FTSE100 Throughout 2008

Faculty of Actuaries Students’ Society

Current Topics – Investments

March 2009

Authors:

Euan G Munro FFA Jason M. Hepner, CFA

Contents

1. Introduction ...... 3 2. Equity Markets ...... 6 3. Government Bonds...... 9 4. Corporate bonds...... 12 5. Real Estate ...... 14 6. The FX markets ...... 15 7. Commodities...... 17

Disclaimer

Any views or personal opinions expressed in this paper are those of the author, and not of Standard Life, FASS, the Actuarial Profession, or any other body (unless specifically stated). The author takes responsibility for any errors or omissions. Neither the author nor any related party will be liable for any direct or indirect losses incurred as a result of actions taken or not taken on the basis of information contained in this paper. Nor does the author or any related party take responsibility for the content of external links.

Investment Markets in 2008

1. Introduction

There are landmark years in the lives of those who operate in the financial markets. 2008 was one of those years.

Equity market events tend to be high profile, and so for example even non-market people will often be aware of the Black Wednesday crash of 1987, and will have been conscious of the dotcom bubble and its subsequent three year deflation. The foreign exchange market has also had its moments. Mischievous Labour politicians love to remember, and Conservative politicians would like to forget, Black Monday – the day when Sterling came crashing out of the European Exchange Rate Mechanism in 1992, dropping around 15% against the Deutsche Mark overnight. Bond markets tend to be a specialist subject and so probably only bond managers will remember (with considerable pain) the bond market crash of 1994, which followed hard on the heels of a multi-year bull market which had culminated in astonishing returns from long dated bonds in 1993.

What marks out 2008 is the breadth of the distress. Few market segments have been left unscathed. The root problem was that an era of readily available and cheap credit came to a screeching halt.

Harbingers of the value destruction witnessed in 2008 had been seen in 2007. By mid 2007 it was widely recognised that some banks had been lending irresponsibly in the US sub-prime mortgage market. However, by the autumn the failure of Northern Rock intimated that the credit/liquidity crunch was impacting on the UK. As 2008 unfolded it became widely recognised that the entire banking systems’ profitability and willingness to lend depended on them being able to securitise their loan books and finance themselves cheaply in the wholesale money markets. As neither of these two were practical possibilities in 2008, the banks stopped lending, creating a vicious cycle as businesses and individuals unable to secure short term borrowing facilities ended up either actually defaulting, or looking much more likely to do so. Banks reported enormous losses, and it became clear that the entire Global banking system would require significant recapitalisation.

The extent of the collapse in the value of bank share prices in 2008 is helpfully underscored visually by Exhibit 1.1 which shows that major global banks have shrivelled in value to be a shadow of their former selves. (Acknowledgements to JP Morgan for this helpful image.)

Exhibit 1.1

Such uncertainty created an appalling atmosphere for risky assets. On the other hand, the anticipation that to avert depression pro-active central banks would cut their interest rates led to significant rallies in world bond markets.

This combination of falling risk assets and declining bond yields has made 2008 a very difficult year for pension funds and individual investors seeking to provision for long dated liabilities. Exhibit 1.2 shows the contrast between the total return on bonds in a number of geographies, and the total return on equities. Readers should bear in mind that liabilities will have typically behaved as a leveraged exposure to bonds (because they are longer in duration). Few asset portfolios behaved like that!

130

120

110

100

40 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Total return of asset classes (rebased): European Equity US Equity German Bonds US Bonds

Exhibit 1.2: Bond versus equity total return comparison

The intention of this paper is not to provide an almanac of all the information and data pertaining to markets in 2008, for that I reference Google. It is rather to draw out some of the key themes that emerged in the past year in the major asset classes. However, I have added (appendix 1) the returns to a Sterling investor of investing in a wide variety of cash, bond, equity and property benchmarks over 2008.

