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Vanguard Symposium meetings

– Light at the end of the tunnel?

November 2012

Peter Westaway

Chief Economist Europe,

Vanguard.

Vanguard Investments Switzerland GmbH

For institutional investors only. Not for public distribution.

The information on this presentation does not constitute legal, tax, or investment

advice. You must not, therefore, rely on the content of this presentation when making

any investment decisions. The value of investments and the income from them may fall

or rise and investors may get back less than they invested.

2

1. The Global outlook

• current risks

2. Europe

• The challenges

• The risks

• Alternative scenarios

3. Implications for Investors

• The benefits of a diversified portfolio

Light at the end of the tunnel?

VANGUARD INVESTMENTS SWITZERLAND GMBH

3

Global growth to remain subdued for some time

Main growth comes from developing world

Extracted 25/10/12 VANGUARD INVESTMENTS SWITZERLAND GMBH

4

Equities recovering..but Europe still well down


5

Global yield curves are flat..

Policy rates expected to stay low for long


6

1. US growth and the fiscal cliff

2. A hard landing in China

3. Europe

The macro risks


14%

16%

18%

20%

22%

24%

26%

1990 1995 2000 2005 2010 2015 2020

CBO Spending Range CBO Revenue Range

Potential deficit

reduction scenarios

– Default

– Grow your way out

– Belt tightening

– Inflate your way out

– Financial repression

Fiscal adjustment

2012-13?

– Full reversal

..3.9% of GDP

– CBO “more likely”

alternative.. 0.9%

U.S. fiscal deficit: Looming fiscal cliff could harm growth

Short-term deficit projections

% o

f G

DP

Total

deficit

9%

Structural

deficit 3–4%

Sources: The Vanguard group, Inc.'s Investment Strategy Group based on Congressional Budget Office The Budget and Economic Outlook: Fiscal Years 2012 to

2022.. The CBO Spending Range in made up of spending under the Alternative Scenario (upper limit) and Baseline/Current Law Scenario spending (lower

limit). The CBO Revenue Range is made up of revenue under the Alternative Scenario (lower limit) and Baseline/Current Law Scenario revenue (upper limit). 9%

deficit was that realized in 2011 and the Structural Deficit represents the average of the deficit under the Alternative Scenario and Baseline/Current Law Scenario

over the next 10 years. $1.2 trillion in spending cuts attributed to automatic sequestration procedure as of June 2012, allocated based on CBO analysis in Budget

and Economic Outlook: An Update, 2012.

7 VANGUARD INVESTMENTS SWITZERLAND GMBH

8

Will China slow down sharply? Monetary policy attempting to engineer soft landing with growth around 7-8%

Extracted 25 Oct. 2012


A history of EMU in one chart! The past 20 years divide into three periods

Source: Bloomberg generic sovereign 10-year yields

Note: Weak periphery is the average of Greek, Irish and Portuguese yields where available for each country

Sovereign 10-year yields, %

9

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

30/06/1993 30/06/1997 29/06/2001 30/06/2005 30/06/2009

Italy

Spain

Germany

France

Weak periphery

Convergence

Honeymoon

Crisis

Extracted 09/10/12


The crisis was prompted by mounting debt problems

10

• Debt had been increasing

for years in Greece and

Portugal

• But the banking crisis

caused problems for

Ireland and Spain

• Even with austerity, debt

ratio levels don’t turn for

some time

• Debt ratios for euro area

as a whole not markedly

high

• And even lower for

Germany


11

• The challenges

• The risks

• The long-run outcomes

Europe: How does it play out?


12

• Fiscal consolidation

• Growth

• Competitiveness

• Structural reform

• Banking repair

The 5 Challenges


Challenge 1: Fiscal consolidation Achieved/required/forecast structural primary balance improvement (% GDP)

Source: IMF World Economic Outlook, October 2012

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2010–11

2012–13

2014–15

•Considerable fiscal

adjustment challenges

remain especially in

Greece, Ireland, Spain and

Italy

•Greece has already done

a lot, contrary to popular

opinion

•Portugal has done a lot of

the work


Challenge 2: Growth Periphery in recession until 2014 and core is sluggish

Euro area, core and periphery GDP growth,

past and forecast (IMF), 2010-2015

14

• GDP continues to fall in

the periphery, through

2013 in Greece, Portugal

and Spain, maybe Italy

• French growth stays

below 1% until 2014.

