High conviction investing

2nd February 2006

Andrew Dalrymple – Senior Portfolio Manager

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Investment risk

The investment definition of risk:

Deviation from the benchmark

The ‘real’ definition of investment risk:

Losing money!

Market risks and the pitfalls of benchmarking

4

Regional constituents of the MSCI World Index (2005)

40

19

12

55

111113

23

13

35

5

0

10

20

30

40

50

60

Asia Pacific ex-Japan

EmergingMarkets

Europe ex-UK Japan North America UK

MSCI World Index GDPAs at 31 Dec 05

%

• More than 50% of the index is made up of US stocks• Less than 4% from Asia• Zero allocation in emerging markets: an area that has produced the highest returns over the last 2-3 years• GDP vs MSCI weighting miss match

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Index comparisons – performance of regional stock markets

Three years to 31 Dec 05 in USD. Source: Lipper Hindsight.

-40

-20

0

20

40

60

80

100

120

140

160

180

12/02 06/03 12/03 06/04 12/04 06/05 12/05

MSCI EM (Emerging Markets) MSCI Europe MSCI Japan

MSCI World MSCI AC Asia Pacific ex Japan S&P 500

• Strong outperformance of certain regional markets over time v MSCI and S&P 500

• Benchmark investors miss key market trends0.0%

3.6%

11.7%

30.0%

% of MSCI World Index

%

54.7%

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MSCI World sector breakdown and performance

Sector and performance breakdowns one year to 31 Dec 05 in GBP

%

• Benchmark investors miss key themes • Significant 2005 outperformance of energy and materials

MSCI World Performance

(2005):23.0%

Stock risks and the pitfalls of benchmarking

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FTSE 100 – market domination of large stocks

Stock Index weighting

BP 9.1

HSBC Holdings 7.5

GlaxoSmithKline 6.1

Vodafone Group 5.5

Royal Dutch Shell 5.0

Royal Bank of Scotland 3.9

Royal Dutch Shell 3.6

AstraZeneca 3.2

Barclays 2.8

HBOS 2.7

49.4

As at 31 Dec 05.

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NASDAQ – market domination of large stocks

Stock Index weighting

Microsoft Corp 8.2

Intel Corp 3.7

Cisco Systems Inc 3.3

Amgen Inc 2.6

Google Inc 2.5

Qualcomm Inc 2.2

Dell Inc 2.0

Oracle Corp 1.9

Apple Computer Inc 1.8

eBay Inc 1.8

30.0

As at 31 Dec 05.

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NASDAQ – Share Price vs Index weightings

0

10

20

30

40

50

60

70

80

Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05

Microsoft Corp Intel Corp

Microsoft Corp & Intel Corp

12.3%

7.6%

$ 8.2%

3.7%

As at 31 Dec 05.

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Hang Seng – market domination of large stocks

Stock Index weighting

HSBC Holdings Plc 30.2

China Mobile Hong Kong 15.5

Hutchison Whampoa 6.7

CNOOC 4.6

Hang Seng Bank 4.1

Cheung Kong Holdings 3.9

Sun Hung Kai Properties 3.8

BOC Hong Kong Holdings 3.4

CLP Holdings 2.3

Hong & China Gas 2.3

76.8

As at 31 Dec 05.

12

0

20

40

60

80

100

120

140

160

Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05

HSBC Holdings Plc Hutchison Whampoa

Hang Seng – Share Price vs Index weightings

HSBC Holdings Plc & Hutchison Whampoa

$

27.5%

10.7%

30.2%

6.7%

As at 31 Dec 05.

Missed Opportunities and High Conviction Themes

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High Conviction Themes – Asia

Severe economic difficulties in late 1990’s

Last five years have seen steady improvement in corporate and

personal balance sheets

One of the strongest areas in the world for private consumption

Favourable demographics

Strong work ethic / entrepreneurial culture

Highly competitive cost base

Attractive valuations

Improving political stability

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50

100

150

200

250

300

350

400

Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06

Bharti Televentures (India) Non-Index stock

• India’s leading mobile telephone operator (12.5 m customers)

• Subscriber growth +50%p.a.

• Mobile penetration rate remains low (4%)

• Excellent, proven management

Source: Bloomberg, as at 31 Dec 05

INR

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High Conviction Themes – How to Invest in the US

Strong ‘bottom up’ focus

A stock pickers paradise

Franchise builders, consolidators

Niche/specialist players

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6

8

10

12

14

16

18

Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06

LKQ Corp (US) Non-Index stock

Source: Bloomberg, as at 31 Dec 05

USD

• Only national provider of recycled car parts

• Highly fragmented market

• Huge market opportunity

• Strong value proposition

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High Conviction Themes – Energy

Free cash flow of E&P majors is very strong

Supply side struggling (gas decline rate of 30% p.a.)

30% more drilling activity in 2005

Service utilisation rates approaching 100% (land and offshore)

Rig day rates at 15 year highs

Cycle to continue owing to rig shortage

19

0

10

20

30

40

50

60

70

80

90

Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05

Ocean Rig (Norway) Non-Index stock

NOK

• Operator of the two most advanced semi submersibles in the world

• Rig day rates have doubled since last September

• Strong demand for harsh environment capability

• Trading around NAV

Purchased

Added to position

Source: Bloomberg, as at 30 Sep 05

Sold

20

SolarWorld (Germany) Non-Index stock

0

50

100

150

Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05

EUR

Source: Bloomberg

Purchased

Took profits

Sold • You all know this one!

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Best ideas portfolio

50 - 55 global opportunities

Conviction based approach

Benchmark aware but not constrained or driven

Strong sector, regional and size bias

High Conviction Themes – Portfolio Construction

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A High Conviction Investor…

Can be contrarian

Has complete flexibility

Identifies and explores themes and areas

Is not forced to buy stocks or regions

Has an absolute return mindset

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£1,000 invested in First State Global Opportunities Fund

Since launch to 31 Dec 05 . Source: Lipper Hindsight, bid to bid, net income reinvested, in £ sterling

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

07/99 07/00 07/01 07/02 07/03 07/04 07/05

FS Global Opportunities Fund (£2,236) IMA Sector Average (£1,120) MSCI World Index (£1,054)

£

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Before making any investment decision based upon the information contained in this presentation, you should assess your own position, and if appropriate, seek the assistance of a financial adviser.

The information contained within this presentation has been obtained from sources that First State Investments believes to be reliable and accurate but no representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information. Neither First State Investments, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from any use of this presentation. This presentation is not intended for distribution to any other person. The presentation is being made available to you solely in your capacity as a professional or institutional investor or authorised person. The information in this presentation may not be reproduced in whole or in part without the prior consent of First State Investments.

Please remember that the value of investments and the income from them may go down as well as up and that you may not get back your original investment. Past performance is not necessarily a guide to future performance. Due to the nature of the funds, short-term volatility is expected and your investment should be viewed as long-term.

Issued by First State Investment Management (UK) Limited, authorised and regulated by Financial Services Authority.

Registered Office: 23 St Andrew Square, Edinburgh, EH2 1BB.

Further details: The Investment Manager is First State Investment Management (UK) Limited. The Authorised Corporate Director is First State Investments (UK) Limited. A copy of the prospectus is available from First State Investments at 3rd Floor, 30 Cannon Street, London, EC4M 6YQ

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