Contents

1. Contents 2000 review Two speeds - one world The technology crash Economic Outlook 2001 outlook Long term scenario USA Europe Japan Regional valuation Sector valuation Investment Outlook Investment behavior Investor strategy Investment themes Sector allocation Equity Research - Contents 1

2. 2000 review two speeds one world The new Paradigm?... 2000 marked a year that tested the New Paradigm. In a presidential election year where the economy turned out to be stronger than many expected, where earnings beat most estimates, inflation remained subdued, long term rates declined and mutual fund inflows reached record levels, most investors expected the markets to move up. In fact, most major investment banks predicted a positive year for both the broad market and technology. A tale of two economies… The nineties could be described as a decade of relatively strong economic growth, the acceleration of 1998/99 however was due essentially to a boom in technology led capital investment. The Internet boom, coupled with Y2K upgrade mania, caused investment in new technology to skyrocket and the US economy benefited from increased productivity and exponential growth in the “new economy”. For the “old economy” companies though, it was for the most part, business as usual. Proof of the technology effect can be seen in the top graph on page 4, showing the % contribution of technology CAPEX to GDP growth (remember technology fixed investment represents only 7% of total GDP, yet at one point- June 1999 - it accounted for 55% of GDP growth). While they enjoyed the upswing in consumer sentiment and the up move in the economic cycle, these traditional industries did not experience growth anywhere near that of the technology industries. Real earnings at the consumer level and corporate level had been in decline since 1998 and the stock market, usually considered a leading indicator, showed scant sign of growth in 1998, 1999 and early 2000. The S&P index, ex- technology, was in fact up a mere 0.30% from 31.12.97 to 10.03.00 (the top of the technology sector). The technology sector however enjoyed all of the leverage that a financial bubble could provide. From excessively cheap capital to ever climbing equity markets, the growth in earnings and sales looked almost too good to be true. Business in the early part of 2000 continued to roll in unabated, a left over of spending on Y2K, but as it disappeared so did the good times. It started with e-commerce, moved into telecomm services and finished with equipment companies. The market followed, with the most significant correction ever seen in the technology sector, plunging the US economy into what may become a prolonged period of economic indigestion. 2

3. Technology % of Non Residential Fixed Investment* 49% 47% 45% 43% 41% 39% 37% 35% 98 Q1 99 Q2 Q3 Q4 Q1 00 Q2 10% 8% 6% 4% 2% Personal Income 1991 to 2000* 0% Jul-91 Jul-93 Jul-95 Jul-97 Jul-99 Greenspan - Old Tools, New problem... The US economic boom that had been in place for over 34 consecutive quarters came to resemble two trains running on parallel tracks - one old and one new - rather than the homogeneous economic growth we had come to know. At the central bank level however, there was concern that this growth could get out of hand, leading to a classic boom and bust cycle. Lacking the precision tools required, the fed set out to slow the economy as it had in the past, by raising rates. Unfortunately the “new economy” felt little impact from the rate hikes which started in mid 1999. With very little debt to speak of, most technology companies had relied on capital markets and Venture Capital funding to finance their working capital needs. The rate hikes and subsequent increase in credit spreads and energy costs succeeded simply in slowing down the “old economy” sectors, which were operating in a relatively slow growth environment already. Greenspan’s only real weapons against the new economy were his words. He tried to talk down the market and limit the “irrational exuberance” as he termed it, which was creating a bubble in the markets. As the technology sector accelerated its upward move, the individual investor became more involved. Personal savings rates in late 1999 and early 2000 turned negative as individuals saved less, betting that market returns would boost their earnings and net worth. Had the markets simply moved sideways from mid march, the consumer and the economy would likely have escaped a serious slowdown. However rather than predicting the slowdown, the Nasdaq crash probably caused it. It impacted the already weakened consumer, and caused the driving sector of the economy to come to a screeching halt. The spill over of the negative wealth effect onto consumer sentiment, and therefore demand for the output of industrial production, was especially acute. 3