• German growth is

modest, averaging around

1% through 2015

• Euro area growth

continues below trend


Challenge 3: Competitiveness Correction is well under way but the gap with Germany is still considerable

• Credit boom led some

periphery countries to

lose competitiveness

• Some are clawing back,

notably Ireland, but

Greece too

• But Germany’s

performance is almost

“too good”.

• In absence of nominal

exchange rate flexibility,

“internal depreciation” is

only option.....

• Euro area

competitiveness boosted

by euro depreciation

during crisis

15

Notes: Figure displays the cumulative percentage difference from the Eurozone average in unit labour costs since Q1 2000. Data from Q1 1995 through latest available as of 31 October 2012.

Source: Eurostat, via Thomson Reuters Datastream.

Real exchange rate defined in terms of unit labour costs,

relative to Eurozone Average

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1998 2000 2002 2004 2006 2008 2010 2012

Cu

mu

lati

ve

Dif

fere

nc

e f

rom

E

uro

Are

a A

ve

rag

e L

ab

ou

r C

os

ts S

inc

e Q

1 2

00

0

France Germany Greece Ireland Italy Portugal Spain


Challenge 4: Structural reform Europe faces a legacy of many too-long-ignored problems.....

• Structural policies are

weak in Greece, Portugal,

and Spain and Italy:

– This spans labour, product,

and service markets; and

– Institutions, human capital,

infrastructure, and innovation

also show weakness

• Ireland’s policies, by

contrast, are markedly

better.

• The corollary is that the

reforms being enforced

have much scope:

– However they will take time

to have an effect.

16

‘Heat map’ of structural reform gaps – selected euro area

economies and comparators

Note: the darker the shading the greater the weakness

Source: IMF (2010) Lifting Euro Area Growth: Priorities for Structural Reforms and Governance

Structural reform gaps

Selected euro area economies Selected others

GRE ITA POR SPA AUS FRA BEL FIN GER IRL NED JAP US SWE UK DEN

Labour market inefficiency

Business regulations

Network regulation

Retail sector regulation

Professional services regulation

Institutions and contracts

Human capital

Infrastructure

Innovation


Challenge 4: Structural reform Some progress is being made

• Most progress made in

“programme” periphery

countries

• Encouraging, but those

are places where most

work to do

17

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

% C

han

ge i

n O

EC

D r

efo

rm r

esp

on

siv

en

ess

ind

icato

r

OECD structural reform process from 2008/9 to 2010/11

Notes: Figure shows the percentage change in the OECD’s reform responsiveness indicator, which is based on a scoring system for identifying

progress on structural reform policies. For details see Chapter 1 of the OECD’s Going for Growth Report, available at:

http://www.oecd.org/eco/productivityandlongtermgrowth/49711014.pdf

Source: OECD (2012), Economic Policy Reforms 2012: Going for Growth, OECD Publishing. http://dx.doi.org/10.1787/growth-2012-en


http://www.oecd.org/eco/productivityandlongtermgrowth/49711014.pdf

Challenge 5: Repair the banks Banks play a crucial role in the euro area transmission mechanism

Bank fortunes intertwined with sovereigns

• Greece: sovereign exposure has sunk

banks

• Ireland: bank travails have undermined

sovereign

Regulatory agenda compounds need to

recapitalise and deleverage

Bank balance sheets vulnerable to

macroeconomic weakness (eg Spain)

Bank credit is typically the engine of growth

in euro area

Banking union still lacking.

“Agreement” to use ESM funds to

recapitalise banks is a crucial step.

