a standard life investments presentation on inflation

A Standard Life Investments presentation on

This communication is intended for investment professionals only and must not be relied on by anyone else.

Inflation Linked bondsJonathan Gibbs – Head of Real Returns

October 2009

2

Standard LifeInvestments

Agenda


• The case for inflation in portfolios

• Inflation products from Standard Life Investments:ProcessProduct rangePerformance

• Outlook

3

Standard LifeInvestments Standard Life Investments

Highly regarded fixed interest team

Key messages

Source: Standard Life Investment, 30 June 2009

• Large, stable Insurance Company parent

• Major fixed income investor – €61.2bn€4.2bn Inflation Linked

• Standard Life Investments is a leading player in inflation marketsglobally

• A robust and flexible process to govern our investment strategy

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Standard LifeInvestments Global & Euro Inflation Linked Funds

• UCITS III SICAV (Lux.)

• Benchmark: Barclays Global Index Linked – hedged to US$

• Target outperformance: 0.5% gross of fees

• UCITS III SICAV (Lux.)

• Benchmark: Barclays Euro Inflation Linked Bonds

• Target outperformance: 0.5% gross of fees

Global Inflation Linked Bond Fund

Euro Inflation Linked Bond Fund

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Standard LifeInvestments Performance vindicates the process

1 Year%

2 Years% p.a.

3 Years% p.a.

5 Years% p.a.

Index Linked Fund -1.25 6.99 5.43 6.73

FTSE BG Ind Linked >5yrs -2.28 6.65 5.14 6.41

Relative return 1.05 0.31 0.28 0.31

Euros 1 Year%

2 Years% p.a.

3 Years% p.a.

Since Inception% p.a.*

SICAV Euro Inflation Linked Bond Fund 7.63 7.21 4.33 3.98

* Inception: 01/04/2005 ** Inception:01/06/2005

OEIC Global Index Linked Bond Fund 1.42 6.78 5.38 5.86

SICAV Global Inflation Linked Fund 1.70 6.05 4.95 4.67

Barclays Gbl Inf Lnkd Bd (Hgd US) 1.31 5.65 4.59 4.39


Barclays Global Inflation IL Bond 0.97 6.54 5.15 5.68


Barclays Euro Infl Linked Bonds 6.31 6.35 3.82 3.61


1 Year%

2 Years% p.a.

3 Years% p.a.

5 Years% p.a.

US$ 1 Year%

2 Years% p.a.

3 Years% p.a.

Since Inception% p.a. **

Source: Source: Standard Life Investments, gross performance to 31 August 2009 in local currency.Standard Life Investments claims GIPS compliance with the Global Investment Performance Standards (GIPS®).

Performance to 31 August 2009

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Standard LifeInvestments A growing asset class, and in focus

• Market capitalisation now above $1.4trn, giving real critical mass

• Eurozone continues to expand – new issuers coming?

• Japan to rebase and re-issue its market in 2010?

• China seeks commitment to expansion of TIPS programme – a huge potential buyer

• US Treasury keen to expand issuance

• UK issuance to remain large for forseeable future

• Australia to reopen inflation issuance

Source: Bloomberg, 10 August 2009

MV weights in benchmark index by country

SW, 2.4%AU, 0.6%

JP, 5.2%

CA, 2.8%

GE, 2.7%GR, 1.5%

IT, 10%

FR, 15.4%

UK, 22.9%

US, 36.6%

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Standard LifeInvestments The case for global inflation

• Broader opportunity set than domestic portfolios

• Access to global liquidity pool

• Derivatives widen opportunities further

• A powerful diversifier

Source: Bloomberg, 15 September 2009

Distribution by size and maturity in benchmark index

0

5

10

15

20

25

30

35

40

2005 2015 2025 2035 2045 2055 2065

UK US FR(i) FR(ei) IT CA AU SW JP GE GR

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Standard LifeInvestments A broad product range for our clients

Overseas Governments

€14.0

Corporates€24.0

Index-Linked€4.2

UK Governments€19.0

• ProductsGlobal Inflation SICAV (USD)Euro Inflation SICAV (EUR)Global Inflation OEIC (GBP)UK Inflation fundsOther currency share classes forthcoming

• Diverse client base Corporate pension schemesLocal authoritiesInsurance companiesGlobal distributorsPrivate Wealth Management

Total €61.2bn

Source: Standard Life Investments, 30 June 2009A conversion rate of £1:€1.174098 as at 30 June 2009 has been used throughout the presentation unless otherwise stated

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Standard LifeInvestments Fixed Income resource

