Investors’ Seminar

June 2010

Disclaimer

This is not Advice. Please see Mark before considering any changes. Mark will put any recommendations in writing

The information contained in this presentation has been prepared for general use only and does not take into

account your personal investment objectives, financial situation or particular needs. Before you make any decision

about whether to invest in a financial product, you should obtain and consider the Product Disclosure Statement of

the financial product.

The information provided by HFS has been done so in good faith and has been derived from sources believed to be

accurate at the time of compilation. Changes in circumstances, including unlawful interference and unauthorised

tampering, after the date of publication may impact on the accuracy of the information. Neither HFS d nor any

member of HFS accepts responsibility for any inaccuracy or for investment decisions or any other actions taken by

any person on the basis of the information included. Past performance is not a reliable indicator of future

performance.

Neither HFS nor any member of HFS guarantees the performance of the Funds, the repayment of capital or any

particular rate of return. The performance of any unit trust depends on the performance of its underlying investment

which can fall as well as rise and can result in both capital losses and gains. Consequently, due to market influences,

no assurance can be given that all stated objectives will be achieved.

Realistic Goals

Structure/Strategy (Tax etc)

Super Fund Admin

Asset Mix 1 -Cash/TermDs needed

Asset Mix 2–Growth Section (LHS)

Stock-Picker Selection

The Boxes to Tick

Investors’ SeminarJune 2010

Today’s Seminar addresses events over the past year and:

1. How they affect:

Structure & Strategy

Asset Mix

Specific Investment Selection

2. What changes are needed

Issues to AddressJune 2010

Structure Matters – The 3 major reviews - Ripoll/Bowen, Cooper and Henry

Asset Mix Considerations – Sovereign Debt Crisis & the GFC

Specific Investments – Economic Conditions including Sovereign Debt, China etc

Structure – Government Policy

Henry/Rudd review

Simplify Tax………no

Complicate super vs non-super……no

Ripoll/Bowen

Fiduciary, transparency; commissions; opt-in

Cooper Review

My Super; SuperStream;

SMSF – minimal change

Structure – What Changes are needed?

Super & Pensions – planning for retirement unchanged

Tax & Centrelink Matters

SMSFs - Trust Deeds

- Investment Placement and monitoring

Asset Mix IssuesJune 2010

Sovereign Debt & the GFC

Globalisation

The Market Economy

Recap on the Global Financial Crisis : Debt – Western Consumers; Deleveraging

Sub-Prime in US; CDOs–and inter-bank transfers

Negative Cycle –Profits Drop; Unemployment increases; Consumer Confidence drops etc

***********************The Solution - Governments stimulating their economies. They had to borrow to do this! Hence now we have Sovereign Debt problems.

GFC Evolution

One of my favourite quotes:

10

‘Experience is the best teacher, but its lessons are not cheap. Therefore we should avoid paying for the same lesson twice. Actually, there is no need for investors to make the same mistake more than once, there being no shortage of possible new mistakes to choose from.’

 

Robert Keavney, Centric Wealth, July 2009

[5]

* Eurostat** The Economist Intelligence Unit as at 29 April 2010.*** OECD Data & Magellan Asset Management

-0.8%-2.8%13.4%164Ireland

-8.9%-9.9%10.1%164Portugal

-8.6%-10.9%11.3%237Greece

-0.2%0.5%11.8%338Belgium

-3.8%-5.3%20.1%1051Spain

-2.5%-3.1%8.3%1521Italy

2010 **2009***Rate**2009*

Current Account Deficit/ GDPUnemploymentGDP (EUR bn)Country

Europe - Key Economic Facts

[6]

* Eurostat.** The World Bank Quarterly External Debt Statistics & Magellan Asset Management Ltd.*** The Economist Intelligence Unit as at 29 April 2010.