18

Source: BIS, through Bloomberg (incl. public sector, banks, private sector)

Peripheral debt held by European and US banks (total claims as

% of tangible common equity, end-2011)

0%

10%

20%

30%

40%

50%

Greece Italy Ireland Portugal Spain

US Banks European Banks


19

• Market scepticism

• Lack of policy commitment/bailout fatigue

• Austerity fatigue

The risks


Eventually, private markets must finance euro area countries Beyond the weak periphery, financing needs are considerable

Given ongoing needs for the

strong periphery (Italy,

Spain) and the weak core

(France, Netherlands), it is

vital market access is

retained at reasonable

interest rates

It is possible that the firewall

of €500 from the ESM will

need to be bolstered by

more European funds or

from the IMF.

20

Estimated euro area sovereign issuance needs (€ bln)

Note: Number at top of bars shows financing needs for each country for the remainder of 2012 and 2013. Number in

brackets show estimated financing needs to the end of 2015.

Source: Bloomberg and IMF

0

50

100

150

200

250

300

350

400

450

500

2012 (rem.)

2013

2014

2015

221 (562)

132 (357)

235(581)

65(189)


If they don’t, policymakers must (continue to) bridge the gap Policy response from EU governments and ECB may need to step up

Considerable funds have

already been promised to

weak periphery under

existing programmes.. But

“firewall debate” suggests

appetite is dwindling

ECB have stepped in with

support for sovereigns and

banks.. But ECB have

made clear that it is not

their responsibility alone to

save the euro.

The fix?...ECB OMTs linked

to ESM funds with

conditionality is potentially

decisive step

21

0

20

40

60

80

100

120

140

Greece (1)

Greece (2)

Ireland Portugal

EU/IMF funds committed under lending

programmes (€ bln)

Source: European Commission Website

Extracted 25 Oct. 2012


In the end, political will matters most EMU was borne out of politics and could fail if commitment falters

22

Greece: Rejection of austerity measures could cause coalition to collapse>>Grexit?

Negotiations over easing of bailout package critical..but no more money on table

Ireland: Good progress but questions over treatment of banks?

Portugal: Market access in 2013 possible..PSI or more EU funds?

Spain: Austerity/reform fatigue and regional tensions may derail efforts

Italy: Political vulnerabilities may undermine fiscal/structural challenges

France: President Hollande’s tax-heavy budget may harm the economy

Netherlands: Like Belgium, fractious coalition but fiscal challenge manageable

Germany: Will euro paymaster run out of patience? Benefits from crisis too


What does it take to “fix” the euro area?

• Short-term measures to ensure countries stay on track

–ECB OMTs and ESM provide financing if markets lose faith

–Subject to conditionality on continuing fiscal consolidation and

structural reform

• Long-term roadmap of how institutions need to evolve

–Roadmap set out by EU Presidents in June 2012

–Fiscal/economic/banking/political union

–Eurobonds

23

:Note: OMTs are “Outright monetary transactions” involving ECB sterilised purchases of periphery sovereign bonds


All eyes are now on Spain Yields in Spain and Italy lower since September on expectation of ECB/ESM action

24

Extracted 17/10/12

(%)


25

1. Benign scenario (15%?)

– Short-term: ESM-ECB bring yields down

– Medium-term: Fiscal consolidation and reforms on track, growth recovers

– Long-term: Fiscal/banking/political union/eurobonds

2. Muddle-through scenario (65%?)

– Short-term: Temporary respite but sustainability questions persist

– Medium-term: Stuttering progress on fiscal, structural reform; OSI on

Greek debt, eventual growth recovery

– Long-term: Slow adherence to fiscal compact, move to eurobonds

3. Malign scenario (20%?)

– Short-term: Adverse events prompts Grexit, deposit runs elsewhere

– Medium-term: Countries leaving EMU suffer deep recession, banking

sector credit crunch in Europe, global recession

– Long-term: Euro only survives in stronger union of northern Europe

Europe: Possible scenarios?


Summary on European crisis

Even three years into the crisis, we still are uncertain as to

which scenario will unfold.

Our modal scenario is still one where the euro survives,

most likely with its current membership....

