Gotham Enhanced Value Indices -...

Gotham Enhanced Value IndicesEnhanced value investing in an accessible Index format

The Royal Bank of Scotland plc is an authorised agent of The Royal Bank of Scotland N.V. in certain jurisdictions.

2 Gotham Enhanced Value Indices

Introduction to the Gotham Enhanced Value Series

The Royal Bank of Scotland N.V. (“RBS”) has partnered with Joel Greenblatt, managing

partner of Gotham Capital International LLC to develop innovative and transparent indices

designed to provide investors with access to fundamental value investing principles utilising

Gotham Capital International’s proprietary approach to working with fundamental formulas.

Simulated past performance shows that the Gotham US Enhanced Value Index would have

outperformed benchmark indices without the performance fees normally charged by hedge

funds.

The Gotham Enhanced Value Indices are designed to select shares that exhibit a high earnings

yield and return on capital employed. Importantly, this investment approach is delivered as a

transparent, rules-based investment process. The Indices benefit from Gotham Capital Inter-

national’s experience working with and reviewing the company data used to calculate these ratios,

with the objective of ensuring that the data is comparable when analysing fundamental factors.

The Gotham US Enhanced Value Index offers exposure to highly liquid stocks in a variety of

business and industry sectors in the United States.

The Gotham Global Enhanced Index aims to give exposure to liquid worldwide shares.

The Gotham International Enhanced Index aims to give exposure to liquid worldwide

shares excluding the US.

The Gotham Enhanced Value Indices aim to provide investors with access businesses with above average returns on capital at below average prices using Joel Greenblatt’s fundamental value investing principles, through US, International and Global Indices, without the performance fees normally associated with hedge funds.

Note: Data observed from 31 December 1999 to 31 December 2009. Past performance and simulated past

performance are not indicative of future performance.

800

600

400

200

0

Source: RBS and Gotham Capital International.

Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09

World Government Bond Index S&P 500® Total Return Index

Gotham US Enhanced Value Index Berkshire Hathaway Inc.

Cumulative historical monthly returns

Years Gotham US

Enhanced

Value Index

S&P 500®

Total Return

Index

10-Year 521.5% -9.1%

5-Year -71.9% 12.3%

3-Year -31.9% -17.7%

1-Year 41.9% 50.5%


Note: Data observed from 31 December 1999 to 31

December 2009. Past performance and simulated past


Simulated historical performance

The Gotham US Enhanced Value Index would

have outperformed the S&P 500® Index as

well as other well-known value investors.

Gotham Enhanced Value Indices 3

“The Gotham Enhanced Value Index Series is a highly logical and consistent way to invest based on the value investment principles described in The Little Book That Beats the Market. We strongly believe that this approach has many advantages over traditional indices.”Joel Greenblatt, Managing Partner of Gotham Capital

International

Introduction to Joel Greenblatt & Gotham Capital

International

Joel Greenblatt is the author of the BusinessWeek bestseller You Can Be A Stock Market

Genius (Simon & Schuster, 1997) and The New York Times bestseller The Little Book that

Beats the Market (Wiley, 2005).

Joel Greenblatt is the Managing Partner of Gotham Capital, an investment partnership he

founded in April 1985 and several other Gotham Capital related investment partnerships.

Gotham Capital International was formed to use its intellectual property in overseas partnerships.

Joel Greenblatt is the former Chairman of the Board (1994-1995) and a former board member

(1994-2000) of Alliant Techsystems, a NYSE-listed aerospace and defence contractor. He

currently sits on the Investment Committee of both the University of Pennsylvania and the

UJA-Federation. Since 1996, Joel Greenblatt has been a professor on the adjunct faculty of

Columbia Business School where he teaches value and special situation investments.

Robert Goldstein joined Gotham Capital in 1989 and John Petry joined in 1997. Joel and

Robert have worked together for 20 years and all three partners have invested together

for over 12 years. Gotham Capital earned annual gross compounded returns of 50% (after

expenses, before incentive fee) from 1985 until it returned outside limited partner capital at the

end of 1994, generating cumulative gross returns of 5,197% vs. 154% for the S&P 500 during

this period. Subsequent to 1994, Gotham Capital has managed internal capital.

In addition to managing Gotham Capital, the principals have launched several ventures

together including the award winning Value Investors Club, Gotham Asset Management (a

value oriented fund of funds), Formulainvesting.com as well as charitable enterprises such as

the Success Charter Network, a network of charter schools in Harlem, New York.


