Obvious with Hindsight

Investment Challenges for the Next Decade

For Investment Professionals Only

Peter MichaelisHead of Sustainable and Responsible Investment

• Five Sustainability Challenges

• How To Protect Your Investments

• How To Benefit From Thinking Long Term

Sustainable investing for the next decade

2

3

The ‘perils of predictions’

Why most investors dislike long-term forecasting

• ‘It will be alright in the end’ – companies will adapt to changes in society

• ‘Someone else’s problem’ – whatever happens will be beyond my time frame

• ‘Impossible to quantify’ – just too many moving parts to understand

Kodak invent the CCD image sensor.It has a 90% share of the film market.

Kodak dominates the market for camera film.

Digital camerasreplace film.

Kodak fails to gain share in digital

cameras. Shares fallto zero.

Collapses are obvious with hindsight; companies frequently fail to adapt

Source : Bloomberg 04/10/2013

1975 Three decades Mid 2000s 2012

Kodak Share Price

4

Lessons from history

01/04/1974 01/04/1979 01/04/1984 01/04/1989 01/04/1994 01/04/1999 01/04/2004 01/04/20090

10

20

30

40

50

60

70

80

90

5

Decarbonising our Economies

Source: Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble, Carbon Tracker Initiative, 2013

Obvious with hindsight example: Carbon

Sustainable Future UK, EU ex UK and Global Growth Equity FundAverage Carbon Dioxide Emitted Relative to Conventional Benchmark

Who wins: • Portfolios with low Carbon exposure:

6

2009 2010 2011 3YR average0.20

0.40

0.60

0.80

1.00

1.20

Source: Internal

Obvious with hindsight example: CarbonC

arbo

n dio

xide

inte

nsity

(Ind

ex e

qual

s 1)

The view from Investment Bank economists:

“The subject is too big to meaningfully contemplate”

“One of the most significant variables we are not capturing is the natural resources with which an economy is endowed and how this drives its relative terms of trade and its bargaining power in the global economy”

• Looking away from a train coming down the track won’t make the train go away

• Natural capital is finite

7

Source of quotes: Broken models? Economies and ecosystem services, Alliance Trust Investments, Newton Investment Management & Schroders, 2013

Obvious with hindsight example: Ecosystems

‘Just how business is done over there’ – Just accept it!

• Corruption is bad for business, bad for society and very risky for investors

• Transparency is coming – will the companies you invest in be affected?

• Oil, Gas and Mining, Forestry, Shell Companies and International Banking

8

NO!

Obvious with hindsight example: Corruption

Global Obesity:

• The World Health Organisation has declared Obesity to be a global epidemic

• Big = 35.7% of US adults are obese 2009-2011

• Growing fast = number of obese adults in Britain to double by 2030, a 3.8% CAGR2

• Costly = “obesity kills thousands of New Yorkers a year and costs $4 billion a year in health care costs.”

9

Source: Chang J et al. Diabetes Care 1994;17:961. Colditz G et al. Ann Intern Med 1995;122:481.http://www.metacure.com/about-diabetes-2/diabesity/

Relationship Between BMI and Risk of Type2 Diabetes

Obvious with hindsight example: Lifestyle disease

Key

• 1.2m people die each year in road accidents with anything from 20m to 50m injured

• 90% of fatalities occur in low and middle income countries

• UN Decade of Action for Road Safety targets halving the forecast fatalities for2020 (1.8m)

10

Obvious with hindsight: Too many road deaths

Chassis & Safety Division (26% EBIT)• Produces electronic stability controls,

emergency brake assists systems, tire pressure monitoring, brake boosters and anti skid control.

• Vehicle production forecast = 4% globally

• Safety systems for 2015 models = 2012/2013 sales for parts providers above 4%.

11

Source: Automobiles & Parts, Kepler Research, October 2011

Integration - safety drives returns at Continental

12

Source: Internal analysis

Continental Analysis – Chassis & Safety Division

Integration

13

Continental share price since September 2012

Source: Bloomberg 04/04/2014

14/08/2012 14/10/2012 14/12/2012 14/02/2013 14/04/2013 14/06/2013 14/08/2013 14/10/2013 14/12/2013 14/02/20140

20

40

60

80

100

120

140

160

180

200

Continental AG

Eur

os

(€)

Our societies and economies are adapting to major challenges:

•Favours Companies Which Are:

•Low Carbon and Resource Efficient

•Transparent and Intolerant Corruption

•Preventing Lifestyle Diseases

•Keeping People Safe

•For Those Negatively Exposed:

•Take no comfort from current share prices

•Change will be rapid and value destructive

•Many companies will fail to adapt

14

‘The future ain’t what it used to be!’

• This presentation is intended for investment professionals only. It must not be distributed to, or relied upon by, retail investors. • Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up

and is not guaranteed. Investors may not get back the amount invested.• Funds which undertake ethical screening to meet their investment aims are unable to invest in certain sectors and companies. Our

exclusion of some areas of the market (on ESG grounds) may result in periods of underperformance with respect to relevant benchmarks. For instance if tobacco stocks were enjoying extremely strong returns we would not be able to participate in their gains.

• Some of the funds have underlying holdings which are denominated in currencies other than Sterling and therefore may be affected by movements in exchange rates. Consequently, the value of these investments may rise or fall in line with exchange rates.

• Bonds may be adversely affected by changes in interest rates and expectations of inflation. Corporate bonds are subject to credit, liquidity and duration risks. Adverse changes in the financial position of an issuer of corporate bonds or in general economic conditions may impair the ability of the issuer to make payments of principal and interest or may cause the liquidation or insolvency of an issuer.

• The Fund can invest in derivatives. Derivatives are used to protect against currency, credit and interest rate moves or for investment purposes. Therefore, there is a risk that losses could be made on derivative positions.

• Examples of stocks are provided for general information only to demonstrate our investment philosophy. It is not a recommendation to buy or sell and the view of the Investment Manager may have changed.

• Whilst care has been taken in compiling the content of this presentation, no representation or warranty, express or implied, is made by Alliance Trust Investments as to its accuracy or completeness. Some slides may have been compiled from external sources.  Whilst these sources are believed to be reliable, the information has not been independently verified and therefore no representation is made as to its accuracy or completeness.

• Alliance Trust Investments Limited is a subsidiary of Alliance Trust PLC and is registered in Scotland No. SC330862, registered office, 8 West Marketgait, Dundee DD1 1QN; is authorised and regulated by the Financial Conduct Authority, firm reference number 479764.  Alliance Trust Investments gives no financial or investment advice.

15

Important information