But a highly disruptive disintegration of the euro area is still

possible...

....with adverse consequences for the European and global

economy if it were to happen.


27

Diversified work well portfolios for long-run investors

• Equity returns are likely to recover

• Bond returns likely to be below historical average

• But bonds provide valuable diversification

• Especially global bonds

So how should investors react to this uncertainty?


PE ratios in the UK suggest a positive outlook for equities…

Perspective on starting valuation and return -

Equities

Notes: Figure displays Price over 12-month trailing earnings for the MSCI UK index from Jan.1970 to Jan.1993 and for the FTSE All

Share index. Data through 31 Oct. 2012.

Source: MSCI and FTSE, via Thomson Reuters Datastream.

0

5

10

15

20

25

30

35

1970 1975 1980 1985 1990 1995 2000 2005 2010

Pri

ce

ove

r 1

2-m

on

th T

rail

ing

Ea

rnin

gs

Average since 1970 = 14

As of 31 October 2012 = 12


Strong relationship over longer horizons ..suggests equity returns will improve

Perspective on starting valuation and return --

Equities

Notes: Figure displays the realised 120-month annualised returns ended Dec. 1979 through Oct. 2012, relative to the initial price over 12-month trailing earnings from Dec.1969 through Oct.2002. UK equity index defined as MSCI UK from Dec.1969 through Dec.1985 and the FTSE All Share thereafter. Returns are in local currency terms, with income reinvested. Data as of 31 Oct. 2012. Source: MSCI and FTSE, from Thomson Reuters Datastream.

UK Equity Returns vs. Initial Valuation 1970-2012

-5

0

5

10

15

20

25

30

35

0 5 10 15 20 25 30 35

Re

ali

sed

10-y

ear

An

nu

ali

sed

Re

turn

on

U

K E

qu

itie

s

Initial P/E Ratio

P/E as of 31 October 2012


Perspective on starting valuation and return --

Bonds

Low current yields correlate with low expected returns

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%

Reali

sed

10-y

ear

An

nu

ali

sed

Retu

rn o

n

UK

Fix

ed

In

co

me

Initial Yield on 10-year Gilt

UK Fixed Income Returns vs. Initial Yield 1976-2012

Yield as of 31 October 2012

Notes: Figure displays the realised 120-month annualised returns ended Jan. 1986 through Oct. 2012, relative to the initial yield on the 10-year UK zero coupon gilt from Jan.1976 through Oct.2002. UK fixed income index defined as FTSE UK Government Index Feb.1976-Feb.2000; Barclays Sterling Aggregate Index thereafter. Returns are in local currency terms, with income reinvested. Data as of 31 Oct. 2012. Source: FTSE, Barclays, and Bank of England.


Why fixed income makes sense in any macro environment

Diversification benefits act as a hedge against macro uncertainty, despite low yields

-12% -12%

-11% -0.11

-0.20

-0.11

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

-25%

-20%

-15%

-10%

-5%

0%

US Fixed Income Euro Area Fixed Income UK Fixed Income

Mo

nth

ly C

orr

ela

tio

n t

o G

lob

al

Eq

uit

y M

ark

et

Dif

fere

nce i

n A

nn

ualised

Vo

lati

lity

R

ela

tiv

e t

o t

he G

lob

al E

qu

ity M

ark

et

Volatility Reduction from Global Equities Correlation to Global Equities

Notes: Displays the difference in annunalised monthly volatility for each fixed income market relative to the global equity market, and the correlation of

monthly returns relative to the global equity market over the period Jan. 2000 – Sept. 2012. Global equity market defined as the FTSE All World, US

fixed income defined as the Barclays US Aggregate, Euro Area fixed income defined as the Barclays Euro Aggregate, UK fixed income defined as the

Barclays Sterling Aggregate. All returns are measured at a monthly frequency, in local currency terms, with dividends reinvested.

