FOR PROFESSIONAL CLIENTS ONLY UK EQUITY TEAM OUTLOOK – 2014

JANUARY 2014

Introduction LUKE CHAPPELL & JAMES MACPHERSON “Over the past several years, the shape of our business has changed. This has been driven, in part, by a change in our clients’ exposure to UK equities and through increased demand for products, which make that allocation work harder, including Focus, Income and Long/Short products. During 2013 the UK Equity team has undergone some significant changes. We have been through a period of refinement, streamlining our product offering and changing portfolio management where necessary LUKE CHAPPELL to ensure we have the correct team and products for our clients. Co-Manager of the We have continued to invest in our research platform, added resources UK Equity team in the form of new portfolio managers and analysts, improved our use of technology and aligned our research approach to best serve our more focused product range. We have used this period of refreshment as an opportunity to improve our team’s performance, simplifying the team structure and adding greater resource around the areas which we believe will be the future drivers of growth. We believe that the team and our offering are now in a much stronger position and we look forward to the year ahead. JAMES MACPHERSON ” Co-Manager of the UK Equity team RICHARD PLACKETT & ROLAND ARNOLD “2013 was a year of low to moderate growth, with signs of recovery throughout the developed world being offset at the margin by a decline in growth assumptions for the developing world. Despite the emerging markets reducing growth rates we still believe in the long-term investment case and expect the developing world to grow at faster absolute rates than the developed world.

Throughout 2013 we have seen a convergence of ratings between value and quality stocks, as value stocks have been supported by substantial flows into the equity markets, and high quality small and mid-caps have been somewhat RICHARD PLACKETT Co-Portfolio Manager out of favour. We believe that within the ‘new normal’ world of moderate growth BlackRock UK Special rates the good quality companies which have invested in themselves throughout Situations Fund the down-turn stand in strong contrast to those that have been unable to invest, and it is these companies which will be able to continue to grow by seizing market share. We like companies which have good supply side fundamentals, such as UK consumer exposed stock Howdens Joinery and housebuilders Bovis and Bellway. Housebuilders have performed well throughout the year as Government policy has been, and continues to be supportive. The supply side remains constrained and there is increased availability of financing which continues to benefit the structurally undersupplied market, although we are monitoring the risks presented by increasing labour or material costs.

Going into 2014 we are likely to see a normalisation of monetary policy, with the ROLAND ARNOLD tapering of the unprecedented volume of stimulus which has been released into Co-Portfolio Manager the economy. However, this moderation will only occur once the economy is in a BlackRock UK Special Situations Fund strong enough position to withstand the gradual withdrawal of stimulus. It will undoubtedly lead to short-term volatility but is a good sign that the economy can be self-supporting once again. Deleveraging by the governments and consumers in the western economy will be a theme that continues well into 2014 (and beyond).

The BlackRock UK Special Situations Fund continues to be a long-term stockpicking fund with a focus on individual company selection. We continue to look for companies which exploit growth where opportunities present themselves. Economically 2014 will be a continuation of what we have witnessed in 2013. However in market terms, performance in 2013 was driven by multiple expansion and expectations; in 2014 we will need to see earnings growth as the driver, with markets likely to be more subdued unless earnings come through. We believe this will benefit our holdings in well-invested market-leading businesses which should be able to continue to grow despite the low growth environment.” NICK LITTLE “The BlackRock UK Fund is an All Cap Fund with a bias towards large-cap stocks. The primary driver of stock selection is a belief in the power of company and industry trends to shape investor returns. We aim to identify companies with a differentiated market position, product or strategy. This enables long-term profit growth and therefore strong cash returns to shareholders over time. We also consider wider economic and political themes that can have an important influence on corporate and stock market outcomes.

2013 was a year of strong market performance, with the FTSE All Share rising NICK LITTLE Portfolio Manager 21%. The BlackRock UK Fund outperformed the market, returning +26% BlackRock UK Fund (D share class, net of fees), and 25% (A share class, net of fees). The Fund benefited from some strong company-specific delivery from holdings such as component manufacturer Essentra, asset manager Hargreaves Lansdown and property company Capital & Counties. Taking a wider view, companies exposed to western economic recovery, particularly within the construction industry, were able to deliver a strong rebound in profitability. We have focused on holdings that we believe can begin the next economic cycle with a competitive edge over peers.