The eagle eyed reader will notice from the appendix that there is a huge disparity in the returns in 2008 due to currency. For example, Japanese equities, to the £ Sterling investor, did not fall by much at all. Similarly, bond market returns were ‘skewed’ by FX movements, for the UK based investor. We discuss these huge FX movements in Section 6.

2. Equity Markets

6500 Weak economic data points to prolonged global downturn

6000 Lehman bankruptcy 5500

Congress rejects TARP Bear Stearns rescue 5000 Fed cuts 125bp in two weeks (no equity reaction) 4500

4000

UK bank bailout 3500 Citi bailout , MBS purchases initiated by the Fed 3000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Exhibit 2.2: FTSE100 throughout 2008

Global equity markets fell by around 40% on average in local currency terms but spread in a range from 25% to around 50%. Full details of returns to a sterling investor are included in the market return appendix.

Exhibit 2.1 shows how the FTSE100 responded throughout the year to a number of significant pieces of market news.

Following a sharp fall at the start of the year, the market enjoyed a brief period of relative stability - helped by the US Federal Reserve cutting interest rates by 125 basis points. However, markets fell again on poor economic and corporate data, finding a local bottom after the US authorities decided to bail out the troubled investment bank Bear Stearns on 17th March. This triggered a bit of a relief rally over the next several months but ultimately gave way through the summer after continuingly poor economic data and the realisation that Bears Stearns was not the only bank with problems. The equity market focus quickly moved to trying to identify the next most vulnerable financial institution. There were plenty of targets!

September saw a period of extreme volatility. The two US agency mortgage businesses - Fannie Mae and Freddie Mac - had to be rescued by the US government on the 7th, Lehman Brothers revealed a $3.9bn Q2 loss on the 10th and after the failure of rescue talks declared bankruptcy on 15th. The shot-gun marriage of Merrill Lynch to Bank of America was announced on the same day. During the following week the

Reserve Primary money market fund broke the buck (i.e. priced the fund at less than par, recognising losses on their ‘high quality’ money market investments). This was key. This was the moment that the market began to realise that AAA rating was not always as it seemed. This was a frightening prospect for many investors. AIG was rescued by the US government, and in the UK Lloyds TSB announced a takeover of HBOS.

Investors pride themselves on being able to absorb and discount lots of information and uncertainty quickly, but this was just too much, too quickly and the policy responses seemed to be on the hoof and inconsistent.

The market needed some reassurance and fast; and high hopes were placed on the US TARP (Troubled Asset Relief Programme) - a $750bn plan to buy bad assets from banks and allow them to repair their balance sheets. Equity markets including the UK crumpled when the US House of Representatives rejected the TARP bill in October.

Markets bottomed as the US and UK announced a banking sector bailout involving capital injections into major banks and the equity markets appeared to find some stability into the close of the year. By November 2008, the market had fallen so sharply, that it had ‘priced in’ much of the bad news.

120

110

100

40 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

S&P FTSE TOPIX Latin America Index

Exhibit 2.2: There was little benefit from international diversification

Exhibit 2.2 demonstrates that the equity market weakness was broad based and largely indiscriminate in local currency terms. There was a period where emerging markets (Latin America is used here as a proxy) appeared to be immune from the negative sentiment in the more developed world. The rationale for this was a 'decoupling' argument that swayed market sentiment in the first half of the year. The argument constructed was that China could continue to grow despite the dramatic slowdown in US demand and would still be a huge consumer of the raw materials exported from Latin America in particular. This belief caused a large spike in

commodity prices, in mid 2008 the cost of filling up the car’s fuel tank became oppressive for many families, it also caused the Emerging Market and especially Latin American markets to outperform.

In a similar vein, what strength had been seen within developed market equity indices, had in early 2008 been in energy and material sectors. ‘Long Commodities’ versus ‘Short Financials’ was a favoured trade by many, including much of the hedge fund community, in the first half of 2008.