Head of Fixed IncomeEuan Munro

Rates & Real ReturnsJonathan GibbsTamsin Balfour

Katy RossGregor Macintosh

Philip LaingIan Pizer

Grant PeterkinJack Kelly

Credit and AggregateAndrew SutherlandCraig MacDonaldRoger SadewskyAlasdair MacLean

Andrew FraserChris Hekscher

Thomas RahmanFiona Dickinson

Saida EggerstedtDaniela MacIntosh

Erlend LochenJoanna DormerArthur Milson

Samantha LambFeryal Taki

Craig McLeod

Strategy Team Corporate Governance

Property team

Equity Team

Treasury team

Multi-Asset Investing

Average Years Experience Average years atStandard Life Investments

16 corporate bond specialists 15 8

79 government bond specialists 13

Critical mass of relevant skill setsSeptember 2009

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Standard LifeInvestments Process - dynamic idea generation

What is driving markets?

Weakdriver

Strongdriver

Fundamentals

Value

Sentiment

Technical

Assessment of an investment strategy

• Uses focus on change philosophy

• Recognises changing strength of groups of market drivers

• Enabling greater flexibility of thought than pure fundamental analysis

• Investment ideas continuously assessed as market conditions change

• Enables dynamic assessment of investment ideas

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Standard LifeInvestments Process – Leveraging ideas across funds

• Global approach ensures ability to add value

• A mix of cash instruments and standard derivatives are used as appropriate

• Positions applied across all possible benchmark groups

A global opportunity set for all products

Momentumstrategies

Duration

Steepeners

Breakeven Inflation

Flatteners

Cross market

Steepeners

GovernmentFixed

couponbonds

Currencies

BenchmarkCreditGovernment

Inflation-linked bonds

Cross market

Market timing indices

Hedged

Country Selection

Carry

models

Duration

Country Selection

Flatteners

Physical allocation

CDS Indices

StockSelection

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Standard LifeInvestments Inflation volatility on the rise?

Source: Bloomberg, 30 April 2009

Monthly change in y/y UK RPI and US CPI rates since 1980

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan-

81

Jan-

83

Jan-

85

Jan-

87

Jan-

89

Jan-

91

Jan-

93

Jan-

95

Jan-

97

Jan-

99

Jan-

01

Jan-

03

Jan-

05

Jan-

07

Jan-

09

US

UK

• Inflation rates likely to be much less predictable than we have become used to

• Extraordinary forces and unprecedented policy measures make an unpredictable cocktail

• In times of uncertainty a balance of bets becomes even more important

• Global inflation provides significant diversification benefits

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Standard LifeInvestments US inflation is not priced in


US CPI (nsa), long term

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Dec

-59

Dec

-62

Dec

-65

Dec

-68

Dec

-71

Dec

-74

Dec

-77

Dec

-80

Dec

-83

Dec

-86

Dec

-89

Dec

-92

Dec

-95

Dec

-98

Dec

-01

Dec

-04

Dec

-07

long term ave cpi

current 10yr BE

• US CPI has spent 79% of the last 49 years above the level currently priced in

• So despite a rally in breakevens, US inflation insurance is cheap in light of massive stimulus

• This represents a very cheap insurance policy in uncertain times

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Standard LifeInvestments Summary

• Standard Life Investments is a leading player in inflation markets globally

• We have the process to deliver performance, and the track record to prove it

• We have a large and expanding range of inflation products

• The economic outlook is highly uncertain, making diversified risk vital

• The market is pricing in very low levels of long term inflation

• Fix your roof while the sun shines!

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Appendices

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Standard LifeInvestments Speculators influencing commodities?

• Other real assets have performed very well

• Equities and commodities appear to be discounting a recovery

• But there are signs that there may be significant speculation in some assets

• There will be few straight lines in this recovery


Ratio of spot oil and natural gas futures

0

5

10

15

20

25

30

31/1

2/20

07

31/0

1/20

0829

/02/

2008

31/0

3/20

08

30/0

4/20

08

31/0

5/20

0830

/06/

2008

31/0

7/20

08

31/0

8/20

0830

/09/

2008

31/1

0/20

08

30/1

1/20

08

31/1

2/20

08

31/0

1/20

0928

/02/

2009

31/0

3/20

09

30/0

4/20

09

31/0

5/20

0930

/06/

2009

31/0

7/20

09

31/0

8/20

09

Peak in oil

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Standard LifeInvestments Trade outlook becomes more crucial


