ETF Presentation

4:00pm

Wealth Peer Group meeting (Music Room)

4:45pm

ETFs explained – Mick Gilligan, Killik & Co (Music Room)

5:45pm

Champagne Reception (Paul’s Terrace) with Fine Violin Fund presentation – Florian Leonhard

6:30pm

Evening buffet (Music Room)

7:15pm

Cash Management presentations (Music Room) Toby Allebon, Investec – Investec High 5 Deposit Henry Buckmaster – Prime Rate AAA rated Money Market Fund Ulf Blacher, ZAN Partners Tri-Party Repo Exchange (T-REx)

8:15pm

Sweets and coffee (Music Room)

9:00pm

Close

Exchange Traded Funds (ETFs) Mick Gilligan, Research Department May 2009

What are Exchange Traded Funds (ETFs)?

Background – Size of market, range of asset classes Comparison: ETFs v other structures Mechanics – how do ETFs work?

Liquidity – Spreads & volumes Costs – explicit & implicit Investment strategies – using ETFs Summary

What are Exchange Traded Funds? (1) Listed securities designed to closely track an index or commodity.

Hybrid between shares and conventional open-ended funds (e.g. OEICs).

Low cost

LARGEST LONDON LISTED ETFs ETF Name

Index / Commodity Tracked

iShares S&P 500 USD S&P 500 Index iShares S&P 500 GBP S&P 500 Index iShares DJ Euro STOXX 50 DJ Euro STOXX 50 Index iShares FTSE 100 FTSE 100 Index Gold Bullion Securities Spot Gold Source: Barclays Global Investors, based on data as at 31 March 2009.

Market Capitalisation **AUM (£bn) 3.2 3.2 3.1 3.1 1.6

What are Exchange Traded Funds? (2) Low costs Low tracking error

Fund iShares FTSE 100 ETF Scottish Widows UK Tracker HSBC FTSE 100 Index M&S UK 100 Cos L&G UK 100 Index FTSE 100 Index

Size (m) 3,051 295 249 190 118

Total Expense Ratio 0.40 1.00 1.14 1.04 2.05

Five Year Performance 13.1 11.4 12.2 10.9 8.4

Deviation from index (annualised) 1.15 1.49 1.34 1.58 2.05

19.0

0.00

Five years to 08.05.09, total return with income reinvested net of basic rate tax. Source: Morningstar, Barclays iShares.

What are Exchange Traded Funds? (3) Structure:

•ETFs (Exchange Traded Funds): tradable shares in open-ended funds

•ETNs (Exchange Traded Notes): tradable secured zero-coupon notes

Background (1) – size of the market First introduced in the US in 1993 1,635 ETFs/ 2,857 listings on 43 exchanges worldwide Assets under management - $634bn Global net ETFs inflows in 2008: $266bn Q1 2009 average daily trading volume: $89bn

Data as at end of Q1 2009. Not including ETCs, ETNs. Source: BGI (Barclays Global Investors)

Background (2) - Range of asset classes Equities

Fixed Interest

Commodities

Money Market

single country

e.g.

US, China, Russia, Kuwait

region

e.g.

Europe, Asia Pacific, Emerging Markets

sectors

e.g.

banks, utilities, shipping

real estate

e.g.

EPRA Asia property

private equity

e.g.

S&P listed private equity

fundamentally weighted

e.g.

RAFI Japan

other

e.g.

Shariah

government bonds

e.g.

sterling, Emerging Markets

inflation linked bonds

e.g.

global, Europe

corporate bonds

e.g.

sterling, euro

diversified

e.g.

CRB Commodities index

energy

e.g.

crude oil, gasoline

base metals

e.g.

copper, zinc

precious metals

e.g.

gold, platinum

agricultural

e.g.

corn, live cattle

e.g.

