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Investor Update

Investor Update. AGM November 2008. AGENDA. Depth and duration of global recession? How long will the bear market last? Portfolio strategy Investment process Performance. Economic Outlook. Systemic risk of financial system failure may have past

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Investor Update

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  1. Investor Update AGM November 2008

  2. AGENDA • Depth and duration of global recession? • How long will the bear market last? • Portfolio strategy • Investment process • Performance

  3. Economic Outlook • Systemic risk of financial system failure may have past • Deleveraging cycle has began ensuring sub-optimal growth for some time to come • Leading indicators are suggesting the global economy is in for a protracted recession • Australian economy unlikely to soften as much as G7. Outcome will depend on quantum of policy support and economic strength of trading partners

  4. Credit markets are improving

  5. US Unemployment US Retail Sales (Year on Year % Change)

  6. Australian EconomyOutcome less clear Supportive Drag Softer global growth Credit rationing Household deleveraging Growth in Emerging Asia? • Strong financial system • Monetary Stimulus • Fiscal Support Resources Infrastructure Business Investment

  7. Treasury Estimates Look Optimistic

  8. Resources and Infrastructure have been a big support for the economy, if this were to reverse recession will be much deeper

  9. Market Outlook • While the downturn in activity might not be as bad as offshore, local shares will inevitably taking their lead from International markets • Shares are already priced for a sharp correction in 2009 earnings. • The unknown is the shape of the recovery, are we in for a long period of sub-optimal growth? If so it is difficult to envisage a strong recovery in the value of risk assets.

  10. BUY SIGNAL

  11. 2 Years of negative returns are rare

  12. Market Cheap on Balance Sheet measures

  13. Market Cheap on prospective profits (forecasts are to high)

  14. Earnings Bubble Vs Price Bubble in 2000

  15. Same story in Australia

  16. Hedge Fund Capitulation(US Equity Holdings- Sept qtr V June qtr)

  17. Defensive sectors have outperformed

  18. Portfolio Strategy • Investors have pushed the premium on earnings certainty and balance sheet strength to extremes • Heavy supply of new equity continues as companies recapitalise balance sheets • Earnings risk still to downside

  19. Sector Strategy- no where to hide • Banks are still at risk from emerging non performing loans and a slowing credit cycle • Resources will struggle as growth expectations and commodity prices move lower • Domestic Cyclicals will struggle as earnings disappoint with the economy slowing • Property will see ongoing equity supply and downward revisions to valuations

  20. Everything is on sale- a winning strategy is to: • Stick to stronger companies, investors will be surprised at the contraction in weaker businesses. In this environment the strong get stronger and the weak fall by the wayside. • Avoid leveraged balance sheets as these companies will inevitably have to recapitalise • Cash is the only truly defensive asset, so called “defensive companies” are overvalued • Buy cheap structural growth companies, the structurally impaired may not make it through this downturn

  21. INVESTMENT UNIVERSE RANKED (1-200) TARGET 3% OUTPERFORMANCE ASX200 TOP Quartile ASX 200 Bottom Quartile

  22. INVESTMENT UNIVERSE RANKED (1-200) ASX200 TOP Quartile ASX 200 Bottom Quartile

  23. ALF Balance Sheet Assets $128m Funding $128m ALF L PORTFOLIO SHAREHOLDER’S FUNDS $78m $78m Market +7% + Market +3% SHORTS / DEBT ALF s $50m $50m Market - 3% TARGET 3% OUTPERFORMANCE ALFL TARGET 3% UNDERPERFORMANCE ALFs

  24. SHORT FUNDING IS DIFFERENT TO FINANCIAL LEVERAGE FROM DEBT

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