How to Invest for the Best Returns

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Outline the benefits of Asset Backed Investments for long-term returns.

Differentiate between under and abnormal performance of multiple Assets.

Fully justify the need for Asset Diversification.

Present the Risk-Return relationship, as well as its numerous comfort zones.

Reinforce why Swallow upholds Passive Management rather than Active.

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… Throughout these notes we have tried wherever possible to use 20 years of data.

May 1994

Inflation = 2.55%

Bank Base Rate = 5.13%

FTSE 100 = 2,970

bbbbbInflation=2.38% | Bank Base Rate=0.5% | FTSE100=6,832

Generate £10,000 of income.

Aim:

Security:

10 Year GILT.

Cost:

£381,679 (ignoring costs)

Inflation=2.55% | Bank Base Rate=5.13% | FTSE100=2970

Aim:

Cost:

£119,617 (ignoring costs)

Security:

10 Year GILT.

Generate £10,000 of income.

This is equivalent to an Annualised Growth Rate of 5.97%. Had the FTSE 100 grown by

the same sum it would now be at 9477. (Bank of England, FTSE and Wren Research statistics).

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Over the long-term, assets tend to perform better than cash or inflation:

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0%

100%

200%

300%

400%

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600%

700%

800%

900%

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Year

Asset Growth June 1994 to May 2014

FTSE 100

International Equities

Emerging Markets

Property

Global Bonds

Cash

RPI

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For example, UK Small has an average return of approximately 10.8%, but in any one year this can vary

between -9.1% and + 30.7%. Cash averages at 4.2%, but this can also vary between 1.6% and 6.4%.

0%

2%

4%

6%

8%

10%

12%

0% 5% 10% 15% 20% 25%

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Annualised Standard Deviation

Standard Deviation Chart June 1994 - May 2014

FTSE 100

UK Small

International Equities

Emerging Markets

Property

Global Bonds

Cash

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Empirical evidence has shown that if you combine asset classes the end result is greater than that of the

composite parts. By choosing uncorrelated assets you can achieve reasonable returns in most markets

as when some assets are going down, others normally rise.

Correlation of 1.0 indicates a perfect association | Correlation of 0 indicates no relation | Correlation of -1.0 indicates perfect disassociation

05/1994 to 05/2014

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We propose 7 different risk categories for our clients. These are based on your FinaMetrica score (1 to

100). If you would like to know how we reach a ranking, please refer to our Risk Profile notes.

So the most cautious investor (i.e. with a FinaMetrica score of less than 20) is the wary one. On the

other hand, the high risk investor (with a score of 90 +) is “Gung Ho”, holding the most volatile assets.

Investment Option

Investor Type

FIXED/CASH PROPERTY EQUITIES TOTAL

UK Intl UK Intl UK International

Core Value Small Main Markets

Emerging Markets

1 Wary 90.00% 10.00% - 100.00%

2 Cautious 60.00% 15.00% 10.00% 5.00% 10.00% - 100.00%

3 Prudent 30.00% 20.00% 15.00% 5.00% 15.00% 5.00% 10.00% 100.00%

4 Balanced 15.00% 10.00% 15.00% 10.00% 15.00% 5.00% 5.00% 20.00% 5.00% 100.00%

5 Adventurous 5.00% 5.00% 15.00% 5.00% 20.00% 10.00% 5.00% 27.50% 7.50% 100.00%

6 Speculative - - 10.00% 5.00% 23.00% 10.00% 10.00% 27.00% 15.00% 100.00%

7 High Risk - 10.00% 20.00% 20.00% 30.00% 20.00% 100.00%

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High Risk Portfolio v Asset Class June 1994 to May 2014

High Risk FTSE 100 UK Value UK Small International Equities Emerging Markets

Year

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The High Risk portfolio contains the other asset classes but has beaten all but UK Small whilst

generating far less volatile returns (Total return over 20 years: 409%)

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Again the Prudent portfolio contains the other asset classes. Having fallen below the FTSE 100, it has

however beaten International Equities and Global Bonds whilst generating far less volatile returns.

(Total return over 20 years: 311%)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

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Prudent Portfolio v Asset Class June 1994 to May 2014

Prudent Global Bonds Property FTSE 100 UK Value International Equities

Year

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Risk is the uncertainty of an investment performing better or worse than expected. This is also called the

standard deviation from the norm. If we look at the returns for the above asset classes over 20 years

we have a table as follows:

As you can see, the use of a mixture of assets overall generates better returns at lower risk than does

an equivalent asset class.

