n trust investment client presentation 150409

Investment Considerations

• Reduce expenses.

• Diversify systematically.

• Minimise taxes and turnover.

• Think long-term.

• Apply discipline.

• Hold low-cost funds.

• Maintain asset allocation.

5410.1

Innovations in Finance

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974

The Birth of Index Funds

John McQuown,Wells Fargo Bank, 1971;Rex Sinquefield,American National Bank, 1973

Banks develop the first passive S&P 500 Index funds.

Efficient Markets Hypothesis

Eugene F. Fama,University of Chicago

Extensive research on stock price patterns.

Develops Efficient Markets Hypothesis, which asserts that prices reflect values and information accurately and quickly. It is difficult if not impossible to capture returns in excess of market returns without taking greater than market levels of risk.

Investors cannot identify superior stocks using fundamental information or price patterns.

Single-Factor Asset Pricing Risk/Return Model

William SharpeNobel Prize in Economics, 1990

Capital Asset Pricing Model: Theoretical model defines risk as volatility relative to market.

A stock’s cost of capital (the investor’s expected return) is proportional to the stock’s risk relative to the entire stock universe.

Theoretical model for evaluating the risk and expected return of securities and portfolios.

The Role of Stocks

James TobinNobel Prize in Economics, 1981

Separation Theorem:1. Form portfolio of risky assets.2. Temper risk by lending and borrowing.

Shifts focus from security selection to portfolio structure.

“Liquidity Preference as Behavior Toward Risk,” Review of Economic Studies, February 1958.

Conventional Wisdom circa 1950

“Once you attain competency, diversification is undesirable. One or two, or at most three or four, securities should be bought. Competent investors will never be satisfied beating the averages by a few small percentage points.”

Gerald M. Loeb, The Battle for Investment Survival, 1935

Analyse securities one by one. Focus on picking winners. Concentrate holdings to maximise returns.

Broad diversification is considered undesirable.

Diversification and Portfolio Risk

Harry MarkowitzNobel Prize in Economics, 1990

Diversification reduces risk.

Assets evaluated not by individual characteristics but by their effect on a portfolio. An optimal portfolio can be constructed to maximise return for a given standard deviation.

Investments and Capital Structure

Merton Miller and Franco ModiglianiNobel Prizes in Economics,1990 and 1985

Theorem relating corporate finance to returns.

A firm’s value is unrelated to its dividend policy.

Dividend policy is an unreliable guide for stock selection.

Behaviour of Securities Prices

Paul Samuelson, MITNobel Prize in Economics, 1970

Market prices are the best estimates of value.

Price changes follow random patterns. Future share prices are unpredictable.

“Proof That Properly Anticipated Prices Fluctuate Randomly,” Industrial Management Review, Spring 1965.

First Major Study of Manager Performance

Michael Jensen, 1965A.G. Becker Corporation, 1968

First studies of mutual funds (Jensen) and of institutional plans (A.G. Becker Corp.) indicate active managers underperform indices.

Becker Corp. gives rise to consulting industry with creation of “Green Book” performance tables comparing results to benchmarks.

Options Pricing Model

Fischer Black, University of Chicago;Myron Scholes, University of Chicago;Robert Merton, Harvard UniversityNobel Prize in Economics, 1997

The development of the Options Pricing Model allows new ways to segment, quantify, and manage risk.

The model spurs the development of a market for alternative investments.

5510.1

Innovations in Finance

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Nobel Prize Recognises Modern Finance

Economists who shaped the way we invest are recognised, emphasising the role of science in finance.

William Sharpe for the Capital Asset Pricing Model.

Harry Markowitz for portfolio theory.

Merton Miller for work on the effect of firms’ capital structure and dividend policy on their prices.

Variable Maturity Strategy Implemented

Eugene F. Fama

With no prediction of interest rates, Eugene Fama develops a method of shifting maturities that identifies optimal positions on the fixed interest yield curve.

“The Information in the Term Structure,” Journal of Financial Economics 13, no. 4 (December 1984): 509-28.