[2] This includes Ashtead, Wolseley and Berkeley Group. All performed well in 2013. These holdings have been funded by the sale of positions in primary commodity producers as the latter face a period of decelerating customer demand at a time of input cost inflation. This will restrain profits and cashflows in the future.

The expectation for 2014 is another year of positive returns for equities. Valuations remain extremely attractive versus bonds, especially where growth in cash flows is deliverable. We expect a continuation of western economic recovery, most notably within the construction sector. We remain cautious of investing in companies that rely on capital spending by resource companies, and also cautious on resource companies themselves which rely on continued growth in Chinese infrastructure spending from unprecedentedly high levels.” LUKE CHAPPELL & IMRAN SATTAR “We believe 2014 will be a year when companies within the developed market will have to deliver upon the promises they made in 2013. Last year was a disappointing period in terms of aggregated earnings trends and this year we will need to see companies delivering on their earnings targets. Government policy and monetary stimulus helped economic growth to recover in 2013, but Central Banks will begin tapering, which despite being data dependent will undoubtedly lead to short-term volatility. However, this is a positive sign that the economy can be self-supporting once again. We remain in a slow growth LUKE CHAPPELL world in which inflation remains subdued, with labour and commodity inflation Co-Portfolio Manager remaining modest. This is a sound backdrop for quality franchises to deliver BlackRock UK Focus Fund good profit growth.

In 2013 the performance laggards have been resource companies which reflects the lack of capital discipline and poor supply/demand dynamics which could change in 2014. We will be actively monitoring whether resource companies demonstrate capital discipline and are able to help themselves and return to growth. We remain cautious on investing in companies that rely on accelerating capital spending by resource companies and cautious on resource companies which rely on Chinese infrastructure spending.

Within the portfolio we retain our quality bias and remain modestly overweight cyclicals which benefit from the continuation of consumer spending and the IMRAN SATTAR financial strength of corporates. We favour companies which produce a high Co-Portfolio Manager return on capital, have strong competitive positions and structural growth BlackRock UK Focus Fund opportunities. Companies with self-help opportunities that deliver good profit growth are likely to be the strongest performers in a world where growth is slow. UK corporates have strong balance sheets but low confidence levels and are currently returning cash to investors in the form of dividends and buybacks. We believe that this year corporate activity will pick up and will translate into increased capital expenditure and M&A activity.

As growth remains scarce, companies which have strong franchises, are cash generative and reinvest that cash wisely are the ones which will deliver superior earnings growth rates in 2014. We favour companies such as:

BG Group – this year, their execution will be under scrutiny. Throughout 2013 they have become better at meeting their milestones, so the market will be watching to see if this is a trend that they can continue into 2014.

Essentra – the plastics component manufacturer has performed well, with strong top-line growth with a self-help story and reinvests its cash flow.

Wolseley – in 2014, we believe investors will be more comfortable with the European recovery story and growth within the US.

[3] Johnson Matthey – the first half of the year was more subdued but the second half was where they reported most of their growth; we expect the recovery in Europe and the US to be additive to performance.

Next – 2013 was another year of strong growth in earnings; in 2014 we think Next will benefit from the recovery in domestic consumer spending and will continue to return excess cash to shareholders whilst investing sensibly.” NIGEL RIDGE & NICK OSBORNE “This year the BlackRock UK Absolute Alpha Fund has seen considerable changes in the team, product design, stock selection and portfolio construction. In terms of product design, low interest rates and low market volatility have created headwinds for the Fund to meet its performance objectives. We have therefore increased the maximum gross exposure of the Fund to 150% (from its previous level of 100%) to give us the right tools to better achieve the absolute return objective, primarily through bigger position sizing in our highest conviction ideas. Within portfolio construction we have reduced the impact of NIGEL RIDGE less liquid securities which historically has been a key driver of performance both Co-Portfolio Manager positive and negative. We have also taken the opportunity to increase the BlackRock UK Absolute Alpha Fund allocation of research resource to the Fund through the formation of a long/ short product group which includes five members of the UK equity team. This group is spending significant time researching ideas and decisions are taken in the context of an absolute return perspective.

Since implementing the changes outlined above, the Fund has experienced improved performance, ending the year positively (+2.8%, P share class net of fees). Importantly, in the fourth quarter, when the changes had all been put into action, the Fund produced its best positive absolute return of +7.8% (P shares net of fees) since inception of the Fund in 2005. This gives us some reason for confidence going forward as it suggests that the market is becoming more fundamentally based rather than being driven by the impact of increased NICK OSBORNE Co-Portfolio Manager liquidity arising from Quantitative Easing (QE). Alpha generation from the short BlackRock UK book has been a challenge in a liquidity driven market, but evidence in the fourth Absolute Alpha Fund quarter is beginning to suggest a change which also bodes well for the future.

