BAILLIE GIFFORD

Copyright © Baillie Gifford & Co 2009. Authorised and regulated by the Financial Services Authority.

This presentation is intended solely for the use of Investment Professionals and should not be relied upon by any other person, it is not intended for use by Retail Clients.

5 Ideas on Investment…

…and 5 Investment Ideas

Portfolio Adviser Conference

June 2012

Patrick Edwardson

BAILLIE GIFFORD

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Important Information and Risk Factors

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This is a marketing communication and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. This presentation contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned. Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact nor should reliance be placed on these views when making investment decisions.

Baillie Gifford & Co, Calton Square, 1 Greenside Row, Edinburgh, EH1 3AN, ScotlandTelephone: 0800 917 2112 Fax: 0131 275 3955 www.bailliegifford.comYour call may be recorded for training or monitoring purposes.

Copyright © Baillie Gifford & Co 2009.

BAILLIE GIFFORD

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5 Ideas on Investment

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Thoughts on risk

How to deal with uncertainty

The world is changing

Alpha beats beta?

Giving yourself the best chance

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Portfolio Adviser Conf 0612.ppt

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Thoughts on Risk

How should we define risk?

— The Oxford Thesaurus says:

— Danger, peril, jeopardy, hazard, chance, gamble

— The Oxford English Dictionary says:

— ―the possibility that something unpleasant will happen‖

— The intelligent investor says:

— ―The possibility that something unpleasant will happen

to your portfolio just when you need the money‖

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Portfolio Adviser Conf 0612.ppt

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The World Is Changing

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% of Total Population 1800 1890 1950 2010

United Kingdom 20.3 61.2 79.0 79.6

Germany 5.5 28.2 68.1 73.9

Italy 18.3 21.2 54.1 68.4

France 8.8 25.9 55.2 85.3

China 3.8 4.4 11.8 49.9

Japan 12.3 16.0 34.9 66.8

India 3.4 5.4 17.0 33.0

Source: Deutsche Bank/The World Economy: A Millenial Perspectives, Angus Maddison, OECD 2001: World

Urbanization Prospects 2009, DB Global Markets Research.

Urbanization Rates Since 1800

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Portfolio Adviser Conf 0612.ppt

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The World Is Changing

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Cumulative Labor Force Growth (age 15–64)

Source: Deutsche Bank/UN Population Division, DB Global Markets Research.

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How to Deal with Uncertainty

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* Active Currency is rescaled in the calculations to show an 10% exposure to a 10% vol portfolio rather than a 100% exposure to a 1% vol portfolio.

** These scenarios are viewed as special cases within the core scenarios.

^ The DG fund return assumes no added value through active management.

*** Trend growth is defined as global GDP growth of approx 3-4%, trend (global) inflation is 2.5-3.5%

Source: Baillie Gifford & Co.

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How to Deal with Uncertainty

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Securities may be categorised in more than one of the above buckets.

Source: Baillie Gifford & Co, as at 31 March 2012.

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Alpha Beats Beta?

Investment Philosophy: Long Term

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Source: Baillie Gifford & Co, NYSE Group.

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Alpha Beats Beta?

Investment Philosophy: Active Management

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Portfolio Adviser Conf 0612.ppt

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Giving Yourself the Best Chance

Avoiding Behavioural Pitfalls

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5 Investment Ideas

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Local currency emerging market debt

Insurance linked securities

High yield bonds

Dividend futures

Good, old-fashioned, equities?

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Local Currency Emerging Markets Debt

Why Local Currency EM?

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Growing asset class

Improving fundamentals

Structural changes

Compelling risk-adjusted return potential

Attractive in a portfolio context

Under-owned and under appreciated© iStockphoto.com

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Local Currency Emerging Markets Debt

Return Potential – Currencies

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Higher growth leads to

— Rising exchange rate

— Falling risk premiums

Link Between Growth and Exchange Rates

Source: Heston and Summers dataset 2007, Baillie Gifford & Co.

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Insurance Linked Securities (ILS)

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Bonds where capital is only at risk if certain,

pre-specified natural events occur

Expected return

— C.6% p.a. over cash*

Risk

— Pre-specified natural events such as

hurricanes and earthquakes occurAs at 31 March 2012.

*Source: AON Benfield, Baillie Gifford & Co.

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High Yield Debt

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Global High Yield & Emerging Market Spreads

Source: BofA Merrill Lynch Bond Indices.

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High Yield Debt

Process in Action – High Yield bondsAt the start of 2009 High Yield bonds were

yielding 25% p.a.

Return

— Our analysis implied expected returns of 15%

p.a. over three years

— Even if defaults were twice as bad as the

1930s depression we still expected to make

money

Risk

— Fundamental risk that a very large number of

bonds default

— Possibility of further price falls in the very

short term

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High expected return with limited downside risk

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Listed Private Equity

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Big discounts = cheap way to get equity exposure?

Source: Collins Stewart and Morningstar.

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Dividend Futures

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Historical and Implied Dividend Analysis

Source: DB Estimates & Calculations, Bloomberg Finance LP, Reuters, Markit, Data as at 28 May 2012.

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Good, Old-Fashioned, Equities?

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