4. S&P 500 Performance* 1997 1998 1999 2000 to March 2000 full year Technology CAPEX % contribution to GDP Growth* 80% 55% 48% 60% 40% 36% 32% 29% 31% 26% 40% 26% 18% 11% 20% -36% S&P Technology S&P ex-technology 0% -20% -40% Mar-98 Sep-98 Mar-99 Sep-99 Mar-00 Sep-00 80% 60% 40% 20% 0% -20% -40% Markets - Old vs. New... It was a year of significant sector rotation in the US, where in the first three months Technology stocks boomed, while the “old economy” sectors faltered badly. During the first technology correction (march to may), these sectors picked up the slack, showing signs of breaking old downtrend lines. It was however not to last as technology stocks made a half hearted recovery and old line sectors under performed during the technology recovery.. In June the broader markets regained their predictive nature, recognizing that the drop in the technology sector probably spelled significant deceleration in growth. By mid year defensive stocks had begun to outperform and would in fact do so for most of the remaining months, along with a revival in the financial sector as the probability of rate cuts came into view. The year ended with the S&P ex-technology outperforming the technology sector for the first time since 1997 (see chart below). The Nasdaq lost 40% of its value (56% from its highs). In retrospect it is clear that the market was confirming the fears we had at the beginning of the year and discussed again in our mid year review. The economy was being pushed towards a recession, yet no-one was ready to admit it. Valuations plummeted and analysts continued to call for a buy on the dips, although evidence of a mounting slowdown became more clear, with leading indicators turning negative, manufacturing showing signs of stress and inventory levels on the rise. Technology companies lost part of their markets in the e-commerce meltdown and in a rationalization/consolidation of the Telecommunications services business. To add to matters, the stock market correction had depleted the spending power of the American consumer. In short it was a very difficult year for the investors. The stage was set for a promising 2000, but it became a year of violent sector rotation, short unpredictable trends. Volatility was the watchword and it impacted not just technology but also blue chip household names such as Proctor and Gamble, Kodak and Xerox - all of which saw one day losses exceeding 20%. Europe in General outperformed the US and the sectors to own in 2000 were utilities, pharma, food and financials. *Bloomberg Data, Federal Bureau of Economic Analysis 4

5. Technology -the crash The year 2000 was a year of exceptional volatility. It saw the technology laden NASDAQ rocket to all time highs early in the year, causing many legendary value hedge fund managers to finally close up shop. Ironically their departure marked the beginning of what became the steepest one year decline ever experienced on the NASDAQ and a return to value fundamentals. The technology move was based upon a number of factors including the popularisation of the internet, a revolution in communications (wireless and optical), the Y2K effect and a final but enormous inflow of Venture Capital funds into the sector. The Internet and communications revolution saw the creation of an ever growing number of technology companies, funded with easy money in times of eager venture capital, accommodating equity markets and low interest rates at the beginning of the cycle. None had profitable business models and their space was becoming more competitive as each second passed. To remain competitive and meet what seemed like never ending demand growth these companies spent ever increasing amount of their new found wealth on expanding their networks, upgrading their equipment and acquiring smaller competitors at a dizzying rate. The retooling across all businesses that took place in preparation for Y2K added to the expansive business environment in which all tech companies participated. Capital spending in 1999 and 2000 on technology skyrocketed and many thought that the cyclicality of the business had passed; a secular technology boom had begun and the massive run up in technology valuations seemed remarkably justified. Adding fuel to the fire, investors threw ever more money at any idea, profitable or otherwise in hopes of turning a quick and substantial profit. The boom had turned ordinary housewives and car salesmen into wall street wizards and at home venture capitalists. Everyone or so it seemed, was in on the party and soon talk of valuation was met with disdain. The ever increasing number of venture capitalists with money to spend, simply wanted in. By the end of 2000 over $83bln had been poured into new ventures, a 40% increase over 1999 which itself totaled more than the five previous years combined! Equity Research - Technology Review 5