Whilst the global economy continues to mend, we expect global growth to be reasonably muted and therefore are focusing on long-term investments in companies with positive earnings momentum on modest valuations, examples being Reed Elsevier and Lloyds. Within the short book we will focus on companies that are experiencing pressure on earnings but trade on high valuations, such as consumer durables which benefited from the flight to quality post the credit crisis and led to a significant increase in valuations; and companies that are facing structural headwinds, such as food retailers where there is pressure from the internet and the rise of discount retailers.

In summary, on the positive side, after three years of earnings downgrades we believe the outlook for earnings is more benign, but QE tapering could put a lid on the market multiple. The key market risk is that we could move to higher volatility as we move closer to market normalisation.”

[4] MARK WHARRIER & ADAM AVIGDORI “2013 was both a challenging and eventful year for the BlackRock UK Income Fund. Over the period the Fund generated a return of 15% (A share class, net of fees to 31 December 2013), which underperformed its benchmark, the FTSE All Share, by –6%. However, later in the year we took the opportunity to establish a dedicated UK equity income group and refine the investment process for the Fund. In September Mark Wharrier joined BlackRock as co-manager and David Goldman as a dedicated analyst on the Fund. The changes are designed to focus the Fund on the core stockpicking strengths of the UK Team and draw on the MARK WHARRIER wider equity income resources of BlackRock. Co-Portfolio Manager BlackRock UK The Fund seeks to identify companies with the best free cash flow profiles Income Fund and scope for dividend growth together with specific growth and turnaround opportunities. We now feel the Fund is in a much better position to both generate strong returns and differentiate from the income peer group. Early results have been encouraging.

Equity returns over the last year have essentially been driven by risk appetite recovering from very low levels as Western economies slowly revert to a more normal environment. Market returns in 2014 will be more reliant on sustained earnings growth against a background of modest economic growth. Consequently we continue to emphasise companies that are capable of generating cash flow growth, have strong business franchises or have scope ADAM AVIGDORI for self-help. Relying solely on a better economic outlook in 2014 is unlikely to Co-Portfolio Manager be enough. Therefore within more cyclical areas we are focusing on companies BlackRock UK Income Fund which have market-leading businesses, such as Legal & General in the savings industry or Wolseley in building material distribution. Such companies have strong balance sheets and scale advantages which should result in much more rapid dividend growth than the market over the coming year. Companies that can continue to grow dividends in excess of 10% are likely to perform well in a market where inflation is low and risk appetite is maturing.

While equity markets have performed well in recent years, UK equities are still reasonably valued and continue to be the highest dividend-yielding developed equity market. More importantly, there is a rich universe of well-financed companies which yield well in excess of government bonds and have the ability to generate ongoing profits growth and dividend growth in excess of inflation.

While volatility will be an ongoing feature of the stockmarket, we feel our focus on companies capable of delivering on growth expectations should generate a healthy total return in the year ahead.” RALPH COX “Looking back at 2013 we must acknowledge that we witnessed several important events and/or changes including: a successful transfer of leadership in China, a broad deceleration in the rate of emerging markets economic growth, the appearance of some green economic shoots in Continental Europe, a change in the mood music between Iran and the US, sequestration and a US government shut down, the beginning of the end of QE in the US, multiple upgrades to UK economic growth forecasts, a new Bank of England (BoE) Governor and interest rate setting framework in the UK, a sea change in attitude towards capex from the RALPH COX mining/oil and gas majors, and the return of buoyant IPO markets. Confidence Portfolio Manager grew as the year progressed and developed equity markets ultimately took all of BlackRock UK Smaller Companies Fund this in their stride, delivering excellent returns particularly for UK small and mid-cap investors. Whilst equity returns in 2014 are unlikely to be as strong as 2013, the foundations are now in place for a much more fundamental driven market backdrop, a condition which after all suits our investment style best. Our high quality, growth-orientated approach will capitalise from the earnings power of companies exposed to the following themes:

[5] Resurgent UK consumer confidence: Consumer confidence is on an improving trajectory and at its highest level since 2007. Wages have been flat in recent years, yet living costs have continued to rise, squeezing workers’ spending power. Can UK GDP growth of c2.4% in 2014 finally enable some real wage growth in the economy? We own the companies with pricing power and/or roll-out potential such as Howden Joinery, Fullers, Ted Baker and Dunelm Mill.

