EUROPEAN EQUITIES – WHAT NEXT?

Rob Burnett

Investment Director, Head of European Equities

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NEPTUNE BY NUMBERS

Corporate– £5.4bn under management – Approximately 75% of the Company is owned by staff and directors

Investment expertise– 22 investment professionals incentivised by shares, fund profitability

and performance– 10 global industry sectors researched by dedicated in-house sector

analysts

Performance– 18 out of 28 onshore funds are in the top quartile since their

respective launch dates– 6 are No. 1 in their sector since their respective launch dates

Source: unless otherwise stated, information is provided by Neptune as at 28.05.10. Performance data from Lipper as at 28.05.10; A Accumulation share class cumulative performance, in sterling with net income reinvested and no initial charges. The performance of other share classes may differ. Past performance should not be seen as a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuation and you may not get back the amount originally invested.

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A PROVEN PROCESS WITH PROPRIETARY RESEARCH

Team-driven active management

– No fixed style

– Seeking to outperform throughout the economic cycle

Top-down global view by experienced sector analysts

– Focus on economic indicators and growth prospects

– Produces output of sector and regional weightings

Bottom-up stock screening

– Stock selection essential in concentrated portfolios

– Proprietary research and valuation models

– Emphasis on global sectors and industry-dominant companies

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MEET THE TEAM

Culture that promotes communication and collaboration

Jeremy Smith

Head of UK Equities and

Oil & Gas Sector

Alex Breese

Industrials Sector

Mark Martin

Healthcare Sector

Ewan Thompson

Mining & Metals Sector

James Dowey

Chief Economist

Douglas Turnbull

Financials Sector

Derek Bartlett

Economist

Harriet Grieve

Consumer Sectors

Felix WintleHead of US Equities and

Healthcare Sector

Rob BurnettHead of European Equities and

Financials Sector

Ted Alexander

TMT Sectors

Adam Kelly

Consumer Sectors

Emma Stanford

Chemicals & Utilities Sector

Rebecca Young

Industrials Sector

Karim Ladha

Financials Sector

Chris Taylor

Head of Research

Thomas Sinclair

Oil & Gas Sector

Nicola Muirhead

Mining & Metals Sector

Thomas Smith

Chemicals & Utilities Sector

Robin Geffen

Managing Director

Fund Manager, Global Equities Jenny Davis

Industrials SectorDouglas McDowell

Head of Client Investment Strategies

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NEPTUNE EUROPEAN OPPORTUNITIES FUND

Fund Manager: Rob Burnett

Assistant Fund Manager: Karim Ladha

Launch date: 29 November 2002

Fund size: £940.5m

Sector: IMA Europe ex UK

c.30-50 stock portfolio

Current gross yield of income share class 3.4%*

The No.1 European fund since launch**

An award-winning fund*Source: Neptune as at 28.05.10. **Source: Lipper as at 28.05.10, IMA Europe ex UK Sector; A Accumulation share class cumulative performance, in sterling with net income reinvested and no initial charges. The performance of other share classes may differ. Past performance should not be seen as a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuation and you may not get back the amount originally invested. Copyright - © 2010 Morningstar, Inc. All Rights Reserved TM as of 28.05.10 in the Europe ex-UK Equity Large-Cap Morningstar Category TM.

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CUMULATIVE FUND PERFORMANCE

55.22 62.54.19 36.24

Source: Lipper as at 28.05.10, IMA Europe ex UK Sector; A Accumulation share class cumulative performance, in sterling with net income reinvested and no initial charges. The performance of other share classes may differ. Past performance should not be seen as a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuation and you may not get back the amount originally invested.

An outstanding performance track record

PeriodNeptune European

Opportunities Fund

IMA Sector

Average

MSCI Europe ex UK

To 28.05.10 % return ranking % return % return

YTD -2.67 14 / 110 -6.69 -8.05

1 year 11.80 80 / 107 14.58 14.16

3 years -8.80 13 / 90 -15.87 -15.11

5 years 89.90 1 / 81 37.12 38.73

Since launch (29.11.02)

221.10 1 / 67 90.08 95.28

Under Rob Burnett (06.05.05)

98.05 2 / 79 40.97 42.79

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EUROPEAN OPPORTUNITIES

Everything rests on confidence:

– Rebound vs. expansion

– Confidence and leverage

– Sovereign default and reflexivity

– Short-run momentum

– Investment strategy

– Focus area: industrials and financials

– Summary

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WE HAVE FINISHED THE REBOUND; NOW IT’S ABOUT EXPANSION

Economic rebound and sustainable expansion are distinct

Sustainable economic expansion requires an expansion of credit outstanding, eventually

Will total credit rise or fall in the coming years?

Confidence &

le

verage

Rebound

Will we see a credit expansion, or a continued contraction?