6. Annual Fiber Optic Equipment Sales Growth* 45.00% 140% 40.00% 35.00% 120% 30.00% 25.00% 20.00% 100% 15.00% 10.00% Digital Mobile Comms equipment sales* 80% 5.00% 0.00% 1997 1998 1999 2000 2001 2002 2003 2004 60% 40% 20% 0% 1998 1999 2000 2001 2002 2003 2004 Communication Equipment Growth Rates* 25 Network Equipment 20 Voice/Data Enterprise Equipment 15 10 5 0 1999 2000 2001 2002 2003 2004 Global Telecom Equipment Sales Growth* 16.00% 12.00% 8.00% 4.00% 0.00% 1999 2000 2001 2002 2003 2004 The confluence of these events conspired to set up the inevitable fall of the technology sector. One by one the leg on the table of the new paradigm became shaky. It started with the internet e-commerce sector. Tired of the endless “profitless” business models, investors, both private and public, began to turn away resulting in the downfall of many cash needy web companies. This caused the established brick and mortar companies to re-examine their blind rush to “webify” their offerings. Their web strategies would be put on hold, as seemingly ferocious VC subsidized dot.com competition appeared on the wane. Eager to compete in the limitless world of communications, companies new and old, offered unreliable technology at rock bottom prices, on nothing but borrowed working capital. The rush to provide a broadband alternative, from both cable and telecom companies resulted in the clash of two competing technologies, DSL and Cable modems; neither of which offered a feasible solution to the client nor for the service provider. As demand slowly waned, first from the cash starved e-commerce companies and then disgruntled consumers, the downward spiral began. To stop the bleeding, these companies cut marketing and equipment budgets, starting trouble upstream at the service and equipment vendors. The capital markets all but shut down to new ideas, sub investment grade financing rates skyrocketed, and many companies, operating on an already thin line, were forced to throw in the towel. The raft of new companies spending money on ever improving technology were now removed from the equation and equipment manufacturers faced a significant challenge to maintain growth. Finally, as the markets fell apart, the economy began to slow significantly. A leading indicator or a self fulfilling prophecy, the impact of market losses on consumer behavior was significant. As capital investment slowed, the consumer sector did nothing to pick up the slack. Technology powerhouse states such as California saw the ominous warning on the wall, technology brought them a boom, but it would also bring them the bust. The economic downturn would be the final leg to fall, making the reversal of fortunes in the new “New Economy” complete. 6 *Telecommunications Industry Association, 2000 review

7. Economic Outlook Residential Fixed Investment % Change annual* Non-Res. Fixed Investment % Change annual* Real Earning 12 month % Change* 4% 3% 2% 1% 0% -1% -2% Nov-97 Nov-98 Nov-99 Nov-00 Nov-96 New House Starts* 1050 950 850 750 650 550 450 350 Jan-00 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 2001 Economic Growth - lowering expectations... The split between the new and old economy made it difficult for the Fed to engineer a soft landing. Its intervention tools impacted traditional industry much more than they did the new economy and the financial bubble it had created. While rising rates helped to slow an already lethargic mainstream economy, it was the severe correction in the technology bubble that truly pushed the economy over the edge. The deceleration of technology investment resulted in the crash of the Nasdaq which created a negative wealth effect and sentiment impact on consumers. As consumer spending represents 60% of GDP, the loss of confidence at the consumer level created a dire situation for the economy. The significant reduction in capital investment (most notably in the technology sector), and a dampened consumer sector - the two main growth drivers of the last nine years of economic growth - make near term prospects dim. Consumer weakness... Real Earnings continue to fall and the savings rate has finally turned negative (due to the reduction in equity gains). While in the past, stock market gains and real estate appreciation have acted to offset this gap, this is no longer the case. Combined with a significant increase in layoff announcements in the US as well as the continued decline in real earnings, the case for immediate consumption led relief is weak. And a Capex Meltdown... Moreover, as the economy weakens and the telecommunications and technology sectors continue to experience soft demand, it is unlikely that the negative trend in capital investment can be immediately reversed. In fact even industry data points to a slowing in investment growth across a range of technology industries from PC to fiber optics growth. *Bloomberg Data, Federal Bureau of Economic Analysis 7