-12.5%-14.3%987.0%64.0%Ireland

-8.5%-9.4%233.0%76.8%Portugal

-9.4%-13.6%171.0%115.1%Greece

-6.6%-6.0%258.3%96.7%Belgium

-11.5%-11.2%168.5%53.2%Spain

-5.3%-5.3%119.0%115.8%Italy

2010***2009*20092009

Fiscal Deficit/ GDPExternal Debt/ GDP **Govt. Debt/ GDP*Country

Europe - Debt and Deficits

[13]

Source: Eurostat, IMF, National Sources, Bloomberg. Forecast balances converted into US Dollars using spot exchange rates on 12 May 2010

7,9043 YEAR TOTAL

7.3%9.4%8.2%368 389312Japan

6.6%9.4%9.3%215 150207United Kingdom

995

1,550

2010

Total, Billions of USD

987 633

1,270 828

2011 2012

4.4%5.9%5.4%Europe

5.1%

2012

8.3%10.6%United States

Percentage Of GDP

2010 2011

Massive government borrowing needs…

Forecast Annual Budget Deficits

[14]

…financed by a limited savings pool

Source: International Monetary Fund, World Economic Outlook, April 2010

3,7513 YEAR TOTAL

576489405Total, other surplus countries

917856Japan

73

493

2010

Total, Billions of USD

93

580

2011

114Germany

702

2012

China

Forecast Current Account Surplus Positions

Sovereign Debt

Governments are powerful because they can tax their constituents. But there is a limit.

Government Debt can be reduced by:

Increasing Tax

Decreasing Spending (but some areas are limited)

4 farrelly’s

Projected Govt debt (% of GDP)

(BIS projections)

1. No change

2. 5% deficit reduction

3. 5% reduction + age spend frozen

1

2

3

5 farrelly’s

Government debt will not get to 400% of GDP

• If interest cost is 5%, interest = 20% of GDP

• At 10%, interest is 40% of GDP• Taxes normally between 20 to 30% of

GDP• Governments will cut spending &

increase taxes - eventually

6 farrelly’s

High debt = low growth

Impact of Government debt on GDP growth. (Developed countries 1946 -2009)

2.53.33.5Median GDP growth

-0.23.53.4Average real GDP growth

Debt above 90%

of GDP

Debt between 60 to 90% of

GDP

Debt less than 60% of GDP

Source : Rogoff and Reinhart, Growth in a time of debt

7 farrelly’s

Developed world worse than the PIGs…

(BIS projections)

1. No change

2. 5% deficit reduction

3. 5% reduction + age spend frozen

Economic Cycles

Consider some long-term cycles

Developed Nations – slower but some growth

Emerging Nations – good potential

The Wealth effect revisited

Emerging Markets – 500 years of Growth

12

13

Emerging Markets – 500 years of Growth

[34]

Magellan InfrastructureWhy Infrastructure – Increasing Opportunity Set

Source: Deloitte, World Bank, ASCE, McGill University, ProjectFinance,A&L Goodbody Consulting, Government of India

Canada faces a $60b annual infrastructure deficit. Investment needs for urban roads and bridges are $66b over 10 years.

The ASCE estimates US infrastructure investment needs to be $2.2 trillion over the next 5 years.

Latin America need projected at $71b

The EU has infrastructure needs that run into trillions of dollars. The energy sector is estimated to require $1.2 trillion over the next 20 years.

The govt of India estimates that it will need to invest approximately

$250b over the next 5 years.

The developing economies of East Asia need to invest $165b pa over the next 5

years

8

8

W ealth jum ped

Household w ealth as a mu ltiple of annual disposable income

350%

450%

550%

650%

750%

850%

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

S ource: A B S , R B A , A ccess E conom ics

Projections

What are the key timeframes:

0-2 years – no projections needed. Cash and Term Deposits cover all goals in this time frame

2-8 years – not necessary to invest in this timeframe if we can have a 10 year focus which incorporates better returns