Sources: Vanguard, based on data from FTSE and Barclays. 31 VANGUARD INVESTMENTS SWITZERLAND GMBH

Why fixed income makes sense in any macro environment

Fixed income provides downside protection to equities, no matter which direction yields move

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

Global Equities Global Bonds Global Equities Global Bonds

During Worst Months of Equity Returns During Worst Months of Bond Returns

Dis

trib

uti

on

of

Mo

nth

ly R

etu

rns

Clear downside protection

during equity market downturns Downside protection,

even when yields are

increasing

Notes: Displays the 5th/25th/median/75th/95th distribution of monthly returns for both global equities and global bonds, during a 10 th percentile or worse

month for either the global equity market or global fixed income market. Global equity market defined as the FTSE All World and global bond returns

are defined as the Barclays Global Aggregate. All returns are measured with currency impact removed, assuming income is reinvested.

Sources: Vanguard, based on data from FTSE and Barclays.


Maturity extension to increase yield?

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

1-3yr 3-5yr 5-7yr 7-10yr 10+ yrs

An

nu

alised

Vo

lati

lity

UK Fixed Income Euro Area Fixed Income US Fixed Income

Upward-sloping yield curves reflect interest rate risk

Average volatility, 2001-2012

Notes: Displays the average annualised volatility of monthly returns for each maturity band across each market. Each market is represented by:

Barclays Sterling Aggregate, Barclays Euro Aggregate, and Barclays US Aggregate. Returns are measured in local currency terms, with income

revinvested.

Sources: Vanguard, based on data from Barclays.


EM/Credit Tilt to increase yield?

EM bonds are not a substitute for diversified fixed income exposure

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

EM Fixed Income Global Corporate Fixed Income Diversified Global Fixed Income

Av

era

ge M

on

thly

Co

rrela

tio

n t

o

Glo

bal E

qu

ity M

ark

et

Correlation to global equities, 2001-2012

Notes: Displays the average correlation of monthly returns for each fixed income sector to the global equity market. Global equity market is defined as

FTSE All World index, EM Fixed Income is defined as the JP Morgan Emerging Markets Bond Index, Global corporate fixed income is defined as the

Barclays Global Aggregate Corporate index, and Diversified global fixed income is defined as the Barclays Global Aggregate index. All returns are in

US dollars with income reinvested, and the Global allocations are in hedged terms (the EM index covers only USD issues, so hedging is not applicable).

Sources: Vanguard, based on data from Barclays, JP Morgan, and FTSE.


Be wary of a focus on yield

Focusing on yield alone ignores the risk impact on a portfolio

Volatility,1990-2012 Beta to UK Stocks, 1990-2012

Notes: Left-hand figure displays the annualised standard deviation of monthly returns from Jan.1990 - Oct.2012. Right-hand figure displays the slope coefficient of a

regression of the returns of the stated asset class on the returns of the broad UK stock market from Jan.1990 t-Oct.2012. UK stocks defined as the FTSE 350 index, Lower

Yield stocks defined as the FTSE 350 low yield index, higher yield stocks defined as the FTSE 350 high yield index, UK REITs defined as the FTSE EPRA/NAREIT UK

Index, UK Bonds defined as the FTSE UK Government Index Jan. 1990-Feb.2000; Barclays Sterling Aggregate Index thereafter. 50/50 portfolio is defined as 50% FTSE

350, 50% UK bonds, rebalanced monthly. All returns displayed in local currency with income reinvested.

Source: FTSE, Barclays, via Thomson Reuters Datastream.

0

5

10

15

20

25

UK REITs Lower Yield

Stocks

Higher Yield

Stocks

Broad UK Stocks

50/50 Portfolio

UK Bonds

An

nu

alised

Vo

lati

lity

(%

)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Lower Yield Stocks

Broad UK Stocks

Higher Yield

Stocks

UK REITs 50/50 Portfolio

UK Bonds

Beta

to

Bo

rad

UK

Sto

ck M

ark

et

35


Balanced portfolio performance since October 2007

Notes: Reflects the cumulative return of various allocations to the Barclays Global Aggregate index (Hedged to GBP), the FTSE All World index (un-hedged in GBP), the FTSE All Share index, and the Barclays SterlingAggregate. Portfolio is re-balanced to target allocation monthly, at month end. Returns are in sterling terms, with income reinvested, through 31 Oct.2012. Source: Vanguard, based on Barclays Capital, FTSE,