8. US Inventories to Sales Ratio 1991 to 2000* Corporate Profits ( US % Change)* Personal Savings Rate ( US %)* Industrial Production YoY change %* 9% 7% 5% 3% 1% -1% -3% -5% Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 The spending boom induced by the Y2K scare and the zero cost of capital (see pages 5 & 6) has lost much of its momentum, networks have been upgraded and the telecommunications industry is in the middle of severe consolidation - at least two legs of the growth foundation are missing. The vicious circle has also impacted corporate profits, which in turn further reduce companies’ ability to reinvest. 2001 looks to be a year of significant earnings slowing and a digestion of over-investment across the entire technology landscape. But some relief in sight... The news however is not all bad. As we outlined in our last report, we believe that a fundamental change in the economic cycle has taken place, shortening the cycle through a combination of supply chain management and increased productivity. Taken together, the impact on the cycle has been significant. The cycle has become shorter and less severe than in the past decades making recessions shorter and more manageable (see mid year 2000 report). In our outlook for 2001 we feel that the economic slowdown will likely be deeper and slightly longer than the market expects, due to the impact of the severe correction on technology investment and consumer sentiment. We do however believe that aggressive Federal monetary policy and accommodative fiscal policy at the political level could be enough to stem the tide of negative economic momentum. With this in mind we have adjusted our economic cycle to reflect a deeper decline in US GDP growth in the first half of 2001. It is likely that this slowdown will consist of 5 quarters of below 3% growth including at least one quarter of negative growth. Growth should start to re-accelerate by the fourth quarter of 2001, as the new economy digests the excesses of the investment cycle of 1998/1999. The aggressive move by the Fed and announced tax cuts however should allow the old economy to significantly improve its prospects. Major improvements in supply chain and production management tools over the past decade will allow for a rapid work through of excess inventory and adjust quickly to reduced growth expectations. European growth, which has already shown some signs of weakening will likely see its lows near the end of 2001/ 1st quarter 2002. While a de-coupling of sorts has taken place, we feel that a US slowdown will take the rest of the world with it, although to a lesser degree than in past years. *Bloomberg Data, Federal Bureau of Economic Analysis 8

9. Our long term scenario • The Fed succeeds in prompting a recovery through very aggressive expansionary monetary policy, and the economy rebounds in late 2001/early 2002. • The New Economy stabilizes at growth levels more inline with the long term average. • European economies, less dependent upon new economy industries, lag US trends by one to two quarters and therefore a slowdown in Europe developing in the mid 2001 will be likely followed by an upturn into late 2002. • The Japanese economy continues its slow climb out of recession, peaking in mid 2002 along with the peak in the US economic cycle. • US growth will bottom at -1.0% in Q2 and peak in 2002 but at a much lower rates than 1999. • Secular global growth will trend down to historic levels. The Economic Cycle USA Europe 9% Japan 6% 3% 0% Dec 99 Dec 00 Dec 01 Dec 02 9

10. USA The Economy Falling interest rates will provide significant benefits to second tier company profitability revitalizing business investment over the fourth quarter. Declining interest rates spur the housing market before year end and cause consumer demand to pick up slightly. Inflation risk minimized as energy prices decline along with the growth rates in the global economy. Steeper yield curve and falling corporate spread indicate higher growth expectations. Oil prices have peaked and may go lower than many expect. Sharp decline in CAPEX and Consumer spending will limit growth in the first 3 quarters of 2001. Economic slowdown deeper and longer (by 1 quarter ) than the market expects. The long term outlook is for more moderate growth as technology spending settles to more historic levels. Loss of huge flow of zero cost capital (venture capital, internet equity bubble) slows technology spending in the near term and causes productivity growth to plateau. The Market Earnings outlook weak, but comparisons become favorable as we move into the second half of 2001. Outside of technology market valuations appear extremely attractive, Expect aggressive FED policy to spur an economic revival and render some valuations more reasonable in regard to valuations models. Technology, cyclical consumer, industrial and financial sectors should out perform in the first quarter due to declining Fed rates and expectation of a quick end to the slowdown. Strong market move in Q1 may make march/April attractive periods to reduce exposure as evidence mounts of continued economic weakness. Technology valuations still imply relatively high levels of growth - which may only be present in certain sectors. Real interest rates (US)* Money Supply (US)* 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% Jan-98 Jan-88 Jan-94 Jan-86 Jan-90 Jan-92 Jan-96 Jan-00 12% 8% 4% 0% -4% Mar-99 Mar-67 Mar-75 Mar-83 Mar-91 2000 Stock Index Performance* DOW JONES -6.19% S&P 500 -10.16% NASDAQ -39.6% *in local currency, to Dec. 31, 2000 *Bloomberg Data, Federal Bureau of Economic Analysis 10