However, decoupling was a fallacy; the market should not have been fooled. The fact was that China needed US consumers to buy all their cheap produce, and China also had overbuilt residential property. The demand for commodities collapsed in late Q2/Q3 and with them went the last strand of optimism for equity markets.

3. Government Bonds

10Y Gilt Yield (%) 5.5

Misplaced and Speculation of temporary Inflation interest rate cuts concerns as oil prices Northern Rock hit $147/bl 5 nationalised

1.5% rate cut 4.5

UK bank bailout Bear Stearns rescue

3.5 Quantitative Easing (QE) talked about, expectations that interest rates are likely to hit zero, along with the prospect of deflation

3 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Exhibit 3.1: UK 10 year Government bond yields over 2008

Exhibit 3.1 shows the evolution of medium dated UK government bond yields over 2008. It may come as some surprise that the extent of the economic slowdown and the fact that the banking sector problems might require dramatic reductions in interest rates does not appear to be reflected by falling bond yields until very late in the year.

The reason for the delayed reaction in bond land was two fold. Firstly, investors were nervous that the bank bail outs might necessitate an enormous increase in gilt supply. They were correct - it will - but they ought not to have worried, as supply always comes well behind inflation expectations as a driver of nominal bond yields (the experience of Japan is proof enough of that statement). That reference to inflation expectations brings me to the second reason that investors were nervous about bonds: in Q2, inflation was apparently very high. Exhibit 3.2 shows UK RPI over the last few years. The surge in commodity prices certainly did push up RPI towards 5% year over year. However, again investors should not have worried. With a banking sector in lock down mode, unwilling to lend, and consumers worried about their jobs and struggling to afford to fill their car tank up, sustained positive inflation was a pipe dream.

Eventually bond investors woke up and realised that their central bankers were not going to fight the last war. They were worried about deflation, not inflation, and were prepared to cut short rates to the bone. That was when bond markets globally surged.

Yields fell and interest rate curves generally steepened over the year. Exhibit 3.3 shows how the US, UK and European bond markets changed shape over 2008.

Exhibit 3.2: UK Retail price inflation, showing peak of c.5% in mid 2008. Inflation was both the highest – and the lowest – in c. 18 years, all in one year!

Exhibit 3.2: Yield curve changes UK, US and Germany (source: Bloomberg)

4. Corporate bonds

UK corporate bond spread over gilts (%) 4

Continued liquidity withdrawal and risk 3.5 aversion

2.5 Bear Stearns rescue

2 Lehman bankruptcy

1.5

1 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Exhibit 4.1: UK investment grade credit spread over gilts

The economic circumstances that have unfolded are often described as a 'credit crunch'. This is true; however, as well as a credit shortage we have also experienced a liquidity crunch. Many investors and institutions do not have sufficient readily available cash.

Therefore credit spreads reflect both the deterioration in the credit environment (i.e. defaults will be going up) and the deterioration in the liquidity environment (i.e. there is a higher than normal yield premium available for less liquid assets). For existing holders of these assets then there has been in Alex Salmond terms “a double whammy”!

Credit spreads drifted wider during the first few months of the year, reaching a local high as Bear Stearns was rescued in mid March. Credit indices typically contain a large proportion of financial debt, and over the summer confidence that major banks were ‘too big to fail’ caused rates to drift lower. Contending with this view of course was a darkening economic environment which eventually caused spreads to continue their upwards trend.

However, spreads jumped dramatically in the turmoil following Lehman’s failure and continued to rise as risk aversion set in and liquidity conditions that previously had been regarded as bad almost dried up altogether. Exhibit 4.1 shows the movement in investment grade credit spreads over the year. By the end of the year spreads were at levels not seen since the Great Depression in the 1930s. Exhibit 4.2 shows the Libor

inter-bank borrowing rate against the BoE base rate as a measure of how strained interbank lending had become.