A balanced global approach has fared well (GBP)

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Oct-2007 Apr-2008 Oct-2008 Apr-2009 Oct-2009 Apr-2010 Oct-2010 Apr-2011 Oct-2011 Apr-2012 Oct-2012

Cu

mu

lati

ve R

etu

rn S

ince 3

1 O

cto

ber,

2007

60% Global Stocks / 40% Global Bonds 60% UK Stocks / 40% UK Bonds 100% UK Stocks


Balanced portfolio performance since October 2007

Notes: Reflects the cumulative return of various allocations to the Barclays Global Aggregate index (Hedged to EUR), the FTSE All World index (un-hedged in EUR), the Eurostoxx equity index, and the Barclays Euro Aggregate. Portfolio is re-balanced to target allocation monthly, at month end. Returns are in euro terms, with income reinvested, through 31 Oct.2012. Source: Vanguard, based on Barclays Capital, FTSE.

A balanced global approach has fared well (EUR)

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%


Cu

mu

lati

ve R

etu

rn S

ince 3

1 O

cto

ber,

2007

60% Global Stocks / 40% Global Bonds 60% Euro Stocks / 40% Euro Bonds 100% Euro Stocks


A balanced global approach has fared well (GBP)

Balanced global portfolio performance since October 2007

Notes: Reflects the cumulative return of various allocations to the Barclays Global Aggregate index (Hedged to GBP), and the FTSE All World index (un-hedged in GBP). Portfolio is re-balanced to target allocation monthly, at month end. Returns are in sterling terms, with income reinvested, through 31 Oct.2012. Source: Vanguard, based on Barclays Capital and FTSE.

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%


Cu

mu

lati

ve R

etu

rn S

ince 3

1 O

cto

ber,

2007

30% Stocks / 70% Bonds 50% Stocks / 50% Bonds 70% Stocks / 30% Bonds 100% Stocks


A balanced global approach has fared well (EUR)

Balanced global portfolio performance since October 2007

Notes: Reflects the cumulative return of various allocations to the Barclays Global Aggregate index (Hedged to EUR), and the FTSE All World index (un-hedged in EUR). Portfolio is re-balanced to target allocation monthly, at month end. Returns are in euro terms, with income reinvested, through 31 Oct.2012. Source: Vanguard, based on Barclays Capital and FTSE.

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%


Cu

mu

lati

ve R

etu

rn S

ince 3

1 O

cto

ber,

2007

30% Stocks / 70% Bonds 50% Stocks / 50% Bonds 70% Stocks / 30% Bonds 100% Stocks


Tactical strategies are difficult (UK Perspective)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Europe ex

Euro ex UK

Equity

UK Equity

North

America

Equity

Euro Equity Emerging

Equity

Un-hedged

Global

Bonds

Hedged

Global

Bonds

Hedged

Global

Bonds

Emerging

Equity

Emerging

Equity

Emerging

Equity Euro Equity

Emerging

Equity

Un-hedged

Global

Bonds

Emerging

Equity

Emerging

Equity UK Linkers

39.8% 16.7% 37.9% 37.3% 74.4% 11.3% 8.3% 10.7% 38.5% 19.3% 51.1% 21.0% 37.4% 45.1% 62.5% 23.6% 20.3%

North

America

Equity

North

America

Equity

Europe ex

Euro ex UK

Equity

Global

Growth

Equity

Developed

Asia Equity

Global Value

Equity

Emerging

Equity UK Bonds Euro Equity

Europe ex

Euro ex UK

Equity

Developed

Asia Equity

Europe ex

Euro ex UK

Equity

Euro Equity

Hedged

Global

Bonds

Europe ex

Euro ex UK

Equity

Europe ex

Euro ex UK

Equity

UK Bonds

37.5% 11.7% 36.7% 28.3% 71.0% 10.1% 5.2% 9.2% 30.3% 15.3% 36.8% 18.4% 18.5% 7.6% 30.5% 22.8% 13.5%

