World s Equity Market Share December 1950 vs. December 2006

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1 World s Equity Market Share December 1950 vs. December 2006 Market Capitalization 1950 Market Capitalization 2006 Europe 26% Other 6% Other 23% U.S. 39% Japan 9% U.S. 59% Europe 26% Japan 9% Source: World Federation of Exchanges

2 World s Equity Market Share December 1988 vs. December 2006 Market Capitalization 1988 Market Capitalization 2006 Europe 26% Other 14% U.S. 29% Other 23% U.S. 39% Japan Source: World Federation of Exchanges Europe 26% Japan 9%

3 World Equity Market Performance Top 10 USD Adjusted Returns, 2006 Percent Change, Year Ago Source: Bloomberg Venezuela Cyprus Botswana Morocco Russia Peru Vietnam China Yugoslavia Croatia

4 Robust Global Equity Markets Despite $70 Crude Oil Jan.2003 = DJIA FTSE Nikkei Emerging Markets Crude Oil US$ per Barrel Source: Bloomberg, Datastream

5 Increasing International Financial Convergence Sum of Foreign Assets and Liabilities as a Ratio to GDP Percent Emerging Markets China India (e) Sources: Lane and Schmukler and Milken Institute staff estimates

6 Net Direct Investment Developing Countries, US$ Billions 120 Africa Middle East 100 Developing Asia Western Hemisphere Source: World Economic Outlook

7 Sources of Funds into Emerging Markets Percent Foreign Direct Investment Source: International Monetary Fund Equity Debt

8 Foreign Investment Inflow to Emerging Markets US$ Billions Direct investment Portfolio investment Other investment Source: International Monetary Fund

9 $100 Invested in These Asset Classes in 2000 Would Give You: $303 $230 $201 $190 $189 $179 $171 $102 Energy Gold Mid-Cap U.S. Stocks Emerging Markets Small-Cap U.S. Stocks Hedge Funds Commodities Large-Cap U.S. Stocks Source: Bloomberg

10 U.S. Stock Market Plummeted on February 27, 2007: A Market Correction Made in China Dow Jones Index 12,450 12,400 The Dow dropped 241 points in 3 minutes 12,350 12,300 12,250 12,200 12,150 12,100 12,050 11:00 11:15 11:30 11:45 12:00 12:15 12:30 12:45 13:00 Source: Bloomberg

11 Higher Degree of Integration Between NYSE and Shanghai Stock Exchange Index, Jan = Correlation = January 2006 March 2007 Dow Jones Industrial Average (L) Shanghai Stock Exchange (R) Composite Source: Bloomberg 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 0

12 21 st Century Global Equity Market Convergence Correlation with Dow, 12-Month Rolling Returns Source: Bloomberg S&P 500 COMPOSITE NASDAQ COMPOSITE FTSE 100 EURONEXT 100 DAX 30 MSCI WORLD

13 Converging Yield to Maturity Percent Emerging Markets Sovereign Plus Index U.S. Government Index Source: Merrill Lynch

14 Increasing Market Volatility Standard Deviation of Weekly Returns Percent S&P 500 EURONEXT 100 NIKKEI 225 SHANGHAI COMPOSITE MSCI WORLD Source: Datastream YTD

15 Equity Issuance ICBC IPO Accounted for 8% of The 2006 World s Issuance 2000 US$ 92 Billions 2006 US$ 240 Billions Latin America 6% Middle East 2% Africa 0.1% Developed Latin America 5% Middle East 1% Africa 1% Countries 50% Developed Countries 51% Asia 38% Asia 32% Europe Source: International Monetary Fund Europe 10%

16 Bond Issuance Global Growth of Bond Financing Doubled Since 2000 Latin America 21% 2000 US$ 166 Billions Middle East 3% Africa 1% Developed Countries 50% Latin America 9% 2006 US$ 350 Billions Middle East 7% Africa 2% Developed Countries 50% Asia 16% Asia 14% Europe 11% Source: International Monetary Fund Europe 16%

17 Raising Price-to-Equity Ratios Equity Valuation: Price-to-Equity Ratio Ratio World Emerging Market EM Asia EM Europe & Middle East EM Latin America Source: International Monetary Fund, MSCI Indices

18 Raising Price-to-Book Ratios Equity Valuation: Price-to-Book Ratio Ratio World EM Latin America EM Asia Emerging Market 1.0 EM Europe & Middle East Source: International Monetary Fund, MSCI Indices

19 Raising Dividend Yield Ratio World Emerging Market EM Latin America EM Asia EM Europe & Middle East Source: International Monetary Fund, MSCI Indices

20 Capital Access Index 2006 Gauging Entrepreneurial Access to Capital Max = Hong Kong Source: Milken Institute United Kingdom U.S. India China Brazil Russia

21 Capital Access Index, ,000 60,000 GDP per Capita, US$ 50,000 40,000 30,000 20,000 10,000 y = 6,821x - 21,731 R 2 = , Sources: World Economic Outlook and Milken Institute Less access More access C it l A I d

22 Cost of Opacity, Opacity Index Premium/Discount 6.63% China 9.45% Nigeria 10% 8% Opacity Index % UK -0.48% HK 0.00% USA 5.76% India 6.00% Russia 6% 4% 2% 0% Premuim/Discount 10-2% 0-4% Source: Milken Institute, 2006

23 Adjusting to Maturity of Emerging Markets We expect the top tier of EM FX to behave pretty much like G10 currencies during the next global recession This group of EM currencies have as strong or stronger country fundamentals than some G10 countries; Liquidity premiums associated with EM currencies are also expected to be limited for select EM currencies True liquidity in the FX market is associated with 24-hour liquidity, in which case some EM currencies are as liquid as SEK or NOK Source: Mark Farrington, Principal Global Investors

24 Select EM FX Convergence on G10 Norms Emerging market (EM) countries have converged on a range of G10 fundamental norms such as: Inflation rates; Level of interest rates; Policy credibility; Debt and debt service levels; Depth and stability of banking sector and capital markets. Countries that stand out as having G10-like characteristics across all categories include: Chile, Czech Republic, Korea, Mexico, Poland and Taiwan Source: Mark Farrington, Principal Global Investors

25 Select EM Convergence on G10 Norms Source: Mark Farrington, Principal Global Investors

26 Most Liquid Currencies During N.A. Time zone Currency Euro Japanese yen British pound Canadian Dollar Swiss franc Australian Dollar Mexican peso Brazilian real US$ Millions 2,376,854 1,257, , , , , , ,179 MXN, BRL & CLP all rank well above 2nd Tier G10 currencies MXN is above AUD & CHF for options BRL is above CHF for options * NY Fed Survey, October 2006 * Sums total volume for Spot, Forwards & Options Source: Mark Farrington, Principal Global Investors

27 EM FX Volumes Rising as a Percent of Total * Goldman Sachs Research North American EUR-USD turnover between 2005 to 2006 dropped from 36% to 31% of total, imply volume shifted to USD-EM Source: Mark Farrington, Principal Global Investors

28 2 nd Tier G10 Volumes Becoming Similar to Top Tier EM * Goldman Sachs Research SEