PERFORMANCE SUMMARY

Gold mining weakness made for a difficult end to a generally good year

The fourth quarter of 2011 presented significantly challenging markets, with a prevailing mood of pessimism and volatility triggered by a range of macro events. During the period the UK Absolute Fund returned -2.07% compared to +0.06% for the IMA Absolute Return sector average and a cash-equivalent return of +0.25% for three month Sterling LIBOR.*

Stocks that have detracted from performance in recent months included a basket of gold mining stocks (including Allied Gold, Centamin Egypt and Petropavlosk). We believe gold is in a correction phase and we've reduced exposure short term, but we continue to believe that the long-term outlook for the sector is strong, given the trend in the price of gold, and indeed current share prices are discounting a bullion price well below current levels.

The prevailing risk averse attitude of investors meant that high beta sectors such as mining and commodities have suffered. Individual events have also hit share prices, for example Centamin Egypt which has struggled despite announcing an increase to production – the sudden death of the CEO in

November created uncertainty and nervousness amongst investors. Within the portfolio we hold a range of gold stocks so as to mitigate some of these stock specific risks and, although this theme has not been a success for the fund as yet, we remain believers in the long-term story for the sector.

On a more positive note, the fund benefited during the quarter from a pair trade within the asset management sector. The long position was in Aberdeen, which is a house with a high level of exposure to emerging markets and strong fund flows. Against this we shorted an asset manager with a fund suite focused more on developed markets and where flows were generally weak; what is more it was trading at a premium. So far the relative performance of the two stocks has been in line with our expectations and the trade has worked well for the fund.

Looking back on 2011 as a whole, we feel that performance has been reasonably strong. Over the year the UK Absolute Fund returned +3.0% compared to -1.32% for the IMA Absolute Return sector average and +0.86% for three month Sterling LIBOR**

* Source: Lipper, % Growth Cumulative (GBP), net of fees, from 30/09/11 to 31/12/11
** Source: Lipper, % Growth Cumulative (GBP), net of fees, from 31/12/10 to 31/12/11

POSITIONING

Staying alert for sources of long-term value

In this fund we tend to avoid applying a significant directional tilt to the portfolio, preferring instead to focus on stock specifics and keep the net exposure reasonably stable. Our high conviction approach and flexible mandate means we don't have to be fully invested at all times, and will only commit capital to the market if we are confident of a return. As such, when there is a significant amount of market uncertainty we will trim back the gross exposure; the current level of around 155% is significantly lower than at most other times during the quarter.

One of the more recent additions to the portfolio has been the acquisition of three UK house builders for the long book. Companies in this sector built up large land banks at high prices during the boom years and had to take significant write downs. As a result they have been selling houses at zero margin for a while, but this is beginning to be worked through now. Going forwards they will sell more and more houses on land that they purchased after the crash, and margins should again begin to look attractive. In the background also is the generally favourable supply/demand dynamic for housing in the UK, so we believe that investors will look more favourably on the sector in future.

Examples of two specific stocks where we currently see value are a long position in RPC Group and a short in an aerospace engineering company. RPC Group takes a high tech approach to what may seem like the low tech industry of making plastic containers. We feel as though their moulding and printing techniques (which, for example, allow printing right to the edge of the container) give them a competitive advantage and we hold the stock as part of a pair trade. The aerospace engineering company, meanwhile, is vulnerable to reduced capital expenditure in both civil and military aviation.

At present there are around 40 positions in the portfolio, with eight of these being pair trades. We do pay close attention to the balance between the long and short books, and in some cases we will match holdings off against each other even if they aren't formally structured as a pair trade. So for example we have a long position in Cobham, a defence technology company, and have offset some of the macro risk for this stock by our short in the aerospace engineering firm mentioned above.

OUTLOOK

Responding to uncertain markets by staying true to our core investment principles

Like everyone we are generally nervous about the UK economy and consumer going into 2012, so with the exception of our holdings in house builders there is very little in the long book that is cyclical. One of the advantages of investing in the UK is that our market is very global. We therefore have the opportunity to play non-UK themes in the portfolio, which is a source of some strong value at present.

As ever we are watchful for sources of risk to the portfolio, and pay close attention to the implicit exposure of the portfolio to various stocks and sectors through index futures. We use index futures to help control the net exposure of the fund, but a short of the index also exposes the portfolio to large macro-driven sectors such as Mining and Banks. In some cases this will be undesirable, and we are keen whenever possible to give ourselves the maximum control over the balance of the portfolio – performance should be driven by our stock selection after all.

For this reason we are more commonly using mid-cap futures for hedging purposes. In 2012 we will remain committed to our core principles, namely to invest with conviction and to build upon our deep understanding of our companies and how they compare to their peers. The fund's size means we can move quickly if we need to, but in general we like to build positions in stocks with strong fundamentals and hold them for the long term.

Robert Churchlow, Graham Taylor and Guy Rushton - Fund Managers Legal & General Investment Management January 2012

This is not a consumer advertisement. It is intended for professional financial advisers and should not be relied upon by private investors or any other persons.

The views expressed within this document are those of Legal & General Investment Management, who may or may not have acted upon them. Legal & General Investment Management is authorised and regulated by the Financial Services Authority and is the Investment Adviser to Legal & General UK Absolute, a UK authorised unit trust.

This document should not be taken as an invitation to deal in Legal & General investments or any of the stated investments. Remember, the value of investments and any income taken may fall as well as rise, are not guaranteed and investors may get back less than they invest. Past performance is not a guide to future performance. Exchange rate changes may cause the value of any overseas investments to rise or fall. Details of the specific and general risks associated with the fund mentioned are contained within the Key Information including the Simplified Prospectus.

Legal & General (Unit Trust Managers) Limited. Registered in England No. 1009418. Registered office: One Coleman Street, London EC2R 5AA. Authorised and regulated by the Financial Services Authority.