10+ years – the key goals. Again we use the Tim Farrelly Projections

AssetMix

Australian SharesInternational Shares

Property

Term Deposits

Cash

17 farrelly’s

Total returns-an example

3.5%pa

EPS PE Price Contribution

$1.00 17 $17.00

$0.95 17 $16.15

$0.95 10 $9.50

-5%pa

-42%pa

Earnings Growth

Income

Sentiment

Total-43%pa

+

+

3 5 f a r r e l l y ’ s

1 0 Y e a r F o r e c a s t s a s a t J u n - 1 0

D i v i d e n d E a r n i n g s C e n t r a l

Y i e l d * G r o w t h F o r e c a s t

A u s t r a l i a n E q u i t i e s 5 . 5 % 3 . 6 % 0 . 8 % 9 . 9 % 1 4 . 8 x

A s s e t S e n t i m e n t P E

4 0 f a r r e l l y ’ s

1 0 Y e a r F o r e c a s t s a s a t J u n - 1 0

* I n c l u d e s e x p e c t e d c u r r e n c y g a i n

D i v i d e n d E a r n i n g s C e n t r a l

Y i e l d * G r o w t h F o r e c a s t

A u s t r a l i a n E q u i t i e s 5 . 5 % 3 . 6 % 0 . 8 % 9 . 9 % 1 4 . 8 x

I n t e r n a t i o n a l E q u i t i e s 4 . 3 % 5 . 3 % - 1 . 9 % 7 . 7 % 2 1 . 1 x

A s s e t S e n t i m e n t P E

4 1 f a r r e l l y ’ s

1 0 Y e a r F o r e c a s t s a s a t

D i v i d e n d E a r n i n g s C e n t r a l

Y i e l d * G r o w t h F o r e c a s t

A u s t r a l ia n E q u i t ie s 5 . 5 % 3 . 6 % 0 . 8 % 9 . 9 % 1 4 . 8 x

I n t e r n a t io n a l E q u i t ie s 4 . 3 % 5 . 3 % - 1 . 9 % 7 . 7 % 2 1 . 1 x

L i s t e d P r o p e r t y T r u s t s 6 . 0 % 2 . 1 % - 1 . 2 % 6 . 9 % 1 6 . 8 x

A s s e t S e n t i m e n t P E

* I n c l u d e s e x p e c t e d c u r r e n c y g a i n

J u n - 1 0

4 2 fa r re l l y ’ s

1 0 Y e a r F o r e c a s t s a s a t J u n - 1 0

* I n c l u d e s e x p e c t e d c u r r e n c y g a in

D iv i d e n d E a rn i n g s C e n t ra l

Y i e l d * G ro w th F o re c a s t

A u st r a lia n E q u it ie s 5 . 5 % 3 . 6 % 0 . 8 % 9 . 9 % 1 4 . 8 x

I n t e r n a t io n a l E q u it ie s 4 . 3 % 5 . 3 % - 1 . 9 % 7 . 7 % 2 1 . 1 x

L is t e d P r o p e r t y T r u s t s 6 . 0 % 2 . 1 % - 1 . 2 % 6 . 9 % 1 6 . 8 x

F ix e d I n te r e s t 6 .7 % 0 . 0 % 0 . 0 % 6 . 7 % 1 5 . 0 x

A s s e t S e n t i m e n t P E

4 5 fa rre lly ’s

1 0 Y e a r F o re c a s t s a s a t J u n - 1 0

* In c lu d e s e x p e c t e d c u rre n c y g a in

D iv i d e n d E a rn i n g s C e n t ra l

Y i e l d * G ro w th Fo re c a s t

A u st r a lia n E q u it ie s 5 .5 % 3 . 6 % 0 . 8 % 9 .9 % 1 4 . 8 x

I n t e rn a t io n a l E q u it ie s 4 .3 % 5 . 3 % - 1 . 9 % 7 .7 % 2 1 . 1 x

L is t e d P ro p e r t y T ru s t s 6 .0 % 2 . 1 % - 1 . 2 % 6 .9 % 1 6 . 8 x

F ix e d In t e re s t 6 .7 % 0 . 0 % 0 . 0 % 6 .7 % 1 5 . 0 x

R e si d e n t ia l P r o p e rty 2 .3 % 4 .5 % - 0 .8 % 6 .0 % 4 3 .5 x

A ss e t S e n ti m e n t P E

44 farrelly’s

Sydney and Melbourne house prices

$0

$100

$200

$300

$400

$500

$600

80 83 86 89 92 95 98 01 04 07

Sydney M elbourne

How much does the market pay for $1 of rent?

