130 / 30 – the new black?

1. 130 / 30 – the new black? Tommy Adams Steven Beveridge

2. Agenda • What are they trying to achieve? • How did they arrive? • 130 / 30 and UCITS III • Can anyone do it? • Is the market ready for it?

3. Part one: What are they trying to achieve?

4. What’s in a name? • Aliases: • short extension, leveraged alpha, active extension, extended equity, 1X0 / X0 • Not a strategy in itself • Not an absolute return approach • Stepping stone to a hedge fund

5. Long Exposure 100% market exposure Traditional Long Only Fund Long portfolio 0% market exposure ShortExposure What does 130 / 30 mean? • Traditional long fund - £100 • Borrows £30 of stock and sells ‘short’ • Reinvests £30 premium in best ‘long’ ideas • 100% net long • 160% gross exposure

6. Least favoured stocks Best ideas Overweight Underweight Traditional long only 130 / 30 Greater freedom and greater conviction • Allows managers greater flexibility to express their views and add alpha in two ways: • Least admired stocks can be expressed as 5% short rather 0.4% underweight • More capital directed towards ‘best ideas’

7. Increasing the alpha opportunity • Alpha generation still comes from stock picking ability - both long and short • 130 / 30 removes some constraints of long only • But still relatively constrained in comparison to say most long short hedge funds: • net 100% long • extension part is market neutral • gross 160% • So relatively benign way of increasing alpha opportunity

8. Index / ETF Enhanced Index Style specific Focussed Active extension Long bias HF Low net HF Equity market neutral Increasing tracking error Relative return Absolute return beta alpha Equity product spectrum

9. Why 130 / 30? • 110 / 10 • 120 / 20 • 130 / 30 – optimal risk reward payoff • 140 / 40 • 150 / 50 – max leverage allowed under UCITS

10. Part two: How did they arrive?

11. US origins • First short extension fund launched 2002 • But only joined by a handful prior to 2006 • US investors > $50bn now • Mainly institutional and family office interest • Some 15% of US institutional investors invest in 130 / 30 funds (Source: Vodia Group)

12. Growing number of products • Currently most still run as segregated mandates .. • .. But rapid rise in mutual fund offerings

13. So far so good .. .. but not enough funds have been around long enough .. How have they performed so far? Source: eVestment Alliance

14. Driving forces behind 130 / 30 • Institutional led demand for higher conviction strategies and alpha generation • Fusion of traditional and alternative investment techniques – ‘hedge-lite’ • Hedge fund providers as well as traditional long-only managers see opportunities • Differentiation by geography and asset class • Facilitated by UCITS III regulations

15. Part three: 130 / 30 and UCITS III

16. UCITS III • 130 / 30 is a specialist high alpha fund • Offshore or onshore • Daily pricing • Investor eligibility • Institutions – private banks, Fund of Funds, Discretionary Managers, Portfolio Bonds (Hong Kong) • Available to ‘specialist’ retail market in UK and can be ‘pass-ported’ cross-border • Don’t have to be qualified investor • No large minimum investment levels

17. UCITS III • Gearing • Gearing through swaps - gross exposure is limited to 200% of Fund NAV (130 / 30 = 160% - so in theory could have 150 / 50) • Shorting • No physical shorting allowed within UCITS III Fund – (Irish Financial Regulator has changed stance!) • ..but synthetic shorting can be achieved by Portfolio Swap / Contract for Difference held by the Fund

18. Typical swap terms • Governed by ISDA between Fund and Swap Counterparty • Fund pays ‘LIBOR + X’ bps for long exposure • Fund receives ‘LIBOR – Y’ bps for short exposure • Initial margin with variation margin popular • Cross margining of positions within swap to minimise collateral requirements • Monthly and forced resets (important for UCITS counterparty exposure limits) • Can ‘trade away’ with any (approved) broker

19. Assets held by Fund The Fund (UCITS III) • All assets held with custodian • Valuation and fund prices by Fund Administrator • Basket of stocks within one OTC swap (long and short exposure) • Swap will reflect M2M value of underlying securities less financing costs Cash Portfolio Swap Long and short exposure Physical Stocks Long only