Multifactor Asset Pricing Model and Value Effect

Eugene Fama and Kenneth French,University of Chicago

Improves on the single-factor asset pricing model (CAPM).

Identifies market, size, and “value” factors in returns.

Develops the three-factor asset pricing model, an invaluable asset allocation and portfolio analysis tool.

“Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Financial Economics 33, no. 1 (February 1993): 3-56.

Database of Securities Prices since 1926

Roger Ibbotson andRex Sinquefield,Stocks, Bonds, Bills, and Inflation

An extensive returns database for multiple asset classes is first developed and will become one of the most widely used investment databases.

The first extensive, empirical basis for making asset allocation decisions changes the way investors build portfolios.

A Major Plan First Commits to Indexing

New York Telephone Companyinvests $40 million in an S&P 500Index fund.

The first major plan to index.

Helps launch the era of indexed investing.

“Fund spokesmen are quick to point out you can’t buy the market averages. It’s time the public could.”

Burton G. Malkiel, A Random Walk Down Wall Street, 1973 ed.

International Size Effect

Steven L. Heston, K. Geert Rouwenhorst, and Roberto E. Wessels

Find evidence of higher average returns to small companies in twelve international markets.

“The Structure of International Stock Returns and the Integration of Capital Markets,” Journal of Empirical Finance 2, no. 3 (September 1995): 173-97.

The Size Effect

Rolf Banz, University of Chicago

Analyzed NYSE stocks,1926-1975.

Finds that, in the long term, small companies have higher expected returns than large companies and behave differently.

Integrated Equity

Eugene F. Fama and Kenneth R. French

Increasing exposure to small and value companies relative to their market weights and integrating the portfolio across the full range of securities may reduce the turnover and transaction costs normally associated with forming an asset allocation from multiple components.

“Migration,” CRSP Working Paper No. 614, Center for Research in Security Prices, University of Chicago, February 2007.

5510.1

Warren E. BuffettChairman and CEO, Berkshire Hathaway, Inc.

Berkshire Hathaway Inc., 1996 Annual Report, chairman’s letter, in www.berkshirehathaway.com.

“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.”

5110.1

Efficient Markets HypothesisEugene F. Fama, University of Chicago

The Hypothesis States:

• Current prices incorporate all available information and expectations.

• Current prices are the best approximation of intrinsic value.

• Price changes are due to unforeseen events.

• “Mispricings” do occur but not in predictable patterns that can lead to consistent outperformance.

Implications

• Active management strategies cannot consistently add value through security selection and market timing.

• Passive investment strategies reward investors with capital market returns.

Eugene F. Fama, “Efficient Capital Markets: A Review of Theory and Empirical Work,” Journal of Finance 25, no. 2 (May 1970): 383-417. Eugene F. Fama, “Foundations of Finance,” Journal of Finance 32, no. 3 (June 1977): 961-64.

5120.1

0

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8

10

12

14

16

18

UK Equity Fund Returns1992-2007

Source: Morningstar data provided by Morningstar Inc. Includes all Morningstar UK Equity funds with fifteen-year returns, distinct portfolios only, as of 31 December 2007.FTSE data published with the permission of FTSE. Dimensional index data simulated by Dimensional from StyleResearch securities data; not available for direct investment.Fama/French data provided by Fama/French.This material has been distributed by Dimensional Fund Advisors Ltd. which is authorised and regulated by the Financial Services Authority. Past performance is not a guarantee of future results. This material is directed exclusively at professional customers as defined by the FSA.

20

Annualised Compound Return (%)

Fama French UK Value Index 11.91

Dimensional UK Small Cap Index 11.00

FTSE All-Share Index 9.57

Number of Funds

Ann

ua

lised

Co

mp

oun

d R

etu

rn (

%)

40 60 80 100

FTSE All-ShareIndex

Dimensional UK Small Cap Index

Fama/French UK Value Index

Morningstar Fund Average

5130.1

Fund A Fund B Fund C Fund D

Morningstar (Dec 2000)

Forbes (Dec 2000) C A A+ D

US News & World Report (Dec 2000) 34 50 10 93

Wall Street Journal (Jan 2001) E C A B

BusinessWeek (Jan 2001) A No Rating B+ C

Funds A, B, C, and D are actual funds. They are not identified because the purpose of this illustration is to emphasise that ratings, by themselves, do not provide enough information to make a sound investment decision.