Key features of the Gotham Enhanced Value Series indices and strategies

Simulated past performance shows that the Gotham US Enhanced Value Index • outperforms other well-known benchmarks and value investors

Unlike hedge funds, the Indices have a rigorous rules based methodology, offering • style purity and transparency

Each share is scored and ranked according to its pre-tax earnings yield and its return • on capital employed and a combined rank is assigned to each company

The Indices do not have the performance fees normally associated with hedge funds•

Company data is systematically extracted and evaluated by Gotham Capital International•

Overview

The Indices are long only equity indices developed by Gotham Capital International in

partnership with RBS, offering investors access to their expertise in fundamental value

investing and RBS’s custom index and global product capabilities.

The Indices seek to outperform the market over the long term by rigorously selecting shares

on a quarterly basis using a two-factor, fundamental model using return on capital employed

and pre-tax earnings yield. The model seeks to identify companies with above average

returns at below average prices.

The two-factor fundamental model is applicable to companies from a wide range of business

and industry sectors. However, certain industries such as financials, real estate, insurance

and utilities have characteristics that make the application of the two-factor fundamental

model less robust and are excluded from the selection universe.

The model is applied by Gotham Capital International, who analyze the company data and

remove any information they deem unreliable or inconsistent. The aim of this is to ensure that

all companies can be equally evaluated when applying the two-factor fundamental model.

Simulated past performance showed that the Gotham Enhanced Value US Index significantly

outperformed the S&P 500® Index and other market averages over time, with more attractive

risk reward characteristics.


3. Fama & French (1993) developed a fundamental

model with 3 factors (market, size, value). Carghart

(1997) added momentum as a fourth factor to the Fama

& French Model.

Fundamentals Analysis and Value Investing

The Indices are based on the principles of value investing, which uses fundamental analysis

to identify investment opportunities in companies with profit potential whose shares are

undervalued by the market, as indicated by fundamental analysis ratios.

Fundamental analysis: a telling indicator of future performance

In the context of investing in shares, selection based on fundamentals is one of the most

widely used methods for identifying potentially profitable investment opportunities. The role of

fundamental factors to assess the risk in a portfolio of shares and its performance has been

studied extensively in academic literature over the past four decades, reaching a significant

milestone with the development of the Fama & French fundamental model in 1993.3 By looking

at a company’s operational efficiency, cash flow, financial leverage, and growth prospects,

analysts seek to identify undervalued and overvalued companies and make investment

decisions based on this.

Fundamental analysis unpacked: Earnings Yield and Return on Capital Employed

After having rigorously analysed over 70 factors in the context of fundamental value investing,

Gotham Capital International favours a simple ranking technique which combines value

and quality (the “Formula”). The basic idea is to compare all shares in the universe by using

two key fundamental analysis ratios - earnings yield and return on capital employed - and

then to buy the shares with the best combined score. This is because the combined score

indicates that, according to its fundamentals, these are shares of profitable companies that

are currently undervalued by the market. A key factor in obtaining reliable results using the

Formula is to obtain comparable data, which is achieved by the Gotham Enhanced Value

Indices by utilising Gotham Capital International’s proprietary database.

The 2 key ratios explored in detail

The Formula favoured by Gotham

Capital International consists of

applying two ratios.

Earnings Yield (EY)

Earnings Yield is defined as EBIT1/

Enterprise Value rather than the

standard PE2 ratio. This is in order to

take into account the amount of debt

a company is using to generate its

earnings.

Return on Capital Employed (ROCE)

Return on capital employed is defined

as EBIT / (net working capital + net

fixed assets). EBIT is used to create a

level playing field across companies

that have different levels of debt and

are subject to different tax rates. Net

working capital and net fixed assets

are combined to give tangible capital

employed: an estimate of how much

capital a company is using to generate

its business.

1. Earning Before Interest and Tax.

2. Price Earnings.

First, it is desirable to be in

a business that earns more

relative to the price paid for

its shares rather than less.

Therefore, a higher earnings

yield is better than a lower one.

The Formula used in the Gotham Enhanced Value Indices combines two key ideas

Buying businesses with above average returns on capital at below average prices

when they are undervalued by the market is the overwhelming logic behind

the Gotham Enhanced Value Indices.

Over time, these undervalued shares should “tend towards the mean”

i.e. appreciate in price as their value is recognised by the market.

Second, buying a share of a

profitable business is better

than buying a share of a less

profitable business. Therefore,

businesses that earn a high

return on capital employed are

better than businesses that

earn a lower one.