20. 100% physical stocks plus swap Separate reporting to be consolidated Minimises financing costs but incurs custody fees Daily risk management / UCITS III compliance monitoring more onerous, with separate part of portfolio Stamp duty trading costs (for long UK stocks) Example portfolio 1 30% long 100% long 30% short Physical stocks Swap ‘wrapper’

21. In practice: 80% physical stocks plus swap Allows for cash reserve for any margin requirement Vary %age physical stock held (dependent on factors such as markets) Allows Fund to take advantage of dividend enhancement opportunities for long positions on swap and transaction cost efficiencies for UK positions Example portfolio 2 50% long 80% long 30% short Physical stocks Swap ‘wrapper’

22. 100% cash plus swap Operational simplicity Consolidated reporting facilitated Simpler risk management Efficient UCITS III compliance monitoring Swap financing on total balances Counterparty exposure may be greater (monthly resets help to manage this) – limit 10% Example portfolio 3 130% long 30% short Swap ‘wrapper’

23. Risk management • Sophisticated user of derivatives: the OTC derivative is used for investment purposes • VaR analysis used to monitor swap risk exposure e.g.: • Absolute VaR calculated daily (<5% of Fund value, 99% confidence interval, holding period 1 day) • Relative VaR (relative to benchmark index) checked quarterly • Risk Management Process (RMP) document lodged and approved with Financial Regulator

24. Part four:Can anyone do it?

25. Can anyone do it? • Increased Alpha potential with similar risk • Conviction led portfolio • Shorting skills are paramount • Many have tried and failed

26. Alternative Investment Techniques • Opportunity for hedge fund managers to widen distribution • Cartesian Capital UK Boutique • Previous hedge fund experience • Recognised shorting credentials

27. Good • Growth • Market position • Free cash flow • Financial strength • Restructuring / recovery • Corporate activity • Bad • Aggressive accounting • e.g. revenue recognition; policy changes; off balance sheet liabilities • Low earnings quality • e.g. divergence of declared profit; cash generated; tax paid; recurring exceptionals; unsustainable margins • Financial weakness • e.g. on and off balance sheet debt; large working capital requirements; overdependence on short term facilities; pensions; leases Short position Long position A different skill-set • Buy signals may not necessarily be used as sell signals

28. Cartesian 130 / 30 • Launched November 2007 – Dublin UCITS • Number of holdings: ~75 • circa 55 long and 20 short • Maximum Long per individual stock 10% • Maximum Short per individual stock 5% • Aim to keep exposure at 160% although flexibility to be in the range 100 – 160% • Min / Max net long exposure 90%-110% • Aim to keep net long exposure at 100%

29. Future Developments at Resolution • Ideas in the pipeline • Managers in other asset classes with shorting experience • Rigorous product development challenge process • Roll out later in 2008

30. Part five:Is the market ready for it?

31. Is the market ready for it? • Developed in the US for Institutional demand • Growing awareness in UK • Pension Funds investing from equity allocation • Retail demand for Alpha.

32. Considerations for Retail Market • Market Research • IFAs • Consumers • Level of understanding • Support • TCF obligations

33. What did we find out? • Clearly a new concept for many • Alpha angle has generated interest • Keen to find out more • Consumers – Yes as part of a balanced portfolio • Key emphasis on education

34. The new black? • Institutional interest proven • Retail wait and see approach • Is it the new black?

35. Wouldn’t go that far but… • We see it as part of ‘purple’ future

36. Disclosure This presentation is for professional clients and investment professionals only and should not be relied upon by retail clients. This document does not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase any investment, nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract for the same. Cartesian Capital TM and the Cartesian Capital logo are trademarks owned by Resolution Investment Services Ltd and are used under licence by Resolution Fund Managers Ltd. Cartesian UK Equity 130/30 fund is a sub fund of Resolution International Funds plc, an open ended company investment company incorporated in Ireland. The value of the investments and any income from them can fall as well as rise and is therefore not guaranteed. Exchange rate movements may cause the value of overseas investments to fluctuate. Issued and approved by Resolution Investment Services Limited authorised and regulated by the Financial Services Authority. Registered in Scotland No. SC101825. Registered office: Resolution House, 50 Bothwell Street, Glasgow, G2 6HR, Tel 0141 222 8000.