PE = 40

PE = 43

PE = 25PE = 11

farrelly’s

10 Year Forecasts as at Mar-09

*Includes expected currency gain

Dividend Earnings Central

Yield* Growth Forecast

Australian Equities 7.3% 1.5% 5.4% 14.2% 9.5 x

International Equities 4.4% 1.0% 7.7% 13.1% 8.4 x

Listed Property Trusts 9.3% 1.1% 2.0% 12.4% 10.8 x

Fixed Interest 4.2% 0.0% 0.0% 4.2% 24.0 x

Residential Property (Syd) 2.3% 4.5% -0.8% 6.0% 43.5 x

Asset Sentiment PE

farrelly’s

10 Year Forecasts as at Mar-07

*Includes expected currency gain

Dividend Earnings Central

Yield* Growth Forecast

Australian Equities 4.9% 1.6% -0.1% 6.4% 16.2 x

International Equities 3.5% 3.0% 0.5% 7.0% 17.8 x

Listed Property Trusts 5.2% 2.2% -3.1% 4.3% 19.2 x

Fixed Interest 5.8% 0.0% 0.0% 5.8% 17.1 x

Residential Property (Syd) 2.0% 3.0% 0.0% 5.0% 50.0 x

Asset Sentiment PE

4 5 fa rre lly ’s

1 0 Y e a r F o re c a s t s a s a t J u n - 1 0

* In c lu d e s e x p e c t e d c u rre n c y g a in

D iv i d e n d E a rn i n g s C e n t ra l

Y i e l d * G ro w th Fo re c a s t

A u st r a lia n E q u it ie s 5 .5 % 3 . 6 % 0 . 8 % 9 .9 % 1 4 . 8 x

I n t e rn a t io n a l E q u it ie s 4 .3 % 5 . 3 % - 1 . 9 % 7 .7 % 2 1 . 1 x

L is t e d P ro p e r t y T ru s t s 6 .0 % 2 . 1 % - 1 . 2 % 6 .9 % 1 6 . 8 x

F ix e d In t e re s t 6 .7 % 0 . 0 % 0 . 0 % 6 .7 % 1 5 . 0 x

R e si d e n t ia l P r o p e rty 2 .3 % 4 .5 % - 0 .8 % 6 .0 % 4 3 .5 x

A ss e t S e n ti m e n t P E

AssetMix

Australian SharesInternational Shares

Property

Term Deposits

Cash

What are the CashFlow Needs for:

Next 2 Years

Next 7-10 Years & Beyond

Need Cash and Term Deposits - this section is structured to be “Consumed”

Security – eg Government Guarantee; Return of the $ invested at the designated time; Only after “signing off” this section of the bucket do we then look at LHS of the bucket

Asset Mix - Decision 1

AS

IS

P

TD

Cash

Asset Mix – the Growth Section

The LHS Side of the Bucket. The Goals are:

Main Goal - Long-Term Total Returns – 10 Year Targets

Sub Goal – replenish the Cash

Volatile Returns are not a concern

Income is not a focus – maximising returns is the goal. A business that reinvests is not any less attractive than one that pays out all profit as a dividend.

Asset Mix - Decision 2

Invest in 3 ways – profit, rent or interest

*************

Inclusions - Cash & Term Deposits; Australian & International Shares; Property when attractive

Exclusions - Structured Funds; Mortgage Trusts ; Hybrids; Fixed Interest Pools; Loans; Mezzanine Funds; Second Tier Debt; Hedge Funds; Bond Funds; Balanced/Conservative etc; Tax-driven investments; Alternatives

*************

Technical/Academic Paper due out soon

The Hayden Asset Allocation Model

Specific Investments within asset sectors

Australian/International Shares

We have a 10 year plus time frame so we are sharing in the profits generated by the business – ie either dividends and/or capital growth generated by higher profits

We want a good portfolio and we want it monitored and changed when needed

Best way - contract Specialist Stock-pickers

AS

IS

P

TD

Cash

Asset Mix – the Growth Section

Fund manager research focuses on the four ‘Ps’

Stated investment policies & strategies.

PROCESSPEOPLEBackground, qualifications & track record.

PORTFOLIODo the securities held reflect stated investment policies & strategies ?

Returns generated relative to to the risks taken.

PERFORMANCE

Research ProcessResearch Process

How Many Managers -ie stock-pickers?