High

Earnings

Yield

Gotham

“Value”

Companies

High Return

on Capital

Employed


Gotham Enhanced Value Indices

Access to fundamentals analysis

The Gotham Enhanced Value Indices are rules-based indices that incorporate a share

selection mechanism based on combining earnings yield and return on capital employed to

identify undervalued stocks with profit potential.

A methodical selection approach based on earnings yield and return on capital employed

requires the discipline to be applied consistently and the patience to keep applying the

methodology even during periods of underperformance. Further, investors may not always

have access to high quality information on companies, which may be using different

accounting approaches and conventions. The Gotham Enhanced Value Indices address

these issues in the following ways:

Automated application of the two-factor formula on a quarterly basis, thereby making • easier to follow the methodology without emotional reactions

Company data is systematically extracted, collected and evaluated by Gotham Capital • International’s specialised team

Unique expertise in understanding the intricacies of the two-factor formula by having it • implemented by its author




60%

40%

20%

0%

-20%

-40%

Berkshire Hathaway Inc.Gotham US Enhanced Value Index

S&P 500® Total Return Index

Annualised performances

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009



20%

15%

10%

5%

0%

-5%


World Government Bond Index

S&P 500® Total Return Index

Gotham US Enhanced Value Index

Berkshire Hathaway Inc.

Risk (as measured by volatility)

0% 5% 10% 15% 20% 25% 30%

Retu

rn

Simulated annualised historical risk returns (monthly data)


Methodology and development in detail

The screening process of the Indices is independently carried out by Gotham Capital

International and involves the application of selection criteria and a ranking methodology

combining earnings yield and return on capital employed.

The Gotham Enhanced Value Indices aim to represent an investment in liquid shares, rebalanced

quarterly, that exhibit a high earnings yield and a high return on capital employed. The selection

criteria ensure that shares eligible for inclusion exhibit adequate liquidity and average daily value

traded requirements, as well as have sufficient data available for scrutiny to apply the ratios. All

business and industry sectors are eligible except for financials, real estate, insurance and utilities in

relation to US companies. For non-US companies, Gotham Capital International review on a country

by country basis whether the two-factor fundamentals ranking methodology is applicable.

Shares that meet the criteria are ranked according to their earnings yield and by their return

on capital employed, the two pillars of the Formula.

Firstly, shares are assigned a ranking according to their earnings yield. The share of the

company with the highest earnings yield will be given the top ranking of “1”. Shares of the

second most attractively valued company will be given a ranking of “2” and so on.

Secondly, shares are assigned a ranking according to return on capital employed. The share of the

company with the highest return on invested capital will be ranked “1”, the share of the company

with the second most attractively valued company will be given a rank of “2” and so on.

Finally, the two rankings for each share will be added together and a final, combined rank will be

assigned so that the share of the company with the lowest combined score will have a combined

score of “1”, the share of the company with the second-lowest combined score will have a rank of

“2” and so on. The combined rank reflects the principle that the two-factor Formula isn’t looking

for the company that ranks best on return on capital or the one with the highest earnings yield,

but rather for the company that has the best combination of those two factors.

Share selection process

Liquidity screen & removal

of excluded sectors

Eligible companies

Removal of companies by Gotham with

incomplete financial information or aged

data, material pending corporate events and

additional analyst accounting adjustments

Final Combined Ranking

Return on Capital Employed RankingEarnings Yield Ranking


Sector composition


The Gotham US Enhanced Value Index is a total return index designed to reflect the

performance of shares screened by applying the two-factor Formula of earnings yield and

return on capital employed to companies in the United States excluding financials, real estate,

insurance and utilities. Only ordinary shares are eligible for inclusion in the index. The top 25

shares according to the combined scores are selected for inclusion in the index.

The index includes a maximum of 25 shares and is rebalanced quarterly.

The Index is calculated in USD•

The Bloomberg Code is GEVIUSA Index•

Rebalancing of shares occurs quarterly in March, June, September and December of • each year

All shares shall initially and on each rebalancing date be equally weighted.

The largest member shares of the Index

Companies Bloomberg Ticker Sector Market Capitalisation

Accenture plc ACN UN Equity Software & Services USD 30,579 million

Raytheon Co RTN UN Equity Capital Goods USD 20,203 million

Viacom Inc B (New) VIA/B UN Equity Media USD 18,358 million

Reynolds American Inc RAI UN Equity Food Beverage & Tobacco USD 15,638 million

Lorillard Inc LO UN Equity Food Beverage & Tobacco USD 12,949 million

McGraw-Hill Cos Inc MHP UN Equity Media USD 10,571 million

Forest Laboratories FRX UN Equity Pharmaceuticals, Biotechnology USD 9,798 million

Apollo Group Inc APOL UQ Equity Consumer Services USD 9,448 million

Fluor Corp FLR UN Equity Capital Goods USD 8,158 million

CF Industries Holdings CF UN Equity Materials USD 4,531 million

Source: RBS and Gotham Capital International, 29 December 2009.