Housing market recovery: Government initiatives to improve mortgage availability have worked and a pick-up in housing transactions from very depressed levels combined with some modest house price inflation is good news for the likes of Countrywide, Bovis Homes, Topps Tiles, Big Yellow, SIG and Quintain.

Business confidence to pick up: Many internationally facing companies have suffered from an environment of low business confidence over the last three years stemming from the European debt crisis and softness in Emerging Markets. With a better global backdrop we can expect a rebound in the fortunes of Victrex, Brammer, Anite and Domino Printing.

Shale gas revolution in the US: Political bickering apart, the world’s largest economy looks very well placed helped by the shale gas revolution and recovering consumer confidence. British winners with a high exposure to the US economy include Elementis, Tyman, Blinkx, 4Imprint, Bodycote and Accesso.

UK innovation: British companies are world leaders in many aspects of science, technology and engineering. We look for high-growth companies that are both taking market share and innovating for the future. Examples include Plexus, Zotefoams, Xaar and Oxford Instruments.

The end of the bond bubble: The QE unwind has started and equity valuations are still attractive on a relative basis. Private Wealth Management companies (Rathbones, Brewin Dolphin) and Fund Managers (Polar Capital) are the beneficiaries of both higher equity markets and positive asset flow dynamics.

Recovery in M&A activity: After a quiet couple of years, the end of 2013 finally saw a pick-up in deal activity announced including a takeover approach for Andor Technology by Oxford Instruments. Exceptionally strong corporate balance sheets, low borrowing costs and recovering confidence has created the perfect environment for more M&A to take place.” MIKE PRENTIS “Within the BlackRock UK Investment Trusts range, we focus on investing in high quality small and mid-cap growth companies. Within the Trusts the majority of value is placed in core names with an incubation sleeve containing the more immature and potentially volatile companies which will hopefully be the core names of the future. Within the market I see a number of predominant themes which I believe will continue into 2014.

(1) UK domestically exposed companies: We look at UK companies in three categories: (a) Housing Market; the housing market has been strong in 2013. MIKE PRENTIS Portfolio Manager UK We remain invested in better quality housebuilders and estate agents. They Investment Trusts are generally trading on lower valuations than their large cap counterparts. Stocks such as Bellway have lots of scope to open more sites and benefit from house price inflation. The agents benefit as transactions rates are picking up. (b) Consumer Stocks; these stocks have been performing well as consumer confidence has picked up. Beneficiaries include kitchen manufacturer Howden Joinery, which is gaining market share; Dunelm Group with its roll-out story and Restaurant Group as people eat out more. (c) London is Buoyant; London based property companies, specifically developers in central London-such as Workspace, St. Modwen and Quintain, have done well.

[6] (2) International exposure: Historically we have been positive on UK listed companies generating significant sales in Asia Pacific countries and the US. However, we reduced our exposure to AsiaPac as growth rates became unclear. We maintain our exposure to the US, particularly the construction industry through Keller Group and Tyman.

(3) Fund Managers: As equity markets have risen, asset managers have been beneficiaries. We favour wealth managers such as Brewin Dolphin (recently added), Charles Stanley and Rathbones and asset managers such as Polar Capital.

(4) Leading technology companies: New industries typically emerge in the small-cap space first. Alongside investing in our core specialist technology stocks such as Aveva, Fidessa, Xaar and Oxford Instruments, we are continuing to identify and investigate new and innovative sources of technology, such as machine to machine communications.

(5) Payment technology: The way in which we pay for goods and services has evolved. No longer do people use cheque books or cash in the same way; We tend to use electronic systems via computers and phones. Within the portfolios, PayPoint and Optimal Payments take advantage of this trend.

(6) European Recovery: We are very gradually increasing our exposure to companies which will benefit from the European recovery, particularly with exposure to Germany, such as building material distributor SIG.

In 2014 we will continue to focus on high quality companies which we believe can grow faster than the market and are able to grow market share in this low-growth world. Within the market we do not expect further re-ratings, as this occurred in 2013; our companies will need to deliver earnings growth and we believe they are well placed to do so. 2014 should be a good year for equities relative to other asset classes but we believe it will be more subdued than 2013.”

[7] WHY BLACKROCK

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Source: BlackRock, data as at 30 September 2013.

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