Source: BCA March 2010

Sustainable expansion

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CONFIDENCE: HOW DO WE JUDGE THE STRENGTH OF ANIMAL SPIRITS?

Confidence and leverage are intertwined

Supply of credit vs. demand of credit

Does the consumer want to take on debt?

 

Confidence needs to improve to help the economic expansion

Source: ISI Bank Loan Survey, 2010

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THE LACK OF CREDIT LOOKS MORE LIKE A DEMAND ISSUE THAN SUPPLY

Not a perfect

analogue

But if there was pent-

up credit demand,

short rates would be

higher

Low interest rates are

not necessarily bullish

 

The market is not pricing in much credit demand

Source: Bloomberg, June 2010

Dax vs. 2yr bund

2yr US bond yield vs. SPX

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SOVEREIGN DEFAULT CONCERNS & REFLEXIVITY

Sovereign problems force fiscal consolidation, shrinking credit outstanding

Reflexivity: the headlines suppress consumer confidence

Source: Bloomberg, June 2010, using 10 year bonds, Italy is top, Spain on the bottom

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THE SHORT RUN: LEADING INDICATORS ARE TOPPING OUT

Even in a strong recovery, defensives should perform well at this point in the cycle

US & European leading indicators peaking

Growth expectations have peaked for 2010 and 2011

Source: Bloomberg, June 2010

Defensive sectors likely to perform in the short run regardless

ISM manufacturing new orders

German IFO business expectations

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WHICH SECTORS?

Sector allocation is key

Overweights: consumer staples, telecoms, cash

Neutral: healthcare, IT, materials, consumer discretionary,

utilities

Underweights: industrials, financials, energy

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RECOMMEND UNDERWEIGHT INDUSTRIALS?

New all time high for the fwd P/E of capital goods relative to the market

Source: Thomson Reuters, Credit Suisse research 31.03.10

The top-down is

OK, bottom-up is

not

Capital goods are

quite expensive

We need the top-

down and bottom-

up in place to be

overweight

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HIGH CONFIDENCE BY THE SELL-SIDE IN CYCLICALS

Bottom-up estimates anticipate near peak margins for cyclicals this year

Source: Thomson Reuters, Credit Suisse research 31.03.10

Expected margins for cyclicals are approaching all time highs

Seems fair and hence less upside

Target prices reached for many discretionary and industrial stocks

Pan European cyclicals net margins

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BANKS: THE ANOMALY OF 1992-2007

Regulators want to bring banking back to its pre-1992 status

Source: FDIC website http://www.fdic.gov/bank/statistical/index.html; Calculation: Net Income /(Total Equity Capital-Intangible Assets)

Return on tangible equity of the US banking system 1934-2008

From 1920-1992 banks RoE was rarely >10%

A combination of leverage (largely off-balance sheet), funding changes and asset changes drove the 1992-2007 anomaly

Given Basel 3 proposals, Neptune est. sustainable RoE going forward is 10-14% in a stable economy

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Banking sector fair value now if no deflationSource: 1920-1969: Profitability in English Banking in the 20th Century by Forrest Capie & Mark Billings, European Review of Economic History 2001. Source: 1969-2009 Credit Suisse and Company Accounts. *Assuming Cost of Equity of 10% and growth of 1%.

Lloyds % true return on equitySector trading at 1.1x tangible book value

Which assumes c.11% sustainable RoE*

This looks fair value, unless you have deflation, where 0.5x book is likely

WHY ARE WE UNDERWEIGHT IF VALUATIONS ARE OK?

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TACTICAL CONSIDERATIONS FOR BANKS

Risks for the sector are still elevated

Source: Bloomberg, June 2010

CDS weaker than equity

Year-on-year growth in trading will be tough, less spread tightening, less fixed income and equity volume

Regulatory risk continues, now litigation risk

Euro Banks Index vs. Euro Banks senior 5yr CDS Index (inverted)

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SUMMARY

We need strong confidence to move to a sustainable economic

expansion

The sovereign crisis matters; it’s suppressing animal spirits in the

medium term

Regardless of market direction, more defensive sectors look better

placed for nowSector leadership is key

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NEPTUNE’S INDUSTRY RECOGNITION

Moneywise Fund Awards 2009 North America Sector

Winner

Best Small GroupBest Japan Fund

Hot 100 – Best Boutique GroupBest International Growth

Group

Gold Standards Awards 2009

Gold Standard Winner

Best European Equity Fund

Best US Equities Fund

Best Europe ex UK Fund

Best North America Fund

Active North American Equity Manager Award

High Alpha Equity Manager Award

Best UK Equity - Small

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APPENDICES

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SECTOR & MARKET CAP SPLITS (%)