Morningstar: Five stars is highest rating; one star is lowest rating.US News & World Report: 100 is highest rating; 1 is lowest rating.

The Limits of Fund Rating Services 5440.1

5370.1

Subsequent PeriodJanuary 1998-December 2002 January 2003-December 2007

Fund Name Rank Quartile RankAverage Annual

Total Return Rank Quartile RankAverage Annual

Total Return

GAM UK Diversified Inc 1 1 11.83 34 1 17.76

Rathbone Special Sits Inc 2 1 11.65 148 3 13.49

Solus UK Special Situations Inc 3 1 9.99 124 3 14.14

Fidelity Special Situations 4 1 8.86 15 1 19.93

Marlborough UK Equity Growth 5 1 7.74 225 4 9.68

Artemis Capital 6 1 7.56 41 1 17.21

St James’s Pl UK & Gen Pro Inc 7 1 7.16 195 4 12.7

Cavendish Opportunities Rtl 8 1 3.09 36 1 17.71

Merrill Lynch UK Spl Sits Inc 9 1 3.05 38 1 17.5

Norwich UK Growth 1 10 1 3 218 4 11.52

Jupiter UK Alpha 11 1 2.36 33 1 17.8

Marlborough Quantock UK A Inc 12 1 2.02 35 1 17.75

Schroder Recovery Inc 13 1 1.44 30 1 17.94

Investec UK Special Sits A Inc 14 1 1.37 95 2 14.8

Allianz RCM UK Mid Cap A 15 1 1.35 7 1 21.46

CS Alpha Growth R Inc 16 1 1.28 213 4 11.86

Family Asset Trust 17 1 1.24 204 4 12.37

AXA Framlington UK Growth Inc 18 1 1.16 129 3 14

Newton Income 19 1 1.15 61 2 15.88

Rathbone Income & Growth Inc 20 1 1.08 71 2 15.35

Insight Inv UK Discret Rtl 21 1 0.87 191 4 12.73

New Star UK Strat Cptl Acc 22 1 0.74 40 1 17.26

JPM UK Active 350 A Acc 23 1 0.36 179 4 12.87

Liontrust First Growth 24 1 0.31 86 2 14.98

Baillie Gifford Brit350 A Inc 25 1 -0.01 186 4 12.79

Invesco UK Growth Acc 26 1 -0.36 37 1 17.67

Rensburg UK Blue Chip Growth Inc 27 1 -0.38 162 3 13.32

Insight Inv UK Dymc Mgd Acc 28 1 -0.64 78 2 15.19

Allianz RCM UK Growth A 29 1 -0.72 160 3 13.33

Investec UK Blue Chip A Acc 30 1 -0.85 157 3 13.39

Top 30 Funds Average Return 2.92 15.15

All Funds Average Return -2.15 14.97

FTSE All-Share Index -2.27 15.4

Number of Funds 138 226

Number of Top 30 Funds > FTSE All Share Index 30 12

Number of All Funds > FTSE All Share Index 54 68

Source: Morningstar Workstation (IMA UK All Companies sector, only funds with 5 year history used, in GBP, net returns, Offer to Offer price).Source and Copyright © 2008 Morningstar Limited. All rights therein are reserved. (http://www.funds.morningstar.com)Whilst Dimensional uses all reasonable efforts to ensure that the information herein is accurate and up to date, no representations or warranties are given as to the reliability, accuracy, and completeness of the information. This material has been distributed by Dimensional Fund Advisors Ltd. which is authorised and regulated by the Financial Services Authority. Past performance is no guarantee of future results. This material is directed exclusively at professional customers as defined by the FSA.