11. Europe CRB Index* 280 260 240 220 200 180 160 Aug-91 Aug-93 Aug-95 Aug-97 Aug-99 • The Economy • Energy price declines and strengthened Euro remove pressure on consumer prices, allowing the central banks the space to ease rates in Q2/Q3 2001. • Euro remains stable to strong in the 1st quarter of 2001, while a combination of economic slowdown in Europe and renewed strength in US economic growth make the outlook past Q1 less certain. Potential for stability at lower levels or resumption of declines in Euro. • Business investment remains high, while investment in IT continues to top the list. • Unemployment continues its downward pace, giving end demand in Europe some support. • Slowing rates of growth continue until early 2002, as US rebound spurs global growth. • Growth rates exceed those of the US throughout most of 2001. • Slowdown in US economy, combined with rise in Euro of late 2000, should work to slow progression in EU growth • The Market • End to rate hikes make bonds more attractive than short term paper. Rates have likely peaked, making longer term bonds more favorable. • With the Euro’s late 2000 rise and early signs of wage increases, earnings outlook begins deteriorates in early 2001. • Earnings comparisons in 2001 are very difficult, causing year over year growth to slow. • Valuations remain high in certain markets and while a correction appears more likely markets may simply trade sideways most of the year. 2000 Stock Index Performance* CAC 40 -0.54% SMI 7.46% DAX -7.53% FTSE -10.12% *in Euro to Dec.31, 2000 *Bloomberg Data, Federal Bureau of Economic Analysis 11

12. Japan • The Economy • Corporate earnings continue to rise, as economy maintains very slow climb out of recession. • Corporate Investment remains the main driver of the economic recovery. • Unemployment has bottomed, setting the stage for a consumer recovery beginning near the middle of 2001. • Consumer spending continues to lag investment spending through out the year. • Key concern is the state of Japanese government budget and its ability to pay for programs initiated to spur demand. • US Slowdown impacts Export company sales growth. • The Market • Corporate restructuring no longer the watchword, earnings, growth and management become key in stock selection • Market valuation has entered more reasonable levels, as earnings begin to rise. • With interest rates on the rise, some Japanese investors (traditionally very conservative) may choose to remain in interest bearing accounts thus giving less impetus to domestic equity investment. • Heavy IPO schedule and low volumes (lack of domestic investors) will keep the Nikkei in a trading range for the foreseeable future. 2000 Stock Index Performance* Nikkei -27.92% Topix -25.46% *in Yen to Dec. 31, 2000 12

13. Regional valuations Changes (from june’00) EPS PEGrowth Old New Old New Europe 22 21 13% 6% France 30 23 14 6 Germany 18 18 19 8 UK 22 21 10 7 Switz. 19 19 11 5 Sweden 21 18 13 3 Italy 18 23 13 5 Holland 16 15 12 5 Japan 55 48 16 10 USA 25 23 12 6 Est. from Morgan Stanley Dean Witter research Regional Valuation EU earnings growth will slow into 2001… The rising Euro, high energy costs and a cyclical slowing in the US work to decrease earnings growth in Europe in 2001. Moreover, the acceleration of economic growth in Europe in 1999 and 2000 brought an acceleration in earnings growth making comparisons more difficult for 2001. Making European stocks expensive... France, Italy and the Scandinavian markets all appear to be the most at risk of correction into 2001, as they will experience the most pronounced growth reductions and remain relatively expensive. And the US follows its lead… The specter of slowing US growth is now upon us and while 2000 was until the fourth quarter a banner year for earnings growth, it has made for some tough comparisons. We expect that earnings revisions going forward will continue to be on the downside, and that not until mid year as the economy begins to show meager signs of recovery, will analysts start to upgrade their earnings outlook. But Valuation has leveled off... But outside of the technology sectors, valuations have come down to relatively reasonable levels. We believe that the US market is trading near fair value levels, and that any broad market sell off would be short lived. While Japanese consumption appears to have bottomed…. The most recent Tankan survey, as well as various leading indicators appear to indicate that unemployment has leveled off, and that consumer confidence is beginning to rise. While most retailers have not yet felt the effects, we believe that the bottom in the consumer market (as we outlined in January) is now being reached. 13

