Uk Equity Team Outlook – 2014

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.

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