Capital Goods 20.27%

Consumer Services 8.23%

Energy 4.35%

Food Beverage & Tobacco 11.80%

Health Care Equipment & Services 4.00%

Materials 4.03%

Media 7.48%

Pharmaceuticals, Biotechnology 15.62%

Retailing 11.88%

Software & Services 11.46%


Comparison of the Gotham US Enhanced Value Index vs

Well Known Value Investors

The initial financial selection criteria

require that shares must have:

A market capitalisation of

USD 1,000,000,000 or be among

the top 1,000 shares with the

largest market capitalization in

the US market universe

For continued inclusion in the

Index (but not for initial inclusion),

the shares must be issued

by a company with a market

capitalisation that is greater than

USD 700,000,000 (or the equivalent

amount in another currency).

A minimum aggregate daily

value traded of USD 250,000,000

registered over each of the previous

3 trailing months, or be among the

top 1,000 most liquid shares in the

US market universe as determined

by this same measure

Industry concentration limits

are applied for diversification

Selection criteria

Performance statistics (monthly data)

Gotham US

Enhanced Value

Index

Berkshire

Hathaway

Inc.

World

Government

Bond Index

S&P 500®

Total Return

Index

Annualised return 20.0% -0.9% 5.9% 6.6%

Annualised risk* 23.3% 16.4% 19.3% 7.6%

Return/risk 85.9% -5.8% 30.4% 87.4%

Average 1-month return 1.8% 0.0% 0.6% 0.6%

1-month wins 61.7% 58.3% 55.0% 59.2%

Worst 1-month period -18.4% -16.8% -14.1% -5.0%

Average 12-month return 20.4% -0.9% 7.3% 7.5%

12-month wins 78.9% 54.1% 68.8% 84.4%

Worst 12-month period -44.5% -43.3% -43.9% -6.9%

* Risk as measured by volatility.






800

600

400

200

0


Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09

First Eagle Global-A


Berkshire Hathaway Inc.


80%

60%

40%

20%

0%

30%

0%

-30%

-60%

An

nu

al P

erf

orm

an

ce

An

nu

al P

erf

orm

an

ce

Feb 04

Mar 04

Jan 04

Dec 03

Sep 03

Dec 09

Apr 04

Nov 09

May 07

Oct 03

Jun 07

Jun 04

May 04

Sep 07

Oct 06

Jul 07

Dec 06

Apr 06

Apr 07

Aug 07

Correlation graphs

Correlation during Equity Bull Markets (20 Best 12-month Rolling Periods)

Correlation during Equity Bear Markets (20 Worst 12-month Rolling Periods)



Standard and Poor’s calculates the Gotham Enhanced Value Index Series to introduce an

independent third party check and publication of Index values.

The historical simulated data has been initially provided by Gotham Capital International,

who have performed backtesting using point in time data that was available historically using

Standard and Poor’s Compustat data as a basis. The simulated historical performance uses

companies that would have been selected by Gotham according to combined scores in

Earnings Yield and Return on Capital Employed with data that would have been available on

the actual historical rebalancing dates, rather than more recent data. This approach has been

adopted deliberately in order to avoid survivorship bias and as well as bias resulting from

growth of smaller companies.

The historical simulation has also been verified by RBS and an independent third party

appointed by RBS.



Gotham US Enhanced Value Index S&P 500® Total Return Index

Feb 09

Jan 09

Nov 08

Mar 09

Dec 08

Oct 08

Apr 09

May 09

Sep 01

Jun 09

Oct 01

Mar 03

Aug 01

Jul 02

Jan 03

Feb 03

Dec 02

Sep 08

Mar 01

Sep 02


Gotham Global and International Enhanced Index

The Gotham Global Enhanced Index and the Gotham International Enhanced Index offer

investors the opportunity gain exposure to worldwide stocks using the Gotham Capital

International two factor Formula.

The Gotham Global Enhanced Value Index and the Gotham International Enhanced Value

Index are total return indices designed to reflect the performance of shares selected by taking

the highest ranked companies from Gotham’s proprietary financial statement database in

Gotham Capital International’s coverage universe. The rankings are made by combing scores

in Earnings Yield and Return on Capital employed. Gotham Capital International’s coverage

universe generally excludes sectors whose financial statements are presented in a manner

such that they do not provide a reliable indication as to their return on invested capital or their

earnings yield, such as in financial related sectors.