UK 6M LIBOR spread over base rate 2.5

UK bank bailout

1.5

Liquidity problems in the financial system continue

1 Bear Stearns rescue

0.5 Larger than expected Lehman bankruptcy rate cuts

0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

-0.5

Exhibit 4.2: Libor spreads a barometer of liquidity strains

5. Real Estate

UK REITS relative to FTSE100 1.25

1.2

1.15 Fear of bank failures post Lehmans raise 1.1 Pricing of a further spectre of lower credit economic slowdown availability 1.05

0.95 Relative performance improves as overall 0.9 market weakens

0.85

0.8 Expectations that yields are peaking out 0.75 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Exhibit 5.1: Listed property versus general equity

Not surprisingly, given what was going on in other asset classes, and given the fact that commercial property purchases are normally debt financed, 2008 presented an appalling environment for property investment. Physical property experienced some apparent protection from simply being too illiquid to sell in a panic, though still managed to slide gracefully down by more than 20% over the course of the year. The listed property sector however, was exposed to the full impact of the global credit crunch and a deteriorating economic outlook, while also being comparatively liquid. Exhibit 5.2 demonstrates how the real estate sector in the UK performed relative to general equity throughout the year; it was one of the worst performing sectors falling 20% more than the broad market, or by around 50% in absolute terms.

As well as further sharp reductions in the capital values of property, the sector continued to experience severely muted transaction volumes, weaker demand, falling rents and increased risks of defaults. Banking consolidation and related job losses intensified concerns over future occupier demand, particularly in the major office markets of New York, London City, Singapore and Hong Kong, while the fall in capital values of commercial properties also accelerated.

The period was particularly tough for the UK retail sector, and as the year drew to a close, a number of well-known names fell into administration, transforming the make- up of the UK high street. As voids increased, UK landlords faced a double blow of loss of rental income as well as paying rates on empty properties. In addition, when properties were re-let, it was generally at a reduced rental level.

6. The FX markets

There was considerable volatility in currency markets also during 2008. The largest amount of the volatility took place in the second half of the year. The US dollar appreciated against most currencies - as it frequently does at times of distress as US risk capital floods back home. The Japanese Yen and Swiss Franc were the only major currencies that appreciated by more than the US dollar, the reason for this being that a considerable amount of risk taking had been funded out of these currencies due to their very low interest rates. This type of phenomenon of investing in higher yielding economies by borrowing in low yielding economies was known as the ‘carry trade’. It had been a popular portfolio strategy, a typical trade would have been out of Japan into New Zealand or Australia, this kind of risk taking was punished heavily in 2008.

Later in the year the currencies of countries that were perceived to have the weakest banking sectors, or where interest rates were expected to be cut fastest and furthest came under pressure. This led to a substantial fall in sterling. Similarly, commodity producer countries’ currencies came under pressure in late 2008, as we discuss below.

Anyone who has recently travelled abroad will have experienced the change in purchasing power of sterling. Indeed in 2008, in travelling abroad you found that sterling was worth much less in most countries. Exhibit 6.1 shows how sterling fared against a basket of world currencies.

Exhibit 6.1: Sterling versus other world currencies

That said, in fairness to Sterling, it did appreciate notably against one currency in 2008. Our Great British pound did far better than the Icelandic Krona, as we can see from exhibit 6.2 below!

Exhibit 6.2: Icelandic Krona versus the British Pound, in 2008

7. Commodities

To see what happened to commodity prices in 2008, and to understand their impact on other asset classes in that year, it is worth looking at a chart of what they did that spans from 2007. The graph below does just that – it shows the CRB index (a key global benchmark that ‘blends’ the price performance of most key commodities) from the start of 2007, through until the end of 2008. Commodities, for so long an ‘afterthought’ for asset allocators and investors in previous years, became a key piece of the global financial jigsaw puzzle in 2008.