Do Winners Repeat?Subsequent Performance of Top 30 FundsFive-Year Period: January 1998-December 2002




Total Return

New Star UK Strat Cptl Acc 1 1 23.83 22 1 0.74

Jupiter UK Growth 2 1 23.69 39 2 -1.36


Fidelity UK Aggressive 4 1 21.15 65 2 -2.88

Marlborough UK Equity Growth 5 1 20.71 5 1 7.74

Rensburg UK Blue Chip Growth Inc 6 1 20.32 27 1 -0.38

Investec UK Alpha Acc 7 1 20.24 53 2 -2.09

Cavendish Opportunities Rtl 8 1 19.61 8 1 3.09

S&W UK Spec Situations Tr 9 1 19.59 136 4 -7.69

Schroder UK Select Growth Inc 10 1 19.3 134 4 -6.33

Investec UK Special Sits A Inc 11 1 18.72 14 1 1.37

Invesco UK Growth Acc 12 1 18.65 26 1 -0.36

Fidelity UK Growth 13 1 18.5 69 2 -2.95

Solus UK Special Situations Inc 14 1 18.48 3 1 9.99

Artemis Capital 15 1 18.47 6 1 7.56


Rathbone Special Sits Inc 17 1 18.07 2 1 11.65

Royal London UK Growth 18 1 17.97 74 3 -3.1

JPM Prem Equity Growth A Acc 19 1 17.95 45 2 -1.62

Martin Currie UK Growth A 20 1 17.81 77 3 -3.3

M&G UK Select A Acc 21 1 17.79 138 4 -9.47


Newton Income 23 1 17.36 19 1 1.15

Credit Suisse Fellowship Rtl 24 1 17.25 112 4 -4.5

GAM UK Diversified Inc 25 2 17.07 1 1 11.83

Std Lf UK Equity Growth Rtl Acc 26 2 16.95 67 2 -2.93

Resolution Balanced Growth Inc 27 2 16.73 109 4 -4.43

Allianz RCM UK Equity C Acc 28 2 16.45 42 2 -1.52

Allianz RCM UK Mid Cap A 29 2 16.32 15 1 1.35

Old Mutual UK Select Eq Acc 30 2 16.32 64 2 -2.86


All Funds Average Return 15.45 -2.15

FTSE All-Share Index 16.63 -2.27






5370.1



Subsequent Period

January 1988-December 1992 January 1993-December 1997

Fund Name Rank Quartile Rank

Average Annual

Total Return Rank Quartile Rank

Average Annual

Total Return

Newton Income 1 1 16.44 23 1 17.36

Artemis Capital 2 1 15.52 15 1 18.47

Invesco UK Growth Acc 3 1 14.83 12 1 18.65

AXA General Inc 4 1 14.34 75 4 13.68

Std Lf UK Equity Growth Rtl Acc 5 1 13.88 26 2 16.95

Threadneedle UK Select 1 6 1 13.38 72 3 13.72

Old Mutual UK Select Eq Acc 7 1 13.16 30 2 16.32

Norwich UK Equity 1 8 1 13.15 73 3 13.69

NFU Mutual UK Growth 9 1 12.74 36 2 15.66

AXA UK Growth R 10 1 12.7 64 3 14

Threadneedle UK Gth & Inc 1 11 1 12.58 89 4 12.5

S&W UK Equity Grwth Tr 12 1 12.4 90 4 12.41

Fidelity UK Growth 13 1 12.34 13 1 18.5

Threadneedle UK Fund 1 14 1 12.11 70 3 13.74

Threadneedle UK Oseas Earns 2 15 1 12.1 96 4 11.03

SLTM UK Eqty General 16 2 11.94 80 4 13.52

L&G (Ba) MM UK Core 17 2 11.64 55 3 14.67

SWIP UK Advantage A Inc 18 2 10.93 56 3 14.58

L&G Equity E Inc 19 2 10.84 66 3 13.96

Resolution Balanced Growth Inc 20 2 10.69 27 2 16.73

Credit Suisse UK Grth & Inc R 21 2 10.54 76 4 13.68

L&G (Ba) MM UK Alpha 22 2 10.48 68 3 13.93

TU British 23 2 10.15 37 2 15.62

CF Canlife Growth 24 2 10.13 32 2 16.14

F&C UK Equity 1 Acc 25 2 10.12 58 3 14.31

British Life UT 26 2 9.96 83 4 13.33