Only ordinary (or their equivalent) shares are eligible for inclusion in the Index, however,

American Depository Receipts or Global Depository Receipts may be used in the Index in

place of the primary listing for liquidity or trading cost reasons.

Each Index has two versions, a version solely for delta one wrappers and a version with higher

liquidity requirements, which can be used for delta one wrappers and wrappers containing

options. Both indices started on 1 January 2010.

Both the Gotham Global Enhanced Value Index and the Gotham International Enhanced Value

Index include a cost of 0.4% which is added to the price of shares from certain countries which

have high trading costs. In addition, a further cost of 2% will be added to the price of shares

from Brazil. These costs will be reflected by a reduction in the value of the Index proportionate

to these costs initially and/or on a rebalancing date when allocation to these countries is

increased or when such shares are introduced in the Index for the first time.


Sector composition

Gotham Global Enhanced Value Index

The Gotham Global Enhanced Value Index includes shares from a selected universe of

securities in the Americas, Europe and Asia. The Index comprises 45 stocks, with 15 shares

from each region. In order to increase allocation to the best global opportunities, the top 10

companies with the highest combined ranking in Earnings Yield and Return on Capital have a

weight of 3% and the remaining shares have a weight of 2%. There are country concentration

limits on shares in the Index which have been designed to ensure diversification.

The Index includes a maximum of 45 shares and is rebalanced quarterly.

The Index is calculated in USD and in EUR•

The Bloomberg Codes are GEVIGU Index (USD) and GEVIGE Index (EUR)•

Rebalancing of shares occurs quarterly each year in September, December, March and June•

A version with enhanced liquidity is also available•

If there are less than 35 shares in the Index, the companies shall be equally weighted.



Astrazeneca plc AZN US Equity Pharmaceuticals, Biotechnology USD 68,093 million

Nintendo Co Ltd 7974 JP Equity Software & Services USD 33,941 million

Takeda Pharmaceutical Co Ltd. 4502 JP Equity Pharmaceuticals, Biotechnology USD 32,876 million

Raytheon Co. RTN US Equity Capital Goods USD 20,192 million

Viacom Inc VIA/B US Equity Media USD 18,216 million

Astellas Pharma 4503 JP Equity Pharmaceuticals, Biotechnology USD 17,901 million

Reynolds American Inc RAI US Equity Food Beverage & Tobacco USD 15,638 million

Lorillard Inc LO US Equity Food Beverage & Tobacco USD 12,978 million

Telecomunicacoes de Sao Paulo SA TLPP4 BS Equity Telecommunication Services USD 12,121 million

Grupo Televisa, S.A.B TV US Equity Media USD 11,693 million



Capital Goods 9%

Commercial & Professional Services 2%

Consumer Durables & Apparel 4%

Consumer Services 13%

Energy 2%

Food & Staples Retailing 2%

Food Beverage & Tobacco 7%

Materials 3%

Media 9%

Pharmaceuticals, Biotechnology 18%

Real Estate 4%

Retailing 5%

Software & Services 16%

Technology Hardware & Equipment 2%

Telecommunication Services 4%




USD 2,000,000,000 (for US

companies) or USD 1,000,000,000

(or non-US companies)

For continued inclusion, liquidity and

market cap must not fall by more

than 25% from initial requirements

and full requirements must be met

every two quarters.

A minimum 3 month average daily

value traded of equal to or greater

than USD 3,000,000

Region and country caps are

applied for diversification



Selection criteria


Sector composition

Gotham International Enhanced Value Index

The Gotham International Enhanced Value Index includes shares from the Americas (excluding

the United States), Europe and Asia. The Index comprises 45 stocks, with 20 shares from

Europe and Asia each and 5 from non-US Americas. Similar to the Gotham Global Enhanced

Value Index, this Index also increases allocations to the best global opportunities and the top

10 companies with the highest combined ranking in Earnings Yield and Return on Capital have

a weight of 3% and the remaining shares have a weight of 2%. There are country concentration

limits on shares in the Index which have been designed to ensure diversification.

The Index includes a maximum of 45 shares and is rebalanced quarterly.

The Index is calculated in USD and in EUR•

The Bloomberg Codes are GEVINU Index (USD) and GEVINE Index (EUR)•

Rebalancing of shares occurs quarterly each year in September, December, March and June•

A version with enhanced liquidity is also available•

If there are less than 35 shares in the Index, the companies shall be equally weighted.