USD, GBP

Comparison ETF v Open Ended v Closed-Ended v Future

Legal Structure

ETF/ETN Open-Ended Fund Open-ended traded fund/ zero OEIC, Unit Trust coupon note

Closed-Ended Fund Investment Trust, ClosedEnded Investment Company

Future Exchange Traded Derivative

Notional Investment

100%

100%

100%

Pricing Minimum investment (Based on UK equity exposure) Dividend payments

Market hours 1 share (£nominal)

Generally once a day 1 share (£nominal)

Market hours 1 share (£nominal)

Generally quarterly

Expiry

Generally quarterly via CREST Perpetual

Perpetual

Generally quarterly via CREST Usually Perpetual

Margin (e.g. c. 9% on FTSE contract) Continuous 1 contract (e.g. FTSE is c. £4,000 margin based on £44,000 exposure) Not paid but market reflects in contract price Usually Quarterly (roll impact)

Stamp duty

No

No

Yes for UK domiciled fund

No

Mechanics – how do ETFs work? (1)

y Hold underlying constituents of index being tracked

y Gain economic exposure to index / commodity via swaps

Mechanics – how do ETFs work? (2) Holding index constituents

Example: FTSE 100 ETF (primary market) Buy FTSE 100 constituents in the market in corresponding market weightings (or may already hold on their books) + deliver to ETF custodian

Cash

Investor (via broker)

Market Maker FTSE 100 ETF shares

Underlying holdings:

same as index

Return profile:

achieved by holding the underlying

ETF custodian Issue FTSE 100 ETF shares

Mechanics – how do ETFs work? (3) Exposure via swap Example: FTSE 100 ETF (primary market) Buy securities (can be completely different from the index underlying holdings) as agreed with swap counterparty and deliver to ETF custodian

Cash

Investor (via broker)

ETF custodian

Market Maker FTSE 100 ETF shares

the portfolio held at the custodian is the investors' collateral

Issue FTSE 100 ETF shares

flow of funds reflecting the difference between the returns of portfolio held at custodian and the index return

Swap counterparty

Underlying holdings: can be different from index Return profile:

achieved by swap with counterparty. The returns of the securities held are swapped for the return on the index

Example of balance sheets in Appendix 6

Mechanics – how do ETFs work? (4) Counterparty risk What is counterparty risk?

The risk that the counterparty to a transaction is unable to fulfil their obligations What ETFs does it affect?

Those employing swaps to achieve their return profiles and those involved in securities lending What is the extent of the risk?

Depends on the structure: 100% of NAV, uncollateralised 10% of NAV, uncollateralised 0% of NAV, uncollateralised

Liquidity – Normal Market Size (1) Market Liquidity - Good Name

Index Tracked

db x-trackers Sterling Money Market db x-trackers US Dollar Money Market iShares FTSE 100 Gold Bullion Securities (USD) iShares $ Treasury Bond 1-3 yr

Sonia TR index Fed Funds Effective Rate TR Index FTSE 100 Index Spot Gold Barcap US Govt 1 To 3 Year TR

Market Capitalisation

Market Spread (bps)

Daily Volume £000

59 42 3,051 2,592 163

3 4 5 8 8

433 1,440 62,166 37,453 1,865

Market Liquidity - Poor Name Lyxor FTSE Coast Kuwait 40 USD Lyxor FTSE Coast Kuwait 40 GBP ETFS Russell Global Gold (GBP) ETFS Leveraged Tin ETFS Russell Global Gold (USD)

Index Tracked FTSE Coast Kuwait 40 Index FTSE Coast Kuwait 40 Index Russell Global Gold Index Dow Jones-AIG Tin Excess Return Index 2x Russell Global Gold Index

Market Capitalisation 11 11 8 1 8

Market Spread (bps) 305 302 270 244 243

Daily Volume £000 2.0 0.2 16.0 24.0 309.0

Source: Bloomberg. Market Spread (bps) = Avg Bid-Ask spread (spread as percentage of mid price) calculated as an average of snapshot bid-ask spreads taken every ten minutes between 10:06 – 16:26 GMT on 6 May 2009. Min and max spreads were taken during the same intervals..

Liquidity (2) – Normal Market Size

Liquidity (3) – Outsized orders Where spreads imply worse liquidity in underlying securities, outsized orders often dealt within screen prices Where spreads reflect liquidity in underlying securities, outsized orders often dealt outside screen prices iShare FTSE 100 – market orders of £1m to £4m not uncommon. Beyond this, investors can go OTC.