Source: Neptune as at 28.05.10

> €5bn 86.2%

€1bn – €5bn 5.6%

Cash 6.7%

Other 1.5%

Other1.5%

Consumer Staples22.9%

Cash6.7%

Energy5.6%

Utilities6.2%

Industrials3.3%

Materials6.6%

IT1.5%

Consumer Disc8.2%

Healthcare14.1%

Telecoms14.0%

Financials9.4%

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DISCRETE FUND PERFORMANCE

55.22 62.54.19 36.24

Source: Lipper as at 28.05.10, IMA Europe ex UK Sector; A Accumulation share class cumulative performance, in sterling with net income reinvested and no initial charges. The performance of other share classes may differ. Past performance should not be seen as a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuation and you may not get back the amount originally invested.

An outstanding performance track record

PeriodNeptune European

Opportunities Fund

IMA Sector

Average

MSCI Europe ex UK

% return ranking % return % return

May 09 – May 10 11.80 80 / 107 14.58 14.16

May 08 – May 09 -20.24 21 / 98 -24.69 -25.36

May 07 – May 08 2.27 9 / 90 -2.44 -0.38

May 06 – May 07 36.37 2 / 84 28.46 29.60

May 05 – May 06 52.70 1 / 81 26.86 26.10

Since launch (29.11.02)

221.10 1 / 67 90.08 95.28

Under Rob Burnett (06.05.05)

98.05 2 / 79 40.97 42.79

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NEPTUNE PERFORMANCE - DISCRETE

Source: Lipper as at 31.03.10; A Accumulation share class discrete performance, in sterling with net income reinvested and no initial charges. The performance of other share classes may differ. Since launch data reflects the performance data for each fund since their respective launch dates. Past performance should not be seen as a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuation and you may not get back the amount originally invested. This document is issued by Neptune Investment Management Limited (“Neptune”) which is authorised and regulated by the Financial Services Authority.

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NEPTUNE PERFORMANCE - DISCRETE

Source: Lipper as at 31.03.10; A Accumulation share class discrete performance, in sterling with net income reinvested and no initial charges. The performance of other share classes may differ. Since launch data reflects the performance data for each fund since their respective launch dates. Past performance should not be seen as a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuation and you may not get back the amount originally invested. This document is issued by Neptune Investment Management Limited (“Neptune”) which is authorised and regulated by the Financial Services Authority.

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NEPTUNE PERFORMANCE - DISCRETE

Source: Lipper as at 31.03.10; A Accumulation share class discrete performance, in sterling with net income reinvested and no initial charges. The performance of other share classes may differ. Since launch data reflects the performance data for each fund since their respective launch dates. Past performance should not be seen as a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuation and you may not get back the amount originally invested. This document is issued by Neptune Investment Management Limited (“Neptune”) which is authorised and regulated by the Financial Services Authority.

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CONTACT DETAILS

Neptune Investment Management Limited 3 Shortlands, London, W6 8DA

Tel: 020 3249 0100Fax: 020 3249 0123

sales.enquiries@neptune-im.co.ukwww.neptunefunds.com

Patrick Berton, Sales Director 020 3249 0104

Adam Hughes, Head of Intermediary Sales 020 3249 0158Mike Woolley, Intermediary Sales Manager 020 3249 0159Tom de Lisle, Intermediary Sales Manager 020 3249 0176Andrew Taylor, Intermediary Sales Manager 020 3249 0161

Emma Staeck, Sales Support Manager 020 3249 0177

Parita Patel, Retail Sales Support 020 3249 0160

For security purposes, calls may be recorded and monitored

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IMPORTANT INFORMATION

This document is issued by Neptune Investment Management Limited (“Neptune”) which is authorised and regulated by the Financial Services Authority. Details of our regulatory status and authorisation by regulators in other countries are available from us on request. The Neptune web address is www.neptunefunds.com

Neptune Funds are available to any persons that may be marketed to under the Financial Services and Markets Act (Promotion of Collective Investment Schemes) (Exemptions) Order 2001. Retail Clients should consult their Independent Financial Adviser or other authorised intermediary.

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Some information and statistical data herein has been obtained from sources we believe to be reliable but in no way are warranted by us as to their accuracy or completeness. These are the analyst’s personal recommendations and as such this document is deemed to be impartial research. We do not undertake to advise you as to any change of our views. This is not a solicitation or an offer to buy or sell. Neptune Investment Management Limited has produced this report for private circulation to Professional and Eligible Counterparties only. The material is not intended for the use of Retail Clients. All information and advice is given in good faith but without any warranty.

Please remember that past performance should not be seen as a guide of future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested.

Any past performance data that has not been shown is due to the information not being available. Neptune is not authorised to give investment advice and only provides information on Neptune products.