Exhibit 7.1: Commodity prices (CRB index) from 01/01/07 until 12/31/08

Commodity prices had already been enjoying a multi-year uptrend due to the growing awareness of supply issues and China’s chronic shortages (ie demand) with regard to certain key raw materials such as oil, copper etc.

In late 2007, as the credit crunch had started, the US Fed had started lowering interest rates, and as the S&P 500 (equities) had clearly begun to peak, investors piled into commodities as an asset class, in search of higher returns. The argument went, as we discussed above, that Emerging Markets could decouple, led by China – therefore commodities were seen as a ‘safe haven’. The result, was that we saw ever more ‘leveraged’ investments into commodities, as investors bought commodities indiscriminately, via index products. We saw a broad based acceleration in commodity prices in late 2007 and early 2008, that confounded even the most ardent commodity bulls. It was inconsistent for commodity prices to be rallying even harder, as the global economy softened. This ‘last hurrah’ into the first half of 2008 was, in fact, a bubble!

To look at commodities in this way is illuminating, in so far as it sheds light on some of the extreme performance we saw across, and within, other asset classes.

Global equity markets in the first half of 2008 had strength in certain sectors and countries that were ‘raw material producers’ (eg oil companies’ shares, Brazilian equities etc). When commodity prices collapsed, their fortunes reversed. Similarly we saw earlier how inflation expectations surged then fell away so sharply. This is due in large part to the year over year ‘headline’ increase, and then decrease, in commodity price inflation. Furthermore, such high commodity prices caused China 17

to have higher interest rates that it otherwise should have, delaying their attempts to cushion the forthcoming global slowdown. Such high oil prices in the first half of 2008 made worse the macro environment for consumers and many corporates’ profits. It confused and partially wrong footed Central Bankers’ attempts to set forward looking monetary policy.

The currencies of commodity producer countries, such as Brazil, Australia, New Zealand etc, were strong in the first half of 2008, then very weak in the latter part of the year. Hence, the market can be seen to have shown both sides of its personality – the rational and irrational, when one considers how it propelled and then reacted to commodity prices in 2008.

Commodity prices have fallen sharply from their peak. This helps the global healing process, in so far as it clearly makes things cheaper for consumers and industrial companies, and allows for unanimity in terms of Central Bankers’ moves towards lower interest rates. This fall in commodity prices can be seen to be a necessary, yet so far insufficient, landmark upon our road to economic recovery.

APPENDIX

Index Monitor 2008 in Sterling

Jan Feb Mar Q1 Apr May Jun Q2 Jul A ug Sep Q3 Oct Nov Dec Q4 3 Mths YTD 1 Year

UK Equities

FTSE All-Share Index -8.67 0.77 -2.05 -9.85 6.26 -0.20 -7.06 -1.45 -3.60 5.00 -13.24 -12.18 -11.90 -1.67 3.67 -10.19 -10.19 -29.93 -29.93

FTSE All-Share 5% Capped Index -8.37 0.73 -1.99 -9.54 5.85 -0.33 -7.24 -2.14 -3.29 4.97 -13.47 -12.16 -12.57 -1.90 4.10 -10.71 -10.71 -30.57 -30.5 7

FTSE All-Share ex ITs Index -8.71 0.69 -2.02 -9.94 6.29 -0.23 -7.04 -1.42 -3.65 5.10 -13.22 -12.13 -11.73 -1.59 3.64 -9.97 -9.97 -29.77 -29.77

FTSE All-Share ex Multinationals ex IT -7.95 -1.40 -1.56 -10.65 1.71 -4.02 -10.04 -12.18 -1.99 5.79 -12.72 -9.50 -18.79 -1.96 4.14 -17.09 -17.09 -41.12 -41.12

FTSE 100 Index -8.90 0.47 -2.20 -10.49 7.05 -0.17 -6.77 -0.37 -3.69 4.86 -12.86 -12.00 -10.55 -1.38 3.52 -8.68 -8.68 -28.33 -28.33