China Mobile CHL US Equity Telecommunication Services USD 183,513 million

America Movil, S.A.B, de C.V. AMXL MM Equity Telecommunication Services USD 76,065 million

Astrazeneca plc AZN US Equity Pharmaceuticals, Biotechnology USD 68,093 million

Nintendo Co Ltd 7974 JP Equity Software & Services USD 33,941 million

Takeda Pharmaceutical Co Ltd. 4502 JP Equity Pharmaceuticals, Biotechnology USD 32,876 million

Alstom SA ALO FP Equity Capital Goods USD 20,569 million

Astellas Pharma 4503 JP Equity Pharmaceuticals, Biotechnology USD 17,901 million

Compass Group plc CPG LN Equity Consumer Services USD 13,363 million

Telecomunicacoes de Sao Paulo SA TLPP4 BS Equity Telecommunication Services USD 12,121 million

Grupo Televisa, S.A.B TV US Equity Media USD 11,693 million



Capital Goods 12%

Commercial & Professional Services 2%

Consumer Durables & Apparel 7%

Consumer Services 14%

Energy 2%

Food & Staples Retailing 2%

Food Beverage & Tobacco 6%

Media 2%

Pharmaceuticals, Biotechnology 15%

Real Estate 3%

Retailing 2%

Software & Services 14%

Technology Hardware & Equipment 5%

Telecommunication Services 14%




USD 1,000,000,000

For continued inclusion, liquidity and

market cap must not fall by more

than 25% from initial requirements

and full requirements must be met

every two quarters.

A minimum 3 month average daily

value traded of equal to or greater

than USD 3,000,000

Region and country caps are

applied for diversification



Selection criteria


Gotham Alpha US Strategy

The Gotham Alpha US Strategy (the “Strategy”) aims to reflect the excess return performance

difference between Gotham US Enhanced Value Index and the US 500 Strategy, thereby attempting

to generate returns in any market environment. By targeting the relative performance between

these two, the Strategy endeavours to minimise exposure to the market and achieve neutrality.

The Strategy has an automatic feature that aims to protect against some of the inherent volatility

exhibited by the stock market. The Strategy will be exposed to the performance of the Gotham

US Enhanced Value Strategy against the US 500 Strategy during periods of low volatility but

will be reduced proportionally in periods of higher volatility. In periods of higher market volatility

this feature may cushion the effect of market falls and constrain the benefit of market rises.

The Strategy has a volatility target of 12%•

The Strategy is calculated in USD•

The Bloomberg code is RBSAGVU1 Index•

The Strategy has a management fee of 0.75% per annum and an access cost of 1.0% p.a.•

The excess return strategy has a cost which can vary between 0.25% and 2.25% p.a., • which represents the interest rate component to make it excess return and the cost of

investing in the Gotham US Enhanced Value Index

Gotham Alpha US Strategy performance



Treatment of dividends within the Strategy

The Strategy is based on the excess return performance difference between the Gotham

US Enhanced Value Index and US 500 Index, neither of which include dividends or interest

rates.

350

300

250

200

150

100

50

0


Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09

S&P 500® Index

Gotham Alpha US Strategy


Risk Stabilisation

For investors looking for additional

performance stability, a volatility

stabilisation overlay can be added to

their product. The volatility stabilisation

overlay evaluates the risk in the index

or strategy every day and then gives

varying exposure to the index or

strategy dependent on the risk. When

the index or strategy has exhibits less

risk, then the product will have more

exposure to the index or strategy. When

the index or strategy exhibits more risk,

the product will give less exposure to

the index or strategy.

Accessing the Gotham Enhanced

Value Indices

Investors can choose to access the

performance of the Gotham Enhanced

Value Indices via delta-one products

(such as Open Ended Certificates)

OTC Options and/or Swaps. Investors

requiring capital protection can achieve

this via CPN or CPPI structures.

Treatment of dividends

The Gotham Enhanced Value Indices

are total return, which means that

the indices shall reinvest dividends

distributed by constituent companies

as and when they occur and these shall

be reflected in the level of the relevant

index in proportion to the prevailing

level of constituent company exposure.

Additional information

Financial companies (including insurance and real estate)

Financial companies have several issues with their financial statement presentation that impact

the application of the two-factor Formula employed. Financial companies interest income and

interest expense impact EBIT. Additionally a company’s decision to invest assets in short/

long term instruments could impact the computation of Enterprise Value. Non-debt liabilities,

banks deposits and insurance unearned premiums as well as other non-debt liabilities can

significantly impact the calculation of Enterprise Value.