Costs (1) – Breakdown

Index Tracked FTSE 100 MSCI Emerging Market Small Cap

Explicit Costs Implicit Costs Revenue Generation Total Costs Total Expense Ratio Market Spread Rebalance costs Tracking error Stock Lending 40 10 10 2 -1 61 74 130 25 90 -10 309

Costs (2) –Implicit Market spread – For normal market size this is a function of typical trading volumes BUT For larger market size is a function of underlying liquidity Rebalancing costs – Market spreads incurred for transactions as a result of corporate actions and index changes.

Costs (3) – Implied by performance Total cost comparison based on performance ETF / Index (Estimated spread)

Performance (v FTSE 100 Index)

db-x trackers FTSE 100 (17bps) Lyxor ETF FTSE 100 (85bps) iShare FTSE 100 (5bps) FTSE 100 Index

-27.9% (-30bps) -28.0% (-40bps) -28.5% (-90bps) -27.6%

(Total return, based on longest common performance period on Bloomberg, 4/10/07 to 11/05/09. Mid to mid with income reinvested)

Investment strategies – using ETFs (1) Strategy

Example

Core – Satellite Strategy

iShares FTSE 100 + Actively managed funds / high conviction stocks

Eliminating cash drag

Seeking immediate equity exposure - decide which funds/stocks to buy later

Tactical asset allocation

Increase/reduce equity exposure

Pairs trading

Long Investment Trust on wide discount, Short Index ETF

Leverage

Leveraged ETFs

Short selling with limited liability

Short ETFs

Investment strategies – using ETFs (2) Leverage & Shorting Leveraged (2x) ETFs replicate twice the DAILY movement in the underlying.

However, for holding periods > 1 day the leveraged ETF return can be different then the return of the index multiplied by 2.

Short (-1x) ETFs replicate the inverse DAILY movement in the underlying.

However, for holding periods > 1 day short ETF return can be significantly different from the inverse return of the index.

Investment strategies – using ETFs (3) Leveraged and Short ETFs: risk-return profile Low volatility

A

Index Daily change Cumulative change

Day 1 100

Day 2 101 1% 1%

Day 3 102 1% 2%

Day 4 103 1% 3%

Index

108

Leveraged (+2x)

Short (-1x)

106 104

Leveraged (+2x) Daily change Cumulative change

100

Short (-1x) A x(-1) Daily change Cumulative change

100

A x2

102 2% 2%

104 2% 4%

106 2% 6%

99 -1% -1%

98 -1% -2%

97 -1% -3%

Day 2 125 25% 25%

Day 3 90 -28% -10%

Day 4 103 14% 3%

150 50% 50%

66 -56% -34%

85 29% -15%

75 -25% -25%

96 28% -4%

82 -14% -18%

102 100 98 96 1

2

3

4

High volatility Day 1 100

A

Index Daily change Cumulative change

100

A x2

Leveraged (+2x) Daily change Cumulative change

Short (-1x) A x(-1) Daily change Cumulative change

100

Index

160

Leveraged (+2x)

Short (-1x)

140

120

100

80

60 1

2

3

4

Summary

Exchange Traded funds (ETFs) – listed, low cost trackers

ETF Landscape – grown to over $700bn in 15 years Comparison v other structures – real time trading, buy/sell @ NAV Mechanics – underlying replication or swaps Liquidity – ETF liquidity should reflect underlying liquidity Costs – explicit & implicit Investment strategies – increase/decrease exposure, shorting ETF Bulletin – weekly publication – data on every London listed ETF

Appendix 1:

Killik & Co ETF Bulletin TER (%)