FTSE 350 Index -8.67 0.66 -1.94 -9.85 6.34 -0.20 -7.02 -1.33 -3.60 5.04 -13.20 -12.11 -11.69 -1.53 3.66 -9.86 -9.86 -29.53 -29.53

FTSE SmallCap Index -8.57 4.25 -5.82 -10.24 3.65 -0.05 -8.48 -5.19 -3.68 3.54 -14.53 -14.77 -19.76 -7.56 4.25 -22.68 -22.68 -43.91 -43.91

FTSE SmallCap ex ITs Index -8.92 4.08 -6.27 -11.14 2.93 -0.99 -8.74 -7.00 -4.47 4.85 -14.99 -14.85 -20.57 -8.97 1.59 -26.55 -26.55 -48.32 -48.32 North American Equities

S&P 500 Composite Index -5.88 -3.31 -0.35 -9.30 5.24 1.52 -9.07 -2.86 -0.38 10.18 -6.79 2.31 -8.21 -2.26 7.86 -3.23 -3.23 -12.77 -12.77

FTSE World North American Index -5.86 -2.66 -0.85 -9.15 5.47 2.22 -8.68 -1.56 -0.78 9.95 -7.03 1.43 -9.27 -2.32 7.80 -4.47 -4.47 -13.34 -13.34

FTSE World USA Index -5.81 -3.27 -0.49 -9.33 5.24 1.78 -8.99 -2.51 -0.34 10.25 -6.76 2.44 -8.38 -2.41 8.11 -3.34 -3.34 -12.47 -12.47

European Equities

FTSE World Europe ex UK Index -10.99 2.16 1.80 -7.44 4.31 1.53 -10.49 -5.20 -1.80 3.97 -13.01 -11.19 -14.88 -1.74 16.62 -2.46 -2.46 -23.99 -23.99

MSCI Europe Index SM -10.30 1.57 0.54 -8.41 5.07 0.92 -9.32 -3.84 -2.41 4.34 -13.09 -11.50 -13.11 -1.87 12.34 -4.22 -4.22 -25.35 -25.35

MSCI EMU -11.67 1.30 1.72 -8.98 4.76 1.37 -11.07 -5.56 -2.00 3.74 -13.44 -12.00 -16.09 -1.51 17.18 -3.16 -3.16 -26.74 -26.74

ISEQ Index -2.53 -0.81 1.07 -2.29 1.52 -2.94 -14.10 -15.36 -16.51 5.91 -22.58 -31.54 -14.80 -11.65 8.01 -18.70 -18.70 -53.97 -53.97

Pacific Equities

MSCI AC Pacific Free ex Japan Index SM -12.30 5.73 -5.24 -12.13 8.36 -0.75 -10.23 -3.45 -2.78 1.61 -14.68 -15.71 -16.35 -1.02 16.29 -3.71 -3.71 -31.15 -31.15

FTSE All World Dev Asia Pacific ex Japan Index -11.04 2.65 -5.10 -1 3.34 8.86 1.08 -8.66 0.51 -3.88 2.41 -15.56 -16.88 -16.54 0.21 13.93 -4.72 -4.72-31.01-31.01

FTSE All World Asia Pacific ex Japan Index -12.14 4.54 -5.59 -13.28 8.42 -1.24 -11.23 -4.96 -1.88 1.82 -14.70 -14.79 -16.94 -1.61 16.64 -4.67 -4 .67-33.05-33.05

Hang Seng Index * -15.54 3.88 -6.04 -17.56 12.94 -4.65 -10.47 -3.58 3.26 1.55 -12.84 -8.60 -14.31 4.70 10.56 -0.81 -0.81 -27.94 -27.94

Tokyo SE (Topix) Index -4.01 0.43 -3.22 -6.71 7.05 2.84 -7.24 2.12 -2.69 4.13 -8.61 -7.40 -5.04 4.69 15.54 14.86 14.86 1.32 1.32