14. And Earnings are set to resume normalized growth patterns…. • Japanese companies after a nine year slump, have realized significant operating earnings growth in 2000 and we now expect that normalized earnings growth can be expected. Sector Valuation • Where are the profits? • As evidenced from the charts on the left, both the technology and telecom services have seen their valuations decline significantly. PEG ratios in technology, an important valuation metric, have dropped to historically low levels and in many cases below the market multiple. On a sector by sector basis some are trading well below 1x growth, a valuation which represent significant value. • In terms of earnings growth, most sectors and the market are seeing downward revisions to earnings estimates, due of course to the looming recession and technology meltdown. Integrated energy companies appear to have seen their earnings peak and experienced the most severe downward revisions followed by technology and basic materials. • There appears to be a case for investment in financials and basic materials and consumer cyclicals based upon earnings growth and PEG valuations. While the transport sector looks to be the most promising in terms of earnings growth revisions. Should our cyclical recovery take place, these sectors appear to be very well placed to benefit. Telecom services and technology appear to have the most bad news built into their valuations, making them attractive on a contrarian and long term growth basis. Growth Expectations ‘01 ‘00 % % Technology 6.6 30.7 Basic Mat. 6.6 15.9 Capital Goods 14.4 13.1 Telecom Svc. -4.8 -2.3 Cons. Cyclical -1.0 -6.8 Cons. Staple 11.7 8.1 Energy -4.8 118 Financials 12.9 10.1 Healthcare 13.9 16.0 Transportation 22.7 -0.8 Utilities 11.4 20.1 S&P 7.8 17.2 *I/B/E/; S&P; Prubache Estimates PEG by Sector Jan. Mar. ‘01 ‘00 Technology 1.5 2.5 Basic Mat. 1.4 1.3 Capital Goods 1.3 1.2 Telecom Svc. 1.4 1.7 Cons. Cyclical 1.3 1.3 Cons. Staple 1.8 1.7 Energy 1.2 1.4 Financials 1.3 1.2 Healthcare 1.6 1.5 Transportation 1.5 1.1 Utilities 1.6 1.9 S&P 1.5 1.9 *I/B/E/; S&P; Prubache Estimates 14

15. Investment Outlook Relative Market performance and a classic business cycle Consumer Discretionary Consumer Durables Capital Goods Energy Chemicals Select Technology Currently in Secular Growth Trend Financials Consumer Staples Pharma Communication Technology Investor Behavior • Under certain circumstances investors will be willing to look over the valley and disregard a forthcoming slowdown. • The degree to which they will anticipate and discount the future depends upon a number of factors • Anticipated length of the cycle • Anticipated depth of the cycle • Valuation (investors will place a floor on prices) • Investor confidence in consensus numbers. • The market tends to react ahead of the economic indicators. The lag between business fundamentals improvement and market movement can be anywhere from 3 to 9 months • As shown in the table (pg.8) outlining the business cycle peaks and troughs, the average deceleration period is 11 months (having been as short as 6mths - 1980). • We believe that this slowdown will be longer than expected, lasting between 9 and 12 months and will show signs of outright contraction. • Investors will be attracted to valuations in various sectors and supported by the relative moderation of this cycle will remain positive on the investment outlook as a whole. 15

16. Investment Strategy Currently in Secular Growth Trend Communication Technology • (Recessionary Phase) Slowing US economy into 2001: • Short term rates (US) have peaked and even started going down. • Fundamental business impact across the board is negative. • Cyclical- Fixed cost industries suffer most in this period i.e.. Consumer Durable, Housing, Capital goods. Due to lingering impact of high cost of capital and the invariability of their cost base. • (Trough) Bottoming out of slowdown in Mid/late 2001: • As trough is reached, consumers feel more comfortable in their economic future and begin to make more discretionary purchases. When interest rates bottom businesses see opportunity to begin expansion anew. • Fundamental business impact is positive for Consumer discretionary (retailers) and certain Financials (Lending banks). • Re-acceleration of growth in late 2001: • As the economy begins to re-accelerate, firms that reduced inventories during recessions must increase production, resulting in an improved outlook for both employees and business. • Consumers, spurred by low interest rates and increased confidence, begin to consider purchase of larger ticket items. • Fundamental business impact positive for Consumer durables, industrials and capital goods • Confirmed growth pattern 2001/2002 • Having reached maximum capacity companies are obliged to increase capital expenditure to meet new increased demand. • Increased economic activity begins to have impact on demand for commodity goods and deep cyclical products. • Fundamental business impact is positive for chemicals (late stage cyclicals) and energy. The Business Cycle While the study of the business cycle aids in the development of an investment outlook, caution is required. Rarely does a cycle repeat itself exactly, and its impact on broad sectors is difficult to pinpoint. This study therefore acts as general guidelines for such analysis. Relative fundamental performance and a classic business cycle Select Financials Consumer Staples Consumer Discretionary Select Financials Consumer Durables Energy Telecom Services Software Semiconductors PC’s Chemicals Capital Goods Pharma 16