The balance sheet structure of financial companies and the treatment of interest on the

income statement makes the calculation of return on invested capital, EBIT, and Enterprise

Value subject to significant variability, distortion and interpretation.

Real estate companies often employ significant amounts of leverage, have attributes similar to

financial companies, and in the United States many have a different corporate structure than

a traditional operating company.

Utilities

In the United States, utilities are generally regulated with the consequence that return on capital

employed is a guaranteed, regulated return to the equity holder, with a capital structure that

is set around that regulated return. For this reason, utilities do not have market rates of return

and are therefore not comparable with other business/industry sectors for the purposes of

applying the two-factor Formula to companies in the United States. For non-US countries, the

applicability of the two-factor Formula will be reviewed on a country by country basis.

Gotham Capital International’s contribution to evaluating company information

Some companies report and/or account for similar items in different ways, making some data

provided even by major data providers difficult to work with. Gotham Capital International has

developed techniques for addressing these difficulties through years of experience working

with these data sources and its own internal data. In the context of applying fundamental

analysis ratios like the ones employed in the two-factor Formula used in the Gotham Enhanced

Value Indices, it is vital to obtain reliable information as such data determines what companies

will be invested in.

Gotham Capital International provides a significant informational advantage to the Gotham

Enhanced Value Indices by providing a sophisticated data analysis and research function.

Gotham Capital International employs a team of dedicated accounting analysts who analyse

and examine company filings and announcements to make adjustments to the data where

necessary. The team is long-standing, with an extensive six month training process before

they can make adjustments to company filings. Gotham Capital International has created a

proprietary database that tracks and stores the adjustments made to any relevant company

filing. This is to attempt to ensure that financial statements are uniformly represented according

to Gotham Capital International’s internal specifications before being entered into the two-

factor Formula to ensure data consistency and comparability.

Types of adjustments made

Adjust the earnings number if a company makes consistent and ongoing restructuring provisions•

Adjust for minority interests•

Adjust the number of shares to account for employee registered shares, employee• registered shares are freely tradable but typically not included in a companies free float

The screened and adjusted data in the Gotham Capital International proprietary database

is used to apply the two-factor Formula to the shares eligible for inclusion in the Gotham

Enhanced Value Indices, with the purpose of ensuring that the ratios produce reliable,

comparable and consistent results across the company universe.

To find out more about Gotham Enhanced Value Indices,

Log on to www.rbs.com/indices or call +44 20 7678 7667

This document has been prepared by The Royal Bank of Scotland N.V. or one of its affiliates (“RBS”) for information and discussion purposes only and is aimed at informing its

readers of the main characteristics of the securities described herein, although it is not intended to specify all possible risks or characteristics of the same. It shall not be construed

as, and does not form part of an offer, nor invitation to offer, nor a solicitation or recommendation to enter into any transaction, nor is it an official or unofficial confirmation of terms.

This document does not replace the essential advice given by your advisors before entering into any derivative activity and does not constitute an offering document or prospectus

and is not intended to provide the sole basis for any evaluation of transactions in securities or financial interests mentioned herein. Potential investors are, therefore, urged to seek

adequate information, before investing in the securities, on the nature of these products and the risks to which they will be exposed. An offer or invitation to offer, solicitation or

recommendation to enter into any transaction will solely be made on the basis of an offering document or where applicable a prospectus which can be obtained free of charge from

RBS offices at 250 Bishopsgate, London, EC2M 4AA, United Kingdom. The purchase of securities involves certain risks including market risk, credit risk and liquidity risk. Investors

should ensure that they understand the nature of all these risks before making a decision to invest in the securities. Investors should carefully consider whether the securities

are suitable for them in light of their experience, objectives, financial position and other relevant circumstances. If in any doubt, investors should obtain relevant and specific

professional advice before making any investment decision. In structuring, issuing and selling the securities, RBS is not acting in any form of fiduciary or advisory capacity. No

representation, warranty or assurance of any kind, express or implied, is made as to the accuracy or completeness of the information contained herein. RBS accepts no obligation

to any recipient to update or correct any such information. No act or omission of RBS or any of its directors, officers, employees or agents in relation to the information contained

herein shall constitute, or be deemed to constitute, a representation, warranty or undertaking of or by RBS or any such person. Any indicative prices or analysis provided herein

have been prepared on assumptions and parameters that reflect our good faith judgement or selection and, therefore, no guarantee is given as to the accuracy, completeness