FTSE World Japan Index -4.05 0.43 -3.66 -7.17 7.67 2.66 -7.46 2.29 -2.92 4.32 -8.91 -7.75 -5.74 3.90 15.25 12.88 12.88 -1.12 -1.12

MSCI Japan Index SM -4.45 0.63 -3.91 -7.61 7.64 2.74 -7.47 2.34 -2.96 4.29 -9.09 -8.00 -5.99 3.99 15.41 12.82 12.82 -1.85 -1.85

MSCI China -21.46 10.71 -12.10 -23.57 16.02 -4.75 -12.76 -3.59 2.78 -0.28 -18.54 -16.50 -14.77 10.09 17.93 10.65 10.65 -31.92 -31.92

Emerging Market Equities

MSCI Emerging Markets Free ex Asia Index SM -10.13 7.35 -3.54 -6.94 8.34 8.87 -8.11 8.39 -6.07 -1.07 -16.53 -22.44 -23.61 -3.19 10.83 -18.04 -18.04 -35.88 -35.88

Global E q uities

FTSE All World World ex UK Index -7.93 0.18 -1.25 -8.92 5.93 2.06 -9.25 -1.89 -1.68 6.38 -9.97 -5.84 -11.73 -1.50 11.45 -3.10 -3.10 -18.47 -18.47

FTSE World World ex UK Index -7.56 -0.07 -0.95 -8.50 5.86 2.11 -9.11 -1.76 -1.74 6.74 -9.65 -5.23 -11.27 -1.58 11.41 -2.71 -2.71 -17.12 -17.12

MSCI World Index S M -7.50 -0.59 -0.82 -8.80 5.71 1.87 -8.59 -1.56 -1.96 7.13 -9.80 -5.26 -10.57 -1.44 10.20 -2.87 -2.87 -17.39 -17.39

MSCI World ex UK Index S M -7.34 -0.70 -0.68 -8.61 5.57 2.14 -8.78 -1.63 -1.76 7.36 -9.45 -4.50 -10.57 -1.44 10.92 -2.24 -2.24 -16.08 -16.08

MSCI EAFE Index -9.11 1.40 -0.92 -8.68 5.93 1.39 -8.80 -2.06 -2.75 4.23 -12.43 -11.24 -11.94 -0.34 13.15 -0.70 -0.70 -21.16 -21.16 Pro p ert y

UK IPD Total Return Index ^ -1.57 -1.02 -0.83 -3.38 -0.48 -0.71 -1.50 -2.66 -1.31 -1.13 -2.40 -4.77 -3.77 -5.12 -10.88 -18.22 -21.29

UK IPD Capital Growth Index ^ -2.02 -1.49 -1.30 -4.73 -0.95 -1.17 -1.98 -4.05 -1.80 -1.64 -2.91 -6.22 -4.29 -5.67 -12.34 -22.61 -25.84 UK Gilts

FTA British Govt All Stocks Index 0.39 0.29 0.75 1.43 -1.53 -1.44 -0.68 -3.61 2.41 2.10 0.10 4.67 0.32 4.46 5.20 10.24 10.24 12.81 12.81

FTA British Govt 5 to 15 Years Index 0.67 0.54 1.35 2.58 -2.07 -1.87 -0.82 -4.69 2.77 2.52 0.91 6.32 0.15 5.18 5.05 10.65 10.65 15.02 15.02

FTA British Govt Over 15 Years Index -0.01 -0.30 0.24 -0.07 -1.58 -1.42 -1.05 -4.00 2.95 2.48 -1.39 4.04 -0.72 6.25 7.95 13.87 13.87 13.65 13.65 UK Index-Linked

FTA British Govt I/L All Stocks Index 1.65 0.16 1.87 3.72 -1.26 0.08 2.26 1.05 -0.29 4.20 -4.03 -0.29 -6.60 -2.64 9.15 -0.75 -0.75 3.72 3.72