Obtain diversification – ie different processes and different people/perspectives

Not too many that we dilute the best performers

Around 3-5 in both Australian and International Shares

ASISP

TD

Cash

Specialist Stock-picker

XYZ Manager

Specific Investments

We, via the Specialist Stock-pickers, want :

** the best performing businesses over a 10+ year time frame

We want to buy these on the stock-market

Most stock-market participants are looking for the best 1 year performers. Their time frame may be shorter, eg 3 months,or……even intra-day!

This can be to our advantage. Avoid the noise.

The three choices:

Index Funds

Choose Your Own Stocks

Contract a High-Quality Stock-Picker

Are some businesses better than others? Yes – either in a better Industry and/or having better Management.

Do some people have specialised skills and resources to be able to find and then analyse businesses? Is it worthwhile paying them to do this? Yes

Is a Stock-Picker Needed?

What makes a quality stock-picker

Consider their processes

We are agreeing to buy a selected portfolio of shares and then contracting them to Manage it

We can see the underlying investments. We can address each holding and ask them why they part-own that business and what are the key factors that would lead them to sell that business

The business must have High Profit Margins or High Turnover and Reasonable Profit Margins – and this advantage must be sustainable.

Choosing a Stock-Picker

What Investments do we own?

The contracted Fund Managers (Specialist Stock-pickers) build a portfolio that we indirectly own.

We want managers that have:

High Conviction portfolios (some businesses are better than others)

Low TurnOver (trading often has a goal to lower volatilty but not necessarily maximise long-term returns)

The businesses that we part-own (via our specialist Fund Managers) should or must meet these criteria:

We want Good Businesses – ie those with a Durable Competitive Advantage

We want to avoid Poor Businesses - ie those where price is the major motivating factor in the consumer’s decision to buy their product or service.

The Buffett Overlay

Analyse specific Investments

We can address the holdings of the Managers –

The Buffett Overlay

The expected profits going forward

Our comfort factor in being a part-owner

The Strategy Going Forward

Review our goals

Consider Cash/Term Deposits and then the allocation to Australian and International Shares

Analyse the Managers via:

a) Their holdings

b) Their ongoing skill-set

What could go wrong?

Lower Returns in LHS

Volatility

Underlying businesses (ie our investments) become long-term laggards

************

Do we need to define the risks? It is not volatility nor short-term underperformance. The key risks are those that will prevent us from achieving our goals.

One of Chris Cuffe’s favourite quotes:

16

‘Experience is the best teacher, but its lessons are not cheap. Therefore we should avoid paying for the same lesson twice. Actually, there is no need for investors to make the same mistake more than once, there being no shortage of possible new mistakes to choose from.’

Robert Keavney, Centric Wealth, July 2009

Fear & Greed Index & the All Ordinaries Index since 1875

10

This chart shows the long term trend of the All Ordinaries Index, and the swings between Fear & Greed cycles, together with Standard Deviation bands:

Transparency.

Logical and Rational.

Well reasoned and justifiable on historical and theoretical basis.

Contract wise people with Integrity and Mutual Goals.

Realistic Goals – specify long-term and short-term goals. Inflation must be considered in goal setting.

A Sound Solid Plan

AssetMix

Australian SharesInternational Shares

Property

Term Deposits

Cash

AS

IS

P

TD

Cash

Asset Mix – the Growth Section

ASISP

TD

Cash

Specialist Stock-picker

XYZ Manager

Changes to Lifestyle or Financial Goals

Asset Sector Changes – eg if the 10 year return differential is significant;

Switching of Fund Managers – may be needed at any time. NB we are retaining the same asset sector exposure –eg to shares – but changing the portfolio and ongoing monitoring responsibility

Switching

Realistic Goals

Structure/Strategy (Tax etc)

Super Fund Admin

Asset Mix 1 -Cash/TermDs needed

Asset Mix 2–Growth Section (LHS)

Stock-Picker Selection

The Boxes to Tick

Peace-of-mind for Investors

1. Part-own a lot of great businesses. We have a diversified portfolio of businesses across locations, industries and via size.

2. Employing (contracting) some very wise people to monitor and change our portfolio of businesses when necessary.