**AUM (£m)

*avg bps spread

*min bps spread

*max bps spread

3m daily vol £000

YTD

Asia

0.65

950

62

54

86

64

-3.0

db x-trackers MSCI EM Asia

Asia

0.65

959

62

59

86

87

-3.2

USD

iShares DJ Asia/Pacific Select Dividend^

Asia Pacific

0.59

29

58

53

59

25

-12.4

GBP

iShares DJ Asia/Pacific Select Dividend^

Asia Pacific

0.59

28

59

31

60

60

-12.3

GBP

db x-trackers MSCI Asia Pacific ex-Jap

Asia Pacific ex-Jap

0.45

17

31

26

54

n/a

GBP

db x-trackers MSCI Pacific ex-Jap

Asia Pacific ex-Jap

0.45

56

56

27

89

n/a

EPIC

CCY

ETF Name

Category

XMAS

GBP

db x-trackers MSCI EM Asia

XMAD

USD

DAP APD XAXJ XPXJ SFE

GBP

iShares AC MSCI Far East ex Jap Small Cap

Asia Pacific ex-Jap

0.74

4

95

90

500

98

1.5

DFE

USD

iShares AC MSCI Far East ex Jap Small Cap

Asia Pacific ex-Jap

0.74

4

93

82

497

7

1.4

LASU

USD

Lyxor ETF MSCI AA Asia ex Japan

Asia Pacific ex-Jap

0.65

14

144

138

155

67

LASP

GBP

Lyxor ETF MSCI AA Asia ex Japan

Asia Pacific ex-Jap

0.65

8

141

139

144

49

-4.9

DBRC

USD

iShares FTSE BRIC 50

BRIC

0.74

86

65

54

499

71

5.3

BRIC

GBP

iShares FTSE BRIC 50

BRIC

0.74

86

59

26

496

448

LEEU

GBP

Lyxor ETF Eastern Europe

East Eur ex-Russia

0.50

4

114

113

117

1

-23.9

LEUU

USD

Lyxor ETF Eastern Europe

East Eur ex-Russia

0.50

n/a

106

105

112

30

-24.1

EER

GBP

iShares MSCI Eastern Europe

Eastern Europe

0.74

97

58

9

294

278

-4.0

5.4

Appendix 2:

London Listed ETFs Six ETF providers and over 400 listings ETF provider

Offering mainly:

iShares

equities and fixed interest

db x-trackers

equities

Lyxor ETF

equities

Invesco PowerShares

fundamentally weighted equity indices

SPA ETF

fundamentally weighted equity indices

ETF Securities

commodities, regional and sectorial equity indices

Appendix 3:

Full Comparison Legal Structure

ETF/ETN Open-Ended Fund Open-ended traded fund/ zero OEIC, Unit Trust coupon note

Closed-Ended Fund Investment Trust, ClosedEnded Investment Company

Holding cost Notional Investment

Total Expense Ratio (TER) 100%

Total Expense Ratio (TER) 100%

Total Expense Ratio (TER) 100%

Purchase/sale costs

Brokerage fees

Minimum investment (Based on UK equity exposure) Dividend payments

1 share (£nominal)

Initial/exit charges; Brokerage Brokerage fees; fees Stamp duty 1 share (£nominal) 1 share (£nominal)

Counterparty exposure Pricing Market Liquidity

Future Exchange Traded Derivative

Contract roll costs Margin (e.g. c. 9% on FTSE contract) Can range from 0-100% Can range from 0-10% Can exist None Market hours Generally once a day Market hours Continuous Should be same as liquidity of N/A - dealing directly with the Dependant on supply/demand High - dependant on underlying fund manager for the fund's shares supply/demand

Expiry

Generally quarterly via CREST Perpetual

Management fee UK Distributor Status ISA/SIPP Stamp duty

Yes (small: 20-98bps) Generally yes Generally yes No

Perpetual

Generally quarterly via CREST Usually Perpetual

Initial/variation margin payments, rollover costs 1 contract (e.g. FTSE is c. £4,000 margin based on £44,000 exposure) Not paid but market reflects in contract price Usually Quarterly (roll impact)

Yes (c 1.5%) Generally yes Generally yes No

Yes (0.5% - 2%) Generally yes Generally yes Yes for UK domiciled fund

No No No No

Generally quarterly

Appendix 4:

Swap v holding underlying Why use a swap?

Minimise tracking error How is the tracking error minimised?