or reasonableness of any such quotations or analyses. Any person who subsequently acquires securities or other financial interests mentioned herein must only rely on the terms

of the definitive offering document or, where applicable, prospectus to be issued in connection herewith, on the basis of which alone subscriptions for securities or other financial

interests may be made. Without prejudice to the legal responsibility on information, RBS does not accept any kind of liability for any cost, loss or claim arising from or related to

the investment on the securities described herein. RBS and/or their affiliates, connected companies, employees or clients may have an interest in financial instruments of the type

described in this document and/or related financial instruments. Such interest may include dealing, trading, holding, acting as market-makers in such instruments and may include

providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein. RBS is not acting as a financial adviser or in

a fiduciary capacity in respect of any transaction or the securities or other obligations referred to herein. RBS makes no representation and gives no advice in respect of any tax,

legal or accounting matters in any applicable jurisdiction. This document is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such

distribution or use would be contrary to local law or regulation. The information contained herein is proprietary to RBS and is provided upon request to selected recipients and may

not be given (in whole or in part) or otherwise distributed to any other third party without the written permission of RBS.

The contents of this document have not been reviewed by any regulatory authority in the countries in which this document is distributed. If you are in any doubt about any contents

of this document, you should obtain independent professional advice.

United States of America: This document is intended for distribution only to “major institutional investors” as defined in Rule 15a-6 under the U.S. Exchange Act of 1934 as amended

(the “Exchange Act”), and may not be furnished to any other person in the United States. Each U.S. major institutional investor that receives these materials by its acceptance hereof

represents and agrees that it shall not distribute or provide these materials to any other person. Any U.S. recipient of these materials that wishes further information regarding, or

to effect any transaction in, any of the securities discussed in this document, should contact and place orders solely through a registered representative of RBS Securities Inc.,

600 Washington Boulevard, Stamford, CT, USA. Telephone: +1 203 897 2700. RBS Securities Inc. is an affiliated broker-dealer registered with the U.S. Securities and Exchange

Commission under the Exchange Act, and a member of the Securities Investor Protection Corporation (SIPC) and the Financial Industry Regulatory Authority (FINRA).

Further, please be advised that the securities referred to herein have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”)

and may not be offered or sold in the United States except to qualified institutional buyers (“QIBs”) in reliance on Rule 144A or another exemption from, or transactions not subject

to, the registration requirements of the Securities Act. The offer or sale of Securities or the transactions contemplated herein may be further restricted by U.S. federal and state

securities law. Potential investors are required to inform themselves of and to observe any legal restrictions on their involvement in the transactions. Please be advised that the

Securities may not be appropriate or suitable for all investors.

Gotham Capital International and its affiliates do not sponsor, endorse, sell, or promote any investment fund or other vehicle that is offered by third parties and that seeks to provide

an investment return based on the returns of the Gotham Enhanced Value Index, the Gotham Global Enhanced Value Strategy, the Gotham International Enhanced Value Strategy

and the Gotham Alpha US Strategy.

Standard & Poor’s does not sponsor, endorse, sell, or promote any investment fund or other vehicle that is offered by third parties and that seeks to provide an investment return

based on the returns of the Gotham UU Enhanced Value Index, the Gotham Global Enhanced Index, the Gotham International Enhanced Index or the Gotham Alpha US Strategy.

The Royal Bank of Scotland N.V. is authorised by De Nederlandsche Bank and subject to limited regulation by the Financial Services Authority. Details of our regulation by the

Financial Services Authority are available from us on request.

© The Royal Bank of Scotland N.V.. All rights, save as expressly granted, are reserved. Reproduction in any form of any part of the contents of this brochure without our prior written

consent is prohibited unless for personal use only.

The brochure contains numerous trade marks belonging to The Royal Bank of Scotland Group plc and other companies in the RBS Group. These trade marks include, but are not

limited to, The Royal Bank of Scotland logo, The Royal Bank of Scotland and RBS. If you are in doubt as to whether an item is a trade mark of The Royal Bank of Scotland Group plc

or a member of the RBS Group, please contact us for clarification at the registered office address of The Royal Bank of Scotland plc, Registered in Scotland No 90312. Registered

Office: 36 St Andrew Square, Edinburgh EH2 2YB.

The Royal Bank of Scotland plc is an authorised agent of The Royal Bank of Scotland N.V. in certain jurisdictions.

Gotham Enhanced Value Indices -...

Documents

Transcript of Gotham Enhanced Value Indices -...