Principal Global Investors
Wealth Management
February 2008
Giles Gunesekera
Director, Head of Third Party Sales
Agenda
Global Markets, the Economy and US Housing
Is Corporate America Vulnerable?
Product innovation – how is the market evolving?
Where to from here?
2
Global Markets, the Economy and US
Housing
3
Where are Global Interest Rates Headed?
Ten Year Government Bond Yields
12.00
10.00
Australia
Percent
8.00
6.00
4.00
United States
Japan
2.00
Ju
n9
M 4
ar
-9
D 5
ec
-9
Se 5
p96
Ju
n9
M 7
ar
-9
D 8
ec
-9
Se 8
p99
Ju
n0
M 0
ar
-0
D 1
ec
-0
Se 1
p0
Ju 2
n03
M
ar
-0
D 4
ec
-0
Se 4
p0
Ju 5
n0
M 6
ar
-0
D 7
ec
-0
7
0.00
Source: FACTSET and Principal Global Investors
4
US No Longer the Engine of Global Growth
Real GDP Grow th
12
Year-on-Year % Change
10
8
6
4
2
2006
Source: Economic Intelligence Unit, JPMorgan and Principal Global Investors
5
2007F
2008F
lo
ba
l
G
A
us
tr
al
ia
E
m
er
gi
ng
M
kt
s
hi
na
C
Ja
pa
n
re
a
A
E
ur
o
U
ni
te
d
S
ta
te
s
0
Modest Inflationary Pressures Remain in the
Global System
Consumer Price Inflation
7.00
Aus tralia
Percentage Change (YoY)
6.00
5.00
Unite d State s
4.00
3.00
2.00
1.00
Ge rm any
Unite d Kingdom
0.00
-1.00
Japan
6
7
6
Ju
n0
Ju
n0
5
4
Ju
n0
3
Ju
n0
Ju
n0
2
1
Ju
n0
0
Ju
n0
9
Ju
n0
Ju
n9
8
7
Source: FACTSET and Principal Global Investors
Ju
n9
6
Ju
n9
Ju
n9
5
Ju
n9
Ju
n9
4
-2.00
The Subprime Debacle: Is it Overdone?
$10.0
$9.0
$8.0
US$ (trillions)
$7.0
$6.0
$5.0
$4.0
$3.0
$2.0
$1.0
$0.0
Total outstanding
mortgages as at
31/12/2005
Source: Principal Global Investors
7
Subprime market share
15% of Subprime with
potential to go into
foreclosure
Index returns over 10 years
Benchmark Period Returns as of 31 December 2007
20
15
Returns (%)
10
5
0
DOW JONES
-5
FTSE EPRA
NAREIT GLOBAL
EX US
LEHMAN GLOBAL
AGGREGATE
MSCI WORLD
S&P 500
S&P/ASX PROP
ACCUM 300 INDEX
-10
-15
Market Index Name
Source: Bloomberg
8
12 MONTH
2 YR ANNZD
3 YR ANNZD
5 YR ANNZD
7 YR ANNZD
10 YR ANNZD
UBS BANK BILL
INDEX
Is Corporate America Vulnerable?
9
Credit Spreads
(US Corporate Quality Spread Aaa vs Baa)
Source: Moodys & Principal Global Investors
10
Leverage Ratios Are Low
Source: DB Global Markets Research, FACTSET
11
Coverage Ratios Are Solid
Source: DB Global Markets Research, FACTSET
12
Low Default Rates – Modest Rise Forecast
%
Source: Merrill Lynch, Moodys and Principal Global Investors.
13
Stockmarket Returns
Source: Principal Global Investors
14
Stockmarket Conditions
PE
Ratio
S&P 500 Price Earnings Ratio
%
S&P 500 Earnings Per Share
% change over 12 mths
US stock market does not look overvalued: PE is lower than mid-90’s average,
earnings growth is solid, suggesting low risk of major correction.
Source: Principal Global Investors
15
Product innovation – how is the
market evolving?
