c.80%)Overseas exposure low & normally inEuropeStocks reflect best qualifying globalsector ideas in steady eddies,recovery and tactical including EMexposureStyleTraditionalBarbellGlobalMarket CapPredominantly large-capLarge, mid and small-capLarge-cap bias, no small-capSectorsTypically more defensiveMore aggressiveDictated by market cycle &global sector analysisHoldingsHigh (70+)High (70+)Low (33)FeesIncomeIncomeCapitalYield4.2%5.1%4.9%Perf 1 Year11.0%5.2%1.0%Perf 3 Years57.8%62.0%60.5%

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 40FUND BLENDING – INDEX STYLE.Schroder Income MaximiserJupiter Merlin IncomeStandard Life Inv GARSM&G Property PortfolioCazenove UK Smaller Co’s

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 41FUND BLENDING – INDEX STYLE.Schroder Income Maximiser• Index funds – dividends?• Sells growth for incomeJupiter Merlin Income• Reduces portfolio cost• Complimentary income storyStandard Life Inv GARS• Reduces portfolio cost• Enhances UK exposureCazenove UK Smaller Co’s• Index dominated by large cap• Offers balance and exposureM&G Property Portfolio• No Direct commercial property index fund• Bricks & mortar rather than equities

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 42QUESTION.How many styles arethere of passiveinvesting?

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 43Full replicationStratified SamplingOptimisationSynthetic replicationPragmatic replication

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 44EQUITY TRADING EXAMPLEFACEBOOK.

PASSIVE INVESTING – GOING UNDER THE BONNET (HARD DRIVE)! 45CONCLUSION.Supporters– RDR– MediaInfluencing decisions– Market efficiencies– Tax wrapper– Passive investing styles• Equities• Bonds– Fund blendingFLEXIBILITYProviding adviser income flexibility, in conjunction with clientportfolio cost reductions, whilst maintaining key market exposure

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