Baltic dry index and US 10yr yields, 2008

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

31/12

/2008

31/01

/2009

28/02

/2009

31/03

/2009

30/04

/2009

31/05

/2009

30/06

/2009

31/07

/2009

31/08

/2009

10/09

/2009

2.2

2.4

2.6

2.8

3

3.2

3.4

3.6

3.8

4

BDIUS10YR

• Commodities rally has been led by trade-related demand

• But fears emerging that China has been stock-piling resources without underlying demand

• Baltic indices often a good leading indicator for economic prospects

• Divergence with bond yields is growing

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Standard LifeInvestments Trade example - Peripheral Europe

Germany vs. Italy 10 yr Yields

Source: Bloomberg

Entry

Exit

Entry

Exit

-2

0

2

4

6

8

10

12

Jul-0

7

Aug-

07

Sep-

07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb-

08

Mar

-08

Apr-0

8

May

-08

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr-0

9

May

-09

%

• Implemented overweight Germany, underweight Italy Fundamental driver

• Long term concerns over Italy’s fiscal and credit issues

• Opened and closed at key technical levels

• Key driver of performance in 2008, and still a live issue

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Standard LifeInvestments Trade example – UK inflation swap curve

Source: Barclays RVI, 31 July 2009

UK 30yr minus 10yr inflation swap rates (bp)

0

10

20

30

40

50

60

70

80

90

10031

/12/

2008

14/0

1/20

09

28/0

1/20

09

11/0

2/20

09

25/0

2/20

09

11/0

3/20

09

25/0

3/20

09

08/0

4/20

09

22/0

4/20

09

06/0

5/20

09

20/0

5/20

09

03/0

6/20

09

17/0

6/20

09

01/0

7/20

09

15/0

7/20

09

29/0

7/20

09

Entry 18.5bp

Entry 18bp

Take profits at 42.5bp

• Given the risk of over-stimulus

• Implied path of future inflation expectations is too flat

• We have entered and exited this position…

• …then re-entered it at similar levels

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• Value opportunity: France inflation over-valued relative to EU HICP

• Sell IL bond / buy nominal bond / receive inflation in swaps

• ECB policy may hurt France more than other countries, so look for inflation expectations to fall relative to others

Trade example – France/EU breakeven anomaly


France 2029 breakeven vs. EUR 20yr inflation swap

-20

-15

-10

-5

0

5

10

15

2019

/03/

2009

26/0

3/20

09

02/0

4/20

09

09/0

4/20

09

16/0

4/20

09

23/0

4/20

09

30/0

4/20

09

07/0

5/20

09

14/0

5/20

09

21/0

5/20

09

28/0

5/20

09

04/0

6/20

09

11/0

6/20

09

18/0

6/20

09

25/0

6/20

09

02/0

7/20

09

09/0

7/20

09

16/0

7/20

09

23/0

7/20

09

30/0

7/20

09

06/0

8/20

09

Entry @ 9bp

Target -20bp

bp

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Euro Inflation Linked Bond Fund

Risk controlled environment

• Managing risk at multiple levels

Fund Specification Document

Front Office System

Independent Risk Team

Investment Governance

Client Account Managers

Investment Guidelines

Duration +/- 2 yrs

Tracking error 0.50% - 1.00%

Derivatives MV up to 100% of fund

FX Hedging 100%

Individual Sovereign Bonds Max 10%, 20% of a given Country

Credit Max 20%. Investment grade only

Cash Up to 10%

22


Global Inflation Linked Bond Fund

Risk controlled environment

• Managing risk at multiple levels

Fund Specification Document

Front Office System

Independent Risk Team

Investment Governance

Client Account Managers

Investment Guidelines

Duration +/- 2 yrs

Country allocation, Major Countries +/- 15%

Country allocation, Other +/- 10%

Derivatives MV up to 100% of fund

FX Hedging 100%

Individual Sovereign Bonds Max 10%, 20% of a given Country

Credit Max 20%. Investment grade only

Cash Up to 10%

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Remember – past performance is no guarantee of future performance. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and cannot be guaranteed.

Standard Life Investments Limited, tel. +44 131 225 2345, a company registered in Scotland (SC 123321) Registered Office 1 George Street Edinburgh EH2 2LL.

The Standard Life Investments group includes Standard Life Investments (Mutual Funds) Limited, SLTM Limited, Standard Life Investments (Corporate Funds) Limited and SL Capital Partners LLP. Standard Life Investments Limited acts as Investment Manager for Standard Life Assurance Limited and Standard Life Pension Funds Limited.

Standard Life Investments may record and monitor telephone calls to help improve customer service. All companies are authorised and regulated by the Financial Services Authority. ©2009 Standard Life Investments. www.standardlifeinvestments.com

a standard life investments presentation on inflation

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