16
Global significance of the industry
17
Private Wealth in Asia Pacific
Number of HNWIS in the Asia Pacific (ex Japan) by Country
('000)
350
320
300
250
200
146
150
87
100
83
77
59
55
50
17
0
China
Australia
Source: Consensus Economics
18
South Korea
India
Hong Kong
Taiw an
Singapore
Indonesia
Asia-Pacific Medium-Term Economic Growth
and Inflation Prospects (2007-2017)
China
India
Indonesia
Singapore
Malaysia
Thailand
South Korea
Hong Kong
Taiwan
Australia
New Zealand
Japan
Source: Consensus Economics
*Source: Consensus Economics, BT Funds Management
19
GDP
Consumer Prices
8.9
8.1
5.8
5.3
5.3
4.7
4.7
4.6
4.4
3.3
2.8
1.9
3.2
4.9
5.3
1.3
2.1
2.8
2.5
2.8
1.8
2.6
2.5
0.9
Case study - Australia
Youthfully vibrant!
20
The Australian advantage
Australia's retail funds management market has been
described by US-based Cerulli Associates as ;
"the most sophisticated retail funds management
marketplace outside of the US".
A recent report by Boston Consulting Group said
that Australia is home to the world's fastest growing highnet-worth investor market.
21
Growth and characteristics of the Australian
Funds Management Industry
Growth primarily attributable to:


Low barriers to entry: sophisticated investors, mature market and
efficient regulatory regime.
Government mandated retirement income scheme, Superannuation
Characteristics of the market include:




22
77% of the market is dominated by 30 managers
Of the top 30 managers, 17 are foreign owned and manage 46%
Leading domestic funds managers are connected to Banks
Increase in demand for alternative assets: hedge funds;
infrastructure investment, listed and unlisted property
The Case for Property Securities
23
Risk-Adjusted Performance
1 January 1998 – 31 December 2007
Sharpe Ratio
0.80
0.64
0.60
0.40
0.40
0.27
0.20
0.00
Global Real Estate
Global Equities
Global Bonds
Annualized Compound Return
12.81%
7.45%
6.26%
Standard Deviation
14.38%
14.02%
6.60%
0.64
0.27
0.40
Sharpe Ratio
Source: FTSE EPRA/NAREIT Global Index, MSCI World Equity Index, JP Morgan Global Bond Index (Returns in USD)
Source: FTSE EPRA/NAREIT Global Index, MSCI World Equity Index, JPMorgan Global Bond Index
24
Gross Dividend Yield by Country
as of 31 December 2007
Gross Dividend Yield by Country
Source: FACTSET
25
Ja
pa
n
Si n
ga
po
re
Sw
i tz
erl
an
d
Ho
ng
Ko
ng
Ita
ly
UK
Gl
ob
al
Sw
ed
en
Au
s tr
ali
a
Be
l gi
um
Ca
na
da
Ne
the
rl a
nd
Un
s
i te
dS
tat
es
Fin
l an
d
Ge
rm
an
y
Fra
nc
e
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
Increasing Opportunity Set
As of January 2007
Source: UBS Investment Research Global Real Estate Handbook
26
A More Efficient Portfolio
Risk-Return Tradeoff Curve
Global Equities, Bonds & Real Estate
0.09
0.09
With 20% Real Estate
0.08
Return
0.08
With 10% Real
Estate
0.07
0.07
Equities & Bonds
0.06
0.06
0.05
0.04
0.06
0.08
0.10
0.12
0.14
0.16
Risk
*FTSE EPRA/NAREIT Global Index, MSCI World Equity Index, JP Morgan Global Bond Index annualized monthly returns (USD) (Jul. 1997 June 2007)
27
Portfolio A
0% Global Property Securities, 55% Global Equities, 45% Bonds
Portfolio B
10% Global Property Securities, 50% Global Equities, 40% Bonds
Portfolio C
20% Global Property Securities, 45% Global Equities, 35% Bonds
What is risk?
Domestic indices now biased towards global
titans
70%
Largest Company
Largest 3 Companies
60%
Largest 5 Companies
Largest 10 Companies
50%
40%
30%
20%
10%
0%
France
France
Source: FACTSET Jan 2008
28
Germany
Germany
Japan
Japan
UK
UK
USA
USA
Europe (ex-UK)
Europe
(ex-UK)
World
World
Why is diversification important?
Market capitalisation in A$ billion
Global investment opportunities are enormous
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$0
Financials
Information Technology
Health Care
MSCI World ex Aust Index S&P/ASX 200 Index
Source: FACTSET/IRESS at 31 December 2007
29
Telecommunication Services
The importance of diversification
30
Why is diversification important?