Allianz RCM UK Equity C Acc 27 2 9.92 28 2 16.45

Invesco UK Opportunities Inc 28 2 9.68 85 4 12.89

Lincoln Growth 29 2 9.65 88 4 12.51

CF Canlife General Inc 30 2 9.62 86 4 12.84


All Funds Average Return 8.89 15.45

FTSE All-Share Index 14.78 16.63




5370.1




Total Return

M&G Recovery A Inc 1 1 33.86 36 3 9.05



Rathbone Special Sits Inc 4 1 32.88 62 4 -10.56

Aberdeen UK Mid Cap A Inc 5 1 29.75 55 4 3.99

Fidelity Growth + Income 6 1 28.52 35 3 9.16

Investec UK Special Sits A Inc 7 1 28 50 4 7.19

Henderson UK Equity A 8 1 27.83 37 3 8.93

Family Charities Ethical 9 1 27.26 32 3 9.52

L&G (Ba) MM UK Core 10 1 26.53 17 2 11.64

Credit Suisse UK Grth & Inc R 11 2 25.73 21 2 10.54

Allianz RCM UK Equity C Acc 12 2 25.62 27 2 9.92

L&G (Ba) 500 Trust Inc 13 2 24.46 54 4 4.51

TU British 14 2 24.3 23 2 10.15

CF Canlife Growth 15 2 24.14 24 2 10.13

SWIP UK Opportunities A 16 2 24.06 38 3 8.93


Lincoln Growth 18 2 23.64 29 2 9.65

Santander N&P UK Growth 19 2 22.51 46 3 8.22

SLTM UK Eqty General 20 2 22.21 16 2 11.94

SWIP UK Advantage A Inc 21 3 22.18 18 2 10.93

M&G UK Select A Acc 22 3 22.12 44 3 8.48

JPM Prem Equity Growth A Acc 23 3 21.96 60 4 -1.88

Threadneedle UK Select 1 24 3 21.87 6 1 13.38

British Life UT 25 3 21.76 26 2 9.96

Threadneedle UK Gth & Inc 1 26 3 21.62 11 1 12.58

Pru UK Growth Trust Inc 27 3 20.56 52 4 6.53

M&G UK Growth A Acc 28 3 20.44 41 3 8.71

F&C UK Equity 1 Acc 29 3 20.05 25 2 10.12

SW UK Select Growth A Acc 30 3 20.04 42 3 8.66


All Funds Average Return 23.18 8.89

FTSE All-Share Index 23.05 14.78






5370.1

Total Return on Northern Investment Group Portfolios Bid:Bid, weekly line chart since start of data, 28 Feb 2006 from UK UT and OEICs universe.Rebased in Pounds Sterling

1y 3y 5y12m-24m

24m-36m

36m-48m

48m-60m

FIDELITY MONEYBUILDER UK INDEX

ACC -30.1 -26.3 +5.1 -7.2 +13.7 +27.2 +12.2

UK ALL COMPANIES

-29.3 -27.5 +3.9 -9.8 +13.8 +27.3 +12.6

FTSE ALL SHARE INDEX

-29.5 -26.2 +7.5 -7.3 +12.9 +29.2 +12.8

Performance of Fidelity MoneyBuilder UK Index Fund

Source: Trustnet 14/04/2009Past Performance is no guarantee of future returns. The value of units can go down as well as up.

http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=FIMNI&univ=U&typeCode=FFIMNI&pagetype=performance

http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=FIMNI&univ=U&typeCode=FFIMNI&pagetype=performance

http://www.trustnet.com/Investments/SectorProfile.aspx?code=U:UG&univ=U

http://www.trustnet.com/Investments/SectorProfile.aspx?code=U:UG&univ=U

http://www.trustnet.com/Tools/Indices.aspx?index=ASX

http://www.trustnet.com/Tools/Indices.aspx?index=ASX

http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=FIMNI&univ=U

n trust investment client presentation 150409

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