FTA British Govt I/L Over 5 Years Index 1.74 0.00 1.94 3.71 -1.29 0.03 2.48 1.19 -0.33 4.67 -5.18 -1.07 -7.85 -2.18 10.38 -0.50 -0.50 3.31 3.31 Miscellaneous Fixed Income

ML Sterling Non-Gilt All Stocks Index -0.60 -1.57 -0.65 -2.80 0.41 -0.81 -0.82 -1.23 1.61 1.48 -4.48 -1.50 -3.07 2.09 3.05 1.98 1.98 -3.57 -3.57

ML Sterling Non-Gilt Over 10 Years Index -1.37 -2.76 -1.28 -5.32 0.85 -0.73 -1.09 -0.98 1.94 1.79 -5.69 -2.14 -5.07 2.78 4.75 2.20 2.20 -6.23 -6.2 3

ML Sterling Non-Gilt Over 15 Years Index -1.41 -2.75 -1.11 -5.19 0.61 -0.61 -1.04 -1.04 2.10 1.70 -5.08 -1.44 -4.71 2.93 5.73 3.71 3.71 -4.10 -4.1 0

ML Sterling Non-Gilt AAA Index 0.31 -0.18 0.31 0.45 -1.12 -1.42 -0.53 -3.04 2.10 1.72 -0.73 3.10 -0.24 2.88 4.20 6.94 6.94 7.39 7.39

ML EMU Direct Govt Over 10 Years Index 4.16 2.33 3.70 10.53 -2.20 -2.01 -1.01 -5.13 2.98 3.96 -2.86 4.00 -1.01 13.78 18.41 33.37 33.37 45.45 45.45

ML Euro High Yield Index -3.21 1.09 4.04 1.80 4.14 1.22 -4.23 0.96 -2.06 3.23 -12.13 -11.16 -18.98 -0.07 17.14 -5.16 -5.16 -13.41 -13.41

JPM Global Govt Bonds Index 3.86 2.33 3.24 9.73 -3.04 -1.28 -0.24 -4.51 0.58 6.73 1.34 8.79 8.84 9.39 14.26 36.03 36.03 55.07 55.07

JPM Global Govt Bonds ex UK Index 4.04 2.50 3.39 10.26 -3.12 -1.27 -0.20 -4.55 0.45 7.04 1.42 9.06 9.41 9.69 14.79 37.75 37.75 58.11 58.11

Salomon WGBI All Maturities Index 3.84 2.38 3.31 9.83 -2.90 -1.25 -0.26 -4.36 0.68 6.43 1.11 8.34 8.07 9.19 14.32 34.90 34.90 53.53 53.53 iBoxx Sterling Non-Gilts -0.53 -1.50 -0.65 -2.66 0.32 -0.91 -0.83 -1.42 1.56 1.68 -4.65 -1.53 -2.81 1.77 2.64 1.53 1.53 -4.06 -4.06 Cash

UK Interbank 7 Days Notice Index 0.47 0.43 0.45 1.36 0.42 0.42 0.43 1.28 0.43 0.40 0.45 1.28 0.42 0.23 0.15 0.81 0.81 4.81 4.81

UK Interbank 1 Month Index 0.47 0.44 0.48 1.40 0.45 0.44 0.46 1.37 0.46 0.42 0.48 1.37 0.50 0.29 0.21 1.01 1.01 5.24 5.24

UK Interbank 3 Months Index 0.48 0.44 0.50 1.42 0.48 0.48 0.50 1.47 0.49 0.46 0.51 1.47 0.52 0.33 0.28 1.14 1.14 5.61 5.61

Notes

A ll data has been sourced from FACTSET, except * denotes price return rather than total return ~ Barclays Capital Indices pr ovided direct from Barclays V ML EMU Direct Govt Over 5 Years Index is taken from the PM system, on a monthly basis