U K S t r a t e g y r e p o r t

RES

-4869-U

JUL 2

009 P

age 1 of 2

expectationS for capital MarKet retUrnS

The long-term annual rate of return on the FTSE All-Share was 8.3% per year between 1988 and 2008, somewhat lower than its performance over longer times. As a result of the severe decline in the stock market, the outlook for UK equity returns is higher. Our expectation is for long-term equity returns in the range of 10% – 12% per annum, and long-term fixed-income returns averaging 5.5% – 6.5% per annum. As a result, if your portfolio is split evenly between equities and fixed income, its average annual return range is 7% – 9%.

Our capital market assumptions are designed to assist you and your financial adviser when:

Selecting a portfolio objective❚❚

Determining the appropriate withdrawal rate ❚❚

Discussing other decisions to help achieve your ❚❚

long-term financial goals

Whilst past performance does not indicate future results, the guidance combines our views on the current environment with long-term historical performance.

Portfolio ObjectivesEach portfolio objective is a mix of shares and fixed-income investments designed to reflect your comfort with risk and your investment time frame. The capital market assumptions are for markets in general. We have taken the recommended mix of assets for each portfolio objective to estimate the range of annualised returns you might expect if you own your investments for 10 years or more. Remember, however, each year’s returns are generally going to be quite different from the long-term averages suggested below.

portfolio objectivePreservation of Principal Income Focus

Balanced towards Income

Balanced Growth & Income

Balanced towards Growth Growth Focus

All-equity Focus

Range of Expected Long-term Portfolio Returns

3% – 5% 5% –7.5% 6% – 8.5% 7% – 9% 8% – 10% 8% – 11% 10% – 12%

Risk and ReturnLooking at 10 years or longer, diversified equity investments have almost always provided higher returns than fixed-income investments (bonds), and fixed-income investments generally provide higher long-term returns than cash investments, such as savings accounts. In contrast, the variation of returns from year to year historically has been highest for equity investments and lower for fixed-income investments.

The higher returns from owning shares over time tend to compensate investors for tolerating fluctuations in the value of their portfolios. Most investors own portfolios that include these three asset classes (equities, fixed income and cash) to provide a combination of relatively stable returns with those that vary more greatly.

All values are represented in GBP. Past performance is not a guarantee of future results. Hypothetical value of £1 invested at the beginning of 1970. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. All rights reserved. 1/4/2009

UK Market Perspective 1970 – 2008

1970 1980 1990 2000

£1,000

£100

£10

£1

£0.10

£69

£24

£12

£37

Compound annual return

UK shares 11.5%

Bonds 9.7

Savings accounts 8.5

Inflation 6.6

When you invest, you’d like to know what you’ll receive in the future: the return on your investment. Unfortunately, we can’t accurately predict future investment returns. However, using the past performance of different investments and current conditions, we can make some assumptions about the range of likely future returns. The Edward Jones Investment Policy Committee (IPC) recently reviewed current capital market assumptions and concluded equity returns are likely to be slightly higher, whilst fixed income and inflation are slightly below the range of long-term historical returns.

Kate Warne, ph.D., cfaMarket Strategist www.edwardjones.com

RES

-4869-U

JUL 2

009 P

age 2 of 2

How Edward Jones Makes Capital Market AssumptionsThe Edward Jones IPC reviews the assumptions about capital markets semiannually. These assumptions are designed for current investments, so they take into account the current environment as well as the historical performance of various assets. They are based on:

Inflation rates❚❚

Dividend yields on UK and foreign equities❚❚

Expected growth rates of earnings and dividends❚❚

Price-to-earnings ratios (or price-to-dividend ratios)❚❚

Current interest rates on fixed-income investments❚❚

Historical relationship among various investments❚❚

Our current assumptions are:

Inflation: 3.0%

Equities: 10% – 12%

Long-term fixed income: 5.5% – 6.5%

Cash: 3.0%

As a result, if your portfolio is split evenly between equities and fixed income, its average annual return range is 7% – 9%.

InflationOne of the biggest risks for long-term investors is inflation (or rising prices). Whilst inflation has averaged 4.1% since 1980, it has ranged from a low of just under 1% to over 16%. The 2009 recession is likely to keep price increases subdued over the next few years, but thereafter we expect a return to moderately low inflation, similar to the recent past. Our expectation is for inflation to average 3.0% per year over the next decade. Investments that provide rising income help address the impact of inflation.

How Much Should Capital Market Assumptions Change over Time?We think the range of expectations about future investment returns should not change very much over time. From year to year, stock market prices and current interest rates typically vary widely, but good and bad short-term performance tends to average out over time. As a result, longer-term returns vary much less widely, as shown below for the returns of the FTSE All-Share Index from 1963 to 2008. The first histogram shows one-year returns, which ranged from a decline of more than 40% to returns of more than 40%. The 10-year annualised returns are mostly clustered together between 0% and 25%.

Return Band

Less than -40%

-35% -40%

-30% -35%

-25% -30%

-20% -25%

-15% -20%

-10% -15%

-5% -10%

0% -5%

5% 0%

10% 5%

15% 10%

20% 15%

25% 20%

30% 25%

35% 30%

40% 35%

More than 40%

197420081973 2002

20011969

2000199419901964

19701966 1976

2007200619871978

200419981988198119791965

2005199619721963

2003199919971995199219911985

1993198619831982 1984

198919801967

1977197519711968

FTSE All-Share Index Total Return 1963 – 2008

One-year Total Return Source: Bloomberg, Edward Jones

Return Band

Less than -40%

-35% -40%

-30% -35%

-25% -30%

-20% -25%

-15% -20%

-10% -15%

-5% -10%

0% -5%

5% 0%

10% 5%

15% 10%

20% 15%

25% 20%

30% 25%

35% 30%

40% 35%

More than 40%

99-0865-74

98-0797-0696-0595-0494-0393-0269-7866-7564-73

92-0190-9987-9685-9473-8272-8171-8070-7968-7767-7663-72

91-0089-9888-9786-9584-9383-9282-9181-9074-83

80-8979-8878-8777-8676-85 75-84

10-year Annualised Total ReturnSource: Bloomberg, Edward Jones

Investors who are taking income from their investments need to pay particular attention to the variability of their portfolios. The withdrawal rate needs to be considerably less than the long-term expected return on the portfolio to reduce the chances of running out of money. After a severe decline in equities, withdrawals make the portfolio’s recovery more difficult, since less remains invested.

Recommendations As you review your portfolio with your Edward Jones financial adviser, keep in mind that you need a long-term investment strategy to help you receive the long-term returns available in the market. Many investors fail to earn those returns because they trade frequently and switch strategies at the wrong times — usually selling investments that have declined and buying those that have already risen. Our advice is to build a well-diversified portfolio with the mix of quality investments tailored for your situation, review it periodically to ensure it remains appropriately balanced and stay invested over time. This approach has helped investors on the path towards their financial goals in the past, and we think it will work for you as well.

Edward Jones Limited is authorised and regulated by the Financial Services Authority and is a member of the London Stock Exchange. Registered in England and Wales No. 3403976. 11 Westferry Circus, Canary Wharf, London, E14 4HH. © 2009.