UK Equity Euro Equity Euro Equity

North

America

Equity

Global

Growth

Equity

Hedged

Global

Bonds

UK Bonds UK Linkers

Europe ex

Euro ex UK

Equity

Euro Equity

Europe ex

Euro ex UK

Equity

Emerging

Equity

Global

Growth

Equity

UK Bonds UK Equity Developed

Asia Equity

Un-hedged

Global

Bonds

23.9% 11.0% 27.6% 26.8% 42.4% 9.9% 4.8% 8.4% 29.4% 13.7% 34.7% 16.8% 12.1% 4.4% 30.1% 21.3% 6.4%

Global Value

Equity

Hedged

Global

Bonds

UK Equity UK Linkers

North

America

Equity

UK Bonds

Un-hedged

Global

Bonds

Un-hedged

Global

Bonds

Developed

Asia Equity UK Equity

Global Value

Equity UK Equity

Europe ex

Euro ex UK

Equity

UK Linkers

Global

Growth

Equity

North

America

Equity

Hedged

Global

Bonds

20.9% 8.6% 23.6% 19.9% 25.4% 9.2% 4.3% 5.3% 25.3% 12.8% 24.9% 16.8% 10.8% 3.5% 21.0% 19.1% 5.8%

Un-hedged

Global

Bonds

UK Bonds Global Value

Equity UK Bonds UK Equity UK Linkers UK Linkers

Emerging

Equity

Global Value

Equity

Global Value

Equity

Global

Growth

Equity

Global Value

Equity UK Linkers

Developed

Asia Equity Euro Equity

Global

Growth

Equity

North

America

Equity

20.3% 7.4% 20.1% 19.5% 24.2% 4.2% -0.9% -15.1% 21.4% 11.9% 24.0% 9.4% 8.3% -13.2% 18.4% 16.4% 1.2%

Global

Growth

Equity

UK Linkers

Global

Growth

Equity

Global Value

Equity Euro Equity

Europe ex

Euro ex UK

Equity

Global Value

Equity

Developed

Asia Equity UK Equity

Developed

Asia Equity Euro Equity

Global

Growth

Equity

Un-hedged

Global

Bonds

North

America

Equity

Global Value

Equity

Global Value

Equity UK Equity

19.9% 6.3% 19.9% 15.0% 20.8% 1.5% -6.7% -17.3% 20.9% 11.5% 22.2% 3.7% 7.6% -13.3% 18.3% 16.1% -3.5%

Hedged

Global

Bonds

Europe ex

Euro ex UK

Equity

UK Bonds UK Equity

Europe ex

Euro ex UK

Equity

Euro Equity

North

America

Equity

Global Value

Equity

Global

Growth

Equity

UK Linkers UK Equity

Hedged

Global

Bonds

Global Value

Equity

Global Value

Equity

North

America

Equity

UK Equity

Global

Growth

Equity

19.3% 4.0% 14.8% 13.8% 18.8% 1.4% -10.8% -20.9% 19.5% 8.3% 22.0% 3.3% 6.8% -15.6% 14.8% 14.5% -5.4%

Euro Equity

Global

Growth

Equity

UK Linkers

Europe ex

Euro ex UK

Equity

Global Value

Equity

North

America

Equity

UK Equity

Europe ex

Euro ex UK

Equity

North

America

Equity

Hedged

Global

Bonds

North

America

Equity

UK Linkers Developed

Asia Equity

Global

Growth

Equity

Developed

Asia Equity

Un-hedged

Global

Bonds

Global Value

Equity

17.9% 2.8% 13.9% 13.0% 16.7% -0.5% -13.3% -21.6% 16.4% 8.0% 20.2% 2.6% 6.6% -20.9% 13.6% 8.9% -6.2%