Increasing pressure to invest offshore
As consumers, have been ‘buying’ offshore for many years
Coca-Cola Procter & Gamble
Nescafé
… none of these global brands are owned by Australian
companies, but they all feature in our daily lives
31
Why is diversification important?
Markets are volatile
S&P 500 Bear Markets in the Past 35 Years
80
Peak to trough price index change
Subsequent 12 month price index change
Trough to 28 February 2006
60
65
%
58%
44%
38%
40
29%
%
20
0
-20
-20%
-27%
-40
-36%
-48%
-48%
-60
1969 - 70
Source : Bloomberg
32
1973 - 74
1980 - 82
1990
2000 - 06
Why is diversification important?
US MARKET REACTION TO CRISES
S&P500 Index
60
Peak to trough after crisis
1 year later from trough
50
2 years later from trough
22 April 2004 from trough
40
30
%
20
10
0
1 day
-10
30 days
11 days
-20
60 days
135 days
-30
Pearl Harbour
Source : Bloomberg/IRESS
33
Korean War
JFK Assasination
Iraq Invades
Kuwait
Terrorist Attack on
US
Why is diversification important?
The roller coaster of investor emotion
Source : Frank Russell
34
Why is diversification important?
Source : ING Funds Managment
35
The Power of Asset Allocation
More than 91% of pension plans’ returns depended on their
asset allocations.*
1.8% market timing
91.5% asset allocation
4.6% selection of
individual investments
2.1% other
*Source: “Determinants of Portfolio Performance II: An Update,” Brinson, Singer, Beebower, Financial Analysts Journal, May-June 1991. Past
performance cannot guarantee future results.
36
Global product trends
Increasing global asset focus (including emerging markets)
Higher concentrated & volatility & alpha products
More benchmark customisation or unaware behaviour
Performance fees
Increased prevalence of long / short (equity & credit)
Multi-managers growing / changing shape
Alternative asset classes
Structured products (SP, ETF, managed accounts)
37
After-tax considerations
Where to from here?
38
Corporate outlook
Underlying credit fundamentals remain solid:
 corporate balance sheets remain strong in
aggregate
 attractive valuation levels
 solid upgrade/downgrade ratio
 continuing low default rates
39
Economic Outlook
Economic fundamentals are sound:
 US housing in extended slowdown, but offset by resilience
in Europe, UK and emerging markets
 Global growth solid & supported by low rates
 US Federal Reserves to cut interest rates again
 Stability will return to financial system under watchful eye of
central banks
40
 Liquidity is available
Summary - key influences on the industry
Longer investment horizons (“retirement of retirement”)
More sophisticated portfolio construction techniques
– Drive for diversification, Risk budgets, Core / satellite philosophy
More efficient implementation (focus on fees & taxes)
Greater customisation (products & portfolios)
Greater product choices available (wholesale, global sources)
Improved information and transparency and tools
41
Discussion time
42
Disclosures
The information in this document has been derived from sources believed to be accurate as of December 2007. It contains
general information only on investment matters and should not be considered as a comprehensive statement on any matter and
should not be relied upon as such. The information it contains does not take account of any investor's investment objectives,
particular needs or financial situation. You should consider whether an investment fits your investment objectives, particular
needs and financial situation before making any investment decision.
Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or
directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason
of negligence) for errors or omissions in this document.
All figures shown in this document are in U.S. dollars unless otherwise noted.
Issued in Australia by Principal Global Investors (Australia) Limited (ABN 45 102 488 068; AFS Licence No: 225 385), which is
regulated by the Australian Securities and Investments Commission. © 2005 Principal Financial Services, Des Moines, IA 50392
USA. "The Principal Financial Group" and "The Principal" are registered trademarks of Principal Financial Services Inc, a
member of the Principal Financial Group. "Principal Global Investors" is a service mark of Principal Financial Services Inc.
The responsible entity and issuer of the Principal Property Securities Fund Fund (ARSN 104 037 425) is Principal Global
Investors (Australia) Limited. You should consider the Product Disclosure Statement available from us and assess whether this
product fits your investment objectives, particular needs and financial situation before making any investment decision. Future
performance and the capital value of the Fund are not guaranteed. Investors are reminded that the Fund’s returns can be
volatile, reflecting rises and falls in the value of underlying assets.
43