In About 70% of Time Periods

Data Series Annualised Return Standard Deviation

Minimum

Return

Maximum

Return

Emerging Markets 5.76% 20.52% ( 14.76%) 26.28%

High Risk 8.48% 15.64% ( 7.17%) 24.12%

UK Small 10.82% 19.92% ( 9.10%) 30.73%

UK Value 8.42% 20.38% ( 11.96%) 28.80%

FTSE 100 7.92% 15.88% ( 7.96%) 23.80%

Prudent 7.32% 7.62% ( .30%) 14.94%

International Equities 6.39% 15.20% ( 8.81%) 21.59%

Property 7.15% 19.08% ( 11.93%) 26.22%

Global Bonds 6.92% 3.77% 3.15% 10.70%

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Wary has an average return of 4.36%, a best return of 8.2% and a worst return of 0.22%. Opposing

this however is Speculative, which has an average return of 9.5% and a best return of 29%. But

most importantly, its poorest recorded performance was at -19%. Subsequently, if you are adverse

to such risk, choose a lower long term return.

( 40.00%) ( 35.00%) ( 30.00%) ( 25.00%) ( 20.00%) ( 15.00%) ( 10.00%)

( 5.00%) -

5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00% 50.00%

Wary

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Portfolio

Highest and Lowest returns, Swallow Portfolios June 1994 to May 2014

Highest

Lowest

Average

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If you look at the best and worst returns from a selection of our recommended portfolios, you will observe

the following:

Best / Worst Returns Annual: 05/1994 – 05/2014; Default Currency: GBP

If you do not require your money for 10+ years , then you can afford a greater amount of risk knowing that

the return is more likely to be as expected.

£10,000

£15,000

£20,000

£25,000

£30,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Va

lue

Years

No charges

Passive

Active

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We believe investment returns in the future will (on average) reflect the inflation rate. Subsequently, if

Inflation is low then an average Passive Fund with charges of 1% is bound to out perform an average

Managed Fund with charges of 2.5%. See “Our Approach to Investment Management” notes for more.

£10,000 at a gross annual return of 5% over 20 years will grow to £26,500 with no charges, £21,911 in

a Passive Fund or £16,386 in an Active Fund. Consequently, an Active Fund has to grow by 30%

more than the index just to keep pace with it.

Active Versus Passive Investment: The Effect of Charges

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If that is not enough to convince the sceptics, the 2013 ratio of US mutual fund new

investments was 62% Passive 38% Active.

Here are some facts to stir the pot:

Global Equity

UK Equity

European Equity

US Equity

Emerging Markets Equity

Global Bonds

GBP Diversified Bonds

Euro Diversified Bonds

US Divsified bonds

83%

65%

78%

80%

75%

82%

79%

99%

99%

% of Fund Managers Underperforming from 1999 to 2013

(Including Funds Wound Up)

(Vanguard approx, calculations made using Morningstar Data)

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The Graham and Campbell study of 237 market timing newsletters showed that less than 25% of the

“experts” predicted the right outcome once, let alone consistently. If we cannot get the asset timing

right, we believe clients should remain invested in their optimum asset classes.

FTSE 100 UK Value UK Small International Equities Emerging Markets Property Global Bonds Cash

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The benefits of Diversification.

What is your riskposition?

The long-term returns of different sectors and their

antagonistic relationships.

Passive Investment strategies.

20 Year financial Landscape

Fixed Interest Rate Investment yields’

should go up! Fundamental interest

is currently approximately 0%.

The capital value of fixed interest

securities bonds will fall.

Property: Capital value of commercial property

could fall alongside rising interest rates.

Property: But rising new build costs invites

inflation proofing over the long term

Macro: Future equity values are uncertain due

to competition turbulence.

Throughout this report, we have proposed a wide array of considerations. Yet at all times, we have made

an explicit effort to retain a perspective centred around the Client’s best interests. The foundation to our

evaluation has subsequently been based on the following:

Investment Forecast Sectors

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Disclosure and Fund Information

The graphs and schedules within this presentation would not have been possible without access to the Dimensional Fund Advisors Ltd back tested

database of funds. The funds we have used were somewhat restricted due to the desire to show 20 years performance (many indices are only 5 to 10

years old). The specific indices we have used are:

Citigroup World Government Bond Index 1-30+ Years (hedged)

Dimensional Global Short-Dated Bond Index (gross of fees, hedged in )

Dimensional Small Cap Index

Dimensional Value Index

FTSE 100 Index

FTSE All-Share Index

MSCI Emerging Markets Index (gross div.)

MSCI World ex UK Index (gross div.)

S&P Global Property Index (gross div.)

S&P Global REIT Index (gross div.)

One-Month Treasury Bills

Retail Price Index

In addition we have used Bank of England data concerning interest rates and related issues. Wherever possible we have included dividend income in

the returns so as to compare all investments on a like for like basis.

•We have taken no account of charges (except in our comments re active fund managers) although clearly charges have a major effect on long term

performance.

•We have taken no account of taxation within our figures. At present in the UK capital gains tax is at a maximum of 28% and income tax is at a

maximum of 62% (45%?/50%?). This makes a colossal difference to the end return on your investments.

•Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or

lower than the performance shown.

And finally, whilst we have tried our best to ensure that we have presented you with an accurate and well reasoned presentation any advice we give to

clients must be client specific and not of a generalised nature. E.&.O.E.

Thank You