for investment professionals only the importance of looking at real returns presented by fiona...

For Investment Professionals Only

The importance of looking at real returns

Presented by

Fiona BarwickDirector of Regional Research

Mondrian Investment Partners 10 July 2008


Introduction

Inflation trends in Asia

What’s causing it?

Consequences

An investment approach that looks at inflation

Conclusion


Inflation in Asia trending up

Inflation in the Asia Pacific ex Japan Region- Core CPI 12 Months to April 2007 & April 2006

2.2 1.8 1.3

6.7 6.3

2.51.5

2.3

0.6 0.71.8

7.1

3.9

5.8 5.4

7.89.0

4.13.0

8.37.6

3.9

6.2

21.3

0

2

4

6

8

10

12

14

16

18

20

22

%

2006

2007


Food and energy matters

CPI basket weights - The importance of food and energy

05

1015202530354045505560

Countries

%

Food (%) Fuel (%)Food & fuel (%)


Globally rice and wheat yields have levelled off


Rice and wheat prices spiking due to declines in inventories and concerns over supply


Commodities price inflation 1987 -2007

Commodity cost curve move up sharply = cost push

Lack of investment over recent years = supply unable to keep up with surging demand = cost push

China’s rapid urbanisation and industrialisation, subsidised prices and low real interest rates leading to demand pull

Prices are rising again in 2008

Index of prices - base falls from a higher level

50

75

100

125

150

175

200

225

250

275

300

325

350

375

400

425

450

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Ind

ex

Steel

Base Metals

Precious Metals

Sou

rce:

LM

E,

Com

ex/N

ymex

, C

RU

, C

lark

sons

, M

acqu

arie

Res

earc

h, J

anua

ry 2

008

90th percentile, cash costs (base)


Ultimately monetary policy is key


Broad money growth indicates inflation looks to be trending higher


Overall real rates look too low


Monetary policy looks too loose in several countries but better in others …

Short rates vs nominal GDP in China

0

5

10

15

20

25

30

J an-95 J ul-96 J an-98 J ul-99 J an-01 J ul-02 J an-04 J ul-05 J an-07

3m CHIBOR China nominal GDP growth

(%)Short Rates vs Nominal GDP in Taiwan

-10

0

10

20

30

40

50

60

J an-65 J an-69 J an-73 J an-77 J an-81 J an-85 J an-89 J an-93 J an-97 J an-01 J an-05

Rediscount Rate Taiwan nominal GDP growth

(%)

Short Rates vs Nominal GDP in India

4

6

8

10

12

14

16

18

J un-00 Mar-01 Dec-01 Sep-02 J un-03 Mar-04 Dec-04 Sep-05 J un-06 Mar-07 Dec-07

Repo rate India nominal GDP growth

(%)

Short Rates vs Nominal GDP in Korea

-10

-5

0

5

10

15

20

25

J an-92 J an-94 J an-96 J an-98 J an-00 J an-02 J an-04 J an-06 J an-08

91d CD rate Korea nominal GDP growth

(%)


Since 2002 low inflation has supported stable monetary policy and market returns

-60

-40

-20

0

20

40

60

80

100

Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06-5

0

5

10

15

20

MSCI Asia Pacific ex-J P (U$) % yoy Change Asian Inflation (RHS)

(%)

(% yoy)


But rising inflation increases market volatility through an increase in the equity risk premium and shrinking PE multiples

Asian Inflation vs. Equity Risk Premium

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

J un-03 Dec-03 J un-04 Dec-04 J un-05 Dec-05 J un-06 Dec-06 J un-07 Dec-070

1

2

3

4

5

6

7

8

9

Asian ERP (LHS) Asian Inflation (RHS)

(% yoy)(%)

Absolute Changes in PE vs % Change in Asian Inflation

-15

-10

-5

0

5

10

15

20

Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

yoy change in trailing PE (x) LHS yoy change in inflation rate (reverse RHS)

\

(x)

(%, reverse scale)


Defensive characteristics – 1 July 1999 to 31 March 2008

Bull Mkt Periods(22 qtrs) Bear Mkt Periods (13 qtrs) Total Annualised (35qtrs) Return

Ann

ualis

ed r

etur

ns (

%)

(net

of

fees

)

34.5% 41.3%

-20.5%

-31.9%

7.8%

-40

-30

-20

-10

0

10

20

30

40

50

Lincoln Far East UnitTrust

MSCI AC Asia Pacificex-Japan Index

UK Retail Price Index 10.7% 2.5%


Risk-Reward comparison1 July 1999 to 31 March 2008

The returns presented in this graph are presented gross of advisory fees and other expenses associated with managing an investment advisory account. Actual returns will be reduced by such fees and expenses.

2

4

6

8

10

12

14

16

12 14 16 18 20 22 24 26

Annualised Standard Deviation

An

nu

ali

se

d R

etu

rn %

MEDIAN

ME

DIA

N

Lincoln Far East Fund

MSCI AC Asia Pacific ex Japan

43 Portfolios


Conclusion

Inflation is trending higher

Monetary policy is too loose

Markets will become more volatile

Mondrian’s approach looks at real absolute returns, preserving capital, lower volatility


This information is intended only for professional financial advisers and should not be used or relied upon by private investors or any other persons. The price of units and the income from them can fall as well as rise and is not guaranteed. Investors might not get back their original investment. Where applicable, exchange rates may also cause the value of underlying overseas investments to go down or up.Past performance should not be taken as a guide to the future.The figures within this presentation, are provided by, and are the primary responsibility of Mondrian Investment Partners.

Issued by Lincoln Unit Trust Managers Limited, incorporated in England registration number 1651703, registered office Barnett Way, Barnwood, Gloucester, GL4 3RZ. Telephone Customer Services 0800 282 621, Fax 01452 637156, www.lutm.co.uk. Lincoln Unit Trust Managers Limited is authorised and regulated by the Financial Services Authority and is a member of the Lincoln Financial Group. Member of the Investment Management Association. Any information offered will relate to the life assurance, pension and unit trust products of the Lincoln Financial Group. No personal financial advice or recommendations will be given. Calls may be monitored and recorded for security and training purposes.

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