The return is generated via a contract promising the index returns What are the risks?

Counterparty risk What happens if the counterparty defaults?

The level of the loss depends on the counterparty exposure and level (if any) of collateralisation.

Appendix 5:

When counterparty risk hits home: AIG AIG was one of the world’s largest insurance companies.

AIG was the counterparty for ETF Securities’ Commodities Platform.

In September 2008, following its credit rating being downgraded, the market feared it may default on its financial obligations.

Market makers stopped making prices in the ETNs backed by AIG. Even though the Fed announced a $85bn bailout for AIG a day later, it approximately a week for trading in these ETNs to normalise.

ETF Securities has aimed to address this weakness by arranging for AIG to post collateral for its obligations.

Appendix 6:

db x-trackers FTSE 100 balance sheet

Appendix 7:

Gold Long/Leveraged/Short return comparison

Appendix 8:

Oil Long/Leveraged/Short return comparison

Appendix 9:

Conventional Indices v Fundamental Indices Conventional - Based on market capitalisation. e.g. FTSE 100, S&P 500, Eurostoxx 50.

Issuers – iShares, ETFS, db x-trackers, Lyxor

Fundamental – Based on valuation metrics. e.g. Market Grader – Filters US equities based on 24 factors from four categories; growth, value, profitability, cashflow.

Issuers – SPA ETF (MarketGrader), Invesco PowerShares (Research Affiliates)

Appendix 10:

Conventional Indices v Fundamental Indices

Fees - average TER 0.5% (conventional) v 0.8% (fundamental)

Liquidity – median Bid/Offer spreads – both c56bps Performance – Outperforming to mid ’07, underperforming since

Appendix 9:

Risks associated with ETFs Risks Usual risks associated with capital market investments. You can lose the value of your investment.

Tracking error can be high Bid-ask spreads can be wide Short/Leveraged ETF returns can vary widely from expectations Swap counterparties can default The implicit cost of rolling futures contracts can be high Long term underperformance of index due to fees This is not an exhaustive list of risks associated with investing in ETFs

This document has been issued by Killik & Co on the basis of publicly available information, internally developed data and other sources believed to be reliable. Any view or recommendation is based entirely on such data as we have no other interest or conflict of interest with companies covered. Partners or employees of Killik & Co may have a position or holding in any of the above investments or in a related investment.

The value of investments and the income from them may vary and you may realise less than the sum invested. In the case of higher volatility investments, these may be subject to sudden and large falls in value and you may realise a large loss equal to the amount invested. Some investments are not readily realisable and investors may have difficulty in selling or realising the investment or obtaining reliable information on the value or risks associated with the investment. Where a security is denominated in a currency other than sterling, changes in exchange rates may have an adverse effect on the value of the security and the income thereon. In addition, if the security is listed outside the United Kingdom, the listing regime and local regulation may differ from that which pertains in the United Kingdom. This may affect the degree of protection that consumers receive. The past performance of investments is not a guide to future performance. The investment or investment service may not be suitable for all recipients of this publication and any doubts regarding this should be addressed to your broker.

Killik & Co is a trading name of Killik & Co LLP, a limited liability partnership authorised and regulated by the Financial Services Authority and a member of the London Stock Exchange.

Registered in England and Wales No. OC325132 Registered office: 46 Grosvenor Street, London W1K 3HN. A list of Partners and branch offices is available upon request. To telephone all offices please call 020 7337 0400 or see the website at www.killik.com

4:00pm

Wealth Peer Group meeting (Music Room)

4:45pm

ETFs explained – Mick Gilligan, Killik & Co (Music Room)

5:45pm

Champagne Reception (Paul’s Terrace) with Fine Violin Fund presentation – Florian Leonhard

6:30pm

Evening buffet (Music Room)

7:15pm

Cash Management presentations (Music Room) Toby Allebon, Investec – Investec High 5 Deposit Henry Buckmaster – Prime Rate AAA rated Money Market Fund Ulf Blacher, ZAN Partners Tri-Party Repo Exchange (T-REx)

8:15pm

Sweets and coffee (Music Room)

9:00pm

Close