The World as I see it.... FELIX STEPHEN Head of Strategy & Research ADVANCE Asset Management Limited May 2014.

The World as I see it....

FELIX STEPHENHead of Strategy & Research

ADVANCE Asset Management LimitedMay 2014

The future...

2

“You can't connect the dots looking forward; you can only connect them looking backwards.

So you have to trust that the dots will somehow connect in your future.

You have to trust in something - your gut, destiny, life, karma, whatever.

This approach has never let me down, and it has made all the difference in my life”

Steve Jobs (Co Founder, Chairman and CEO Apple Inc, Pixar, NeXT Inc)(24th Feb 1955 – 5th Oct 2011)

Uncertainty, Predictability & Time(We live in a world of heightened uncertainty)

3

Source: Dr Tim Jones & Advance Asset Management

Demographic dividends have been of exceptional support for financial assets and housing markets

4

Source: Soc Gen & Advance Asset Management

Global Headline Inflation Trends (Disinflation)

5

Source: Haver Analytics & Advance Asset Management

The importance of credit in a modern economy

6

Source: UBS & Advance Asset Management

USA: Money Supply, Credit & Inflation Trends

7

Source: Fed, US Dept of Commerce, Nomura Research Institute & Advance Asset Management

US Households are paying down debt even at historically lowest Interest Rates

8

Source: FRB, Dept, of Commerce, NRI & Advance Asset Management

QE and the impact on US Employment(What exactly is QE supposed to be doing?)

9

Source: Bloomberg & Advance Asset Management

What drives people to make an investment decision?

10

Risk / Return

Fear / Greed

Investor decisions are influenced by information and emotion

11

EuphoriaPanic

Fundamental research drives decision making

Greed drives decision making

Fear drives decision making

Risk Appetite

Eastern Europe and The South China Sea regions

12

Source: GlobalconflictMaps.com & Advance Asset Management

South China Sea

13

Source: UNCLOS, CIA, BBC & Advance Asset Management

Growth of Wealth Management Products in China

14

Source: UBS, Bloomberg & Advance Asset Management

Core scenario anticipates a gentle decline in growth

15

Source: Soc Gen, Bloomberg & Advance Asset Management

Likely progression of a crisis

16

Source: Soc Gen & Advance Asset Management

Foreign Ownership of Asian Government Bonds

17

Source: UBS, Bloomberg & Advance Asset Management

Ponzi Finance: Speculative and leveraged investing

18

Source: NYSE, Bloomberg & Advance Asset Management

Ponzi Finance: Speculative and leveraged investing

19

Source: NYSE, Bloomberg & Advance Asset Management

Post GFC House Price Movements........

20

Source: OECD, Goldman Sachs, & Advance Asset Management

A summary of Macro-prudential housing policies.......

21

Source: Goldman Sachs, & Advance Asset Management

A sharp decline in implied & realised volatility is due to tighter regulation and easy monetary conditions and.....

22

Source: CitiGroup, Bloomberg & Advance Asset Management

The distribution of Risk - The Bell CurveCentral banks and regulators have been instrumental in reducing “Tail Risks”

23

Source: Stockcharts.com & Advance Asset Management

Our response to uncertainty and volatility: SAA,DAA & TAA

24

Peak

FinancialMarketCycle

Trough

High Risk

PortfolioRisk

Allocation

Low Risk

Through 2 Financial Market Cycles

Active Asset Allocation Strategies

DAA (LHS) TAA (LHS) SAA (LHS) Financial Market Cycle (RHS)

The future...

25

“ In a time of drastic change, it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that NO LONGER EXISTS”

Eric Hoffer(American Social Writer & Philosopher)25th July 1902 – 21st May 1983

Disclaimer

26

This information is of a general nature only and has been prepared without taking into account the objectives, financial situation or needs of any particular person. Before acting on the information, a person should consider its appropriateness having regard to these factors. The information is made available for use by advisers only and must not be passed on to clients. The Advance Multi-Blend Funds (Funds) are issued by Advance Asset Management Limited ABN 98 002 538 329 AFSL No. 240902 (Advance).

Before deciding whether to acquire or to continue to hold an investment in a Fund, investors should obtain and consider the current Product Disclosure Statement for the Fund, available from www.advance.com.au. Past performance is not a reliable indicator of future performance. While the information in this document is given by Advance in good faith, it does not warrant that it is accurate, reliable, free from error or omission. Information from third parties is believed to be reliable however it has not been independently verified. Advance is a member of the Westpac Banking Corporation (Westpac) Group of companies.

An investment in the Fund does not represent an investment in, deposit with or other liability of Westpac or any other member of the Westpac Group. It is subject to investment risk, including possible delays in repayment and loss of income and principal invested. Neither Westpac, nor any other member of the Westpac Group, stands behind or otherwise guarantees the capital value or the performance of an investment in a managed fund issued by Advance. Subject to any terms implied by statute which cannot be excluded, neither Advance nor any other company in the Westpac Group or their directors, employees and associates accept any responsibility for errors in, or omissions from the information.

Questions?

Follow Felix’s weekly podcast at advance.com.au