17. Investment Themes • Interest rate Cycle: • Slowing EU growth and falling US rates favour Large Cap, Global financial names (Citibank, Zurich Insurance). As the economy progressively picks up speed in late 2001, a move into regional consumer banks would be likely. • We think that select US industrials now look attractive, as valuations have bottomed, rates are falling and investors look over the valley (GE, 3M) . • Weakened Asian economies, slowing EU growth and lower energy prices support reducing exposure to oil stocks. • Continued restructuring and focus of companies on core business support further gains in business services/outsourcing companies (Flextronics, Adecco). • US Recovery: • At this stage of the cycle, economic recovery favours slightly cyclical consumer companies such as Home Depot, Wal-Mart, Federated Department Stores, Costco. • Mixed bag of growth places focus on regional differences. • In Europe defensive consumer and industrials should outperform. • In the US we focus on consumer discretionary and interest rate sensitive. • Lack of consumer follow through in Japan makes consumer area unattractive. • Technology, & Life Sciences Growth: • Fed easing and Tax cuts make cyclical recovery more likely • Capital Investment continues to favour IT spending. • However build out in communications industry slowing. • Internet revolution continue to dominate trends. • Focus on interest rate sensitive Telecom services, Semiconductors and PC producers as well as value added software and optical technology. (Worldcom, Vodaphone, Apple, JDS Uniphase, Applied Materials) • Aging population and medical technology advances spur life sciences growth. Pharma group provides less out-performance potential after strong move in 2000 ( Pfizer, Ares Serono, Aventis, Amgen). Growth & Technology At FFG our investment focus is based on growth. We search out those stocks and sectors that will maintain sufficient growth over the long term to outperform the market. This philosophy has lead us to focus upon a number of sectors most notably of which is technology. 17

18. Sector Allocation • Technology 35% • Why Technology: • Competitive pressures • Capital investment acceleration • Solid long term EPS Growth • Reasonable valuation • Favorable timing • Focus on: • Value technology • Interest rate sensitive • Semiconductors, PC makers, Telecom services • Software • Internet infrastructure • Broadband communications • Risks: • Wireless equipment - could see short term weakness in sector before 3rd generation build out begins. • Economic downturn more severe than expected • Telecom services meltdown has farther reaching impact on infrastructure build out than expected. Life Sciences 10% • Why Life Sciences: • Earnings to outperform broader market • Aging population • Technology enhanced productivity • Consolidation potential • Genome advances creating new product cycle in biotech • Focus on: • Biotech • Mid sized take over targets • Accelerating EPS with limited patent Expiry • Avoid Pharma • Risks: • High Valuations • Late in Cycle • Generic drug competition 18

19. Financials 20% • Why Financials: • Interest rate cuts in the US - favorable timing • Sector Consolidation • Recovery of insurance sector • Economic recovery in late 2001 • Focus on: • Asset Management • Global reach • Brokers and European take over candidates • Insurance (Glass Steagal) • Risks: • Economic downturn more severe than expected - credit risk • Financial market weakness may hurt investment gains • Lending volumes may peak with economic growth • Trading income slows with equity markets Consumer 20% • Why Consumer: • Defensive US names should no longer be favoured • European defensive should become moderately overweight • Positive correlation to rising incomes • Interest rate cuts favour more cyclical consumer names such as discount department stores, DIY. • Historically low valuation • Focus on: • European defensives • US slightly discretionary companies • Global Brands & Global Reach in distribution • Avoid durable and luxury goods for a few more months. • Risks: • US recovery slows • European slowdown arrive more quickly than expected 19

20. Industrial/Energy 15% • Why Cyclicals: • Investors will look over the short slowdown in US • Interest rate driven market recovery • Oil price moderation • Increased oil E&P activity (benefits services, engineering & construction firms) • Focus on: • Infrastructure • Business Services • Energy - reduced to 5% in late 2000 • Basic Materials • Value Added Chemicals • Risks: • Valley is longer than expected • Emerging market slowdown • Oil price weakness negative for Energy sector. 20