Blending insights

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  • 1. Blending InsightsJoe ParkinNovember 2012For professional clients / qualified investors only

2. Why Blending Insights?European AUM Split by Active and Passive Funds100%98%96%94% % of AUM92%90%88%86%84%82% 20042005 200620072008200920102011 Jun-12% of AUM in Active Funds % of AUM in Index Funds % of AUM in ETFsSource: BlackRock, Simfund. Please note, the data excludes AUM in Cayman Islands, British Virgin Islands and Bermuda domiciled funds. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY2 3. Our approachWe interviewed: 35 Multi-asset, Advisory and Discretionaryinstitutions across EMEA Investors with predominantly active, blended orpassive portfolios Our respondents manage ~ 2.5 Trillion* 5 of the top 10 Global Private Banks***Source: BlackRock, as of Year End 2011**Source: Scorpio Partnership Private Banking Benchmark 2012 FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 3 4. The Blending Insights 5. Investment philosophy and client base are keyIts not just a theoretical or academic discussion of whats bestIve been a fund selector for so many years, andI have to believe that I canadd value through selecting funds.So, we really try to go from an agnostic standpoint,throw it all in the machine and purely from aquantitative perspective, as emotion free as physically possible, to say is it possible for a fundselector to find value? FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 5 6. Three identities emerge Actively Active Currently focused on using active management to generate alpha and not actively blending Indexing, where it is used, is only for cash management or as a last choice if other alternatives are unavailable. Embracing Blending Adopting indexing for tactical or short-term exposures, or Moving towards a more comprehensive approach to blending Agnostic Allocators Agnostic process for blending and the use of indexing. Primary focus on asset allocation to deliver alpha implementation choice often a secondary consideration.FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 6 7. Theres no single answer I think the fact that weve tried to go all the waydown a very technical route and come all the wayback down to what is more a qualitative approach has been a bit surprising. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 7 8. So what drives blending processes?Asset class efficiency Some trends: US large cap equities, high yield But plenty of disagreement Select by asset class or blend within them?Is that all you need to consider?We will make that decision at that particular point in time, and then decide whether to go active or passive, but its a function of time. The decision to go passive in US, UK small cap today is not going to be the same as thedecision three years down the line. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 8 9. Blending often evolvesIt sounds strange, but there was not a time when we sat together and said: Okay now were going to do this. It more or less evolved. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 9 10. Catalysts Current Investment Markets Growth in Index Product RangeClient-DrivenWhat is driving these changes in investment approach? Costs Regulation Business OpportunityPerformance of Active Funds FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 10 11. Catalysts Client drivenThere is some expectation in investor communities, in the market,that passive products should play a role in peoples portfolios. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 11 12. CatalystsCurrent investment marketsThe starting position on returns on equity and fixed income does not do the trick anymore, so you have to do more, youhave to be more diligent FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 12 13. Catalysts RegulationThe regulator has played a very interesting role here. A few years ago they were more or less telling everybody you should offer passive over active and I remember the asset managers at that time werequite astounded that the regulator was taking such a pro-passive approach. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 13 14. Catalysts Cost If we are in a lower return world, then the cost on a relative basis(active versus indexing) will matter more... FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 14 15. Blending isnt easySelling a StoryAvailability and Structure of IndexingCommunicationBlending active and index strategies does not comewithout challenges and obstaclesOperational Challenges of using ETFsEducation Changing a Mind-SetHaving an In-House ManagerAdvisory Revenue ModelFOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 15 16. The Future 17. The FutureFee compressionOne thing is quite clear, that we will see pressure on prices,on margins, in our business. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 17 18. The Future Advisory business model In the RDR world, active versus passive becomes, as far as the industry is concerned, a much more level playing field now.The fear is that once you start moving towards an advisory model, a lot of our advisory clients will say: Well, in that case, either well goto discretionary or the execution-only option. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY18 19. The FutureFuture of active management So the small percentage of active managers that have great track records will get piles of money and the majority of them wont. We think the likelihood of active managers not delivering again for the next ten years is lower than it was for the last ten years. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 19 20. The Future Evolution of indexing Youre starting to see the fragmenting of what we mean by index and therefore what we mean by passive.FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 20 21. The FutureFuture of blending We do think that in time, that blended will be the range that wesell the most of. That combination of value for money, plus the active overlay, plus the active fund selection, that combination is the sweet spot of what everyone wants.People have moved slowly into passive. I think they will keepmoving into passive even if active management delivers, thenat some stage the pendulum might swing back. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 21 22. DisclaimerRegulatory InformationBlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Services Authority (FSA), having its registered office at 12 Throgmorton Avenue,London, EC2N 2DL, England, Tel +44 (0)20 7743 3000, has issued this document for access by Professional Clients only and no other person should rely upon theinformation contained within it.For investors in IcelandAny funds mentioned or inferred to in this document are not registered for public distribution in Iceland. This document is intended for information purposes only and does notconstitute investment advice or an offer to sell or a solicitation of an offer to buy the funds described within and no steps may be taken which would constitute or result in apublic offering of the funds in Iceland. This document is strictly confidential and may not be distributed without authorisation from BlackRock Advisors (UK) Limited.Please read the prospectus and ensure that you are eligible to invest under the local regulatory and financial rules, and comply with restrictions on foreign currencyinvestments, that exist for Icelandic investors. We recommend that you seek independent financial advice before making any investment decision. This document is for yourinformation only. Accordingly, this document and relevant information may not be used for any other purpose or passed on to any other person in Iceland. The funds describedor inferred to in this document are not registered for public distribution in Iceland and may not be offered, sold or resold to the public in Iceland.Restricted InvestorsThis document is not, and under no circumstances is to be construed as an advertisement or any other step in furtherance of a public offering of shares in the United States orCanada. 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