UK Bonds Global Value

Equity

Hedged

Global

Bonds

Hedged

Global

Bonds

UK Linkers UK Equity

Europe ex

Euro ex UK

Equity

UK Equity UK Linkers UK Bonds UK Linkers

North

America

Equity

Hedged

Global

Bonds

Europe ex

Euro ex UK

Equity

UK Linkers UK Linkers

Europe ex

Euro ex UK

Equity

16.5% 2.7% 11.8% 12.6% 4.3% -5.9% -18.9% -22.7% 6.8% 6.7% 9.9% 1.7% 5.8% -25.1% 6.4% 8.8% -12.0%

UK Linkers Emerging

Equity

Un-hedged

Global

Bonds

Un-hedged

Global

Bonds

Hedged

Global

Bonds

Global

Growth

Equity

Euro Equity Euro Equity

Hedged

Global

Bonds

Global

Growth

Equity

UK Bonds UK Bonds

North

America

Equity

Euro Equity

Hedged

Global

Bonds

UK Bonds Developed

Asia Equity

11.9% -2.7% 7.3% 12.0% 1.1% -17.1% -20.1% -28.3% 5.5% 4.6% 8.3% 0.6% 5.6% -26.2% 5.3% 7.9% -12.6%

Developed

Asia Equity

Un-hedged

Global

Bonds

Emerging

Equity

Developed

Asia Equity UK Bonds

Developed

Asia Equity

Global

Growth

Equity

North

America

Equity

UK Bonds

North

America

Equity

Un-hedged

Global

Bonds

Developed

Asia Equity UK Equity UK Equity UK Bonds

Hedged

Global

Bonds

Euro Equity

2.6% -5.4% -17.2% 3.1% -1.0% -20.0% -21.3% -29.5% 3.5% 4.1% 6.8% -0.2% 5.3% -29.9% 3.3% 4.8% -16.6%

Emerging

Equity

Developed

Asia Equity

Developed

Asia Equity

Emerging

Equity

Un-hedged

Global

Bonds

Emerging

Equity

Developed

Asia Equity

Global

Growth

Equity

Un-hedged

Global

Bonds

Un-hedged

Global

Bonds

Hedged

Global

Bonds

Un-hedged

Global

Bonds

UK Bonds Emerging

Equity

Un-hedged

Global

Bonds

Euro Equity Emerging

Equity

0.5% -18.4% -21.8% -23.5% -1.8% -27.2% -22.9% -32.8% 1.2% 1.9% 5.8% -6.5% 3.4% -34.8% -4.8% -0.5% -18.4%

UK equity defined as the FTSE All Share index, Euro Equity defined as the FTSE Eurobloc index, Europe ex Euro ex UK equity defined as the FTSE Europe ex Eurobloc ex

UK index, Developed Asia equity defined as the FTSE Developed Asia Pacific index, North America equity defined as the FTSE North America index, Emerging equity defined

as the FTSE Emerging index, Growth and Value equities are defined as the FTSE World Growth and FTSE World Value indices. UK Bonds are defined as the Citi WGBI UK

index from 1994-1998 and the Barclays Sterling Aggregate from 1999-2011. Hedged and unhedged global bonds are defined as the Barclays Global Aggregate. UK Linkers

are defined as the Barclays UK Inflation Linked Index. Returns are denominated in sterling and include reinvested dividends and interest. 40


Conclusions

•The economic environment is more uncertain than usual.

•Benign and malign scenarios could result that make a difference

even to the long-term investor.

•.Risky to build portfolio around central case assumptions

•High-yielding alternative assets may not deliver in future as they

have in past

•Equities should deliver returns for the long term

•Bonds provide diversification benefits

Stay diversified....stay the course


Important information

The opinions expressed in this presentation are those of individual speakers and may not be representative of Vanguard Investments Switzerland GmbH. The material

contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or

solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.

Issued by Vanguard Investments Switzerland GmbH.

© 2012 Vanguard Investments Switzerland GmbH. All rights reserved.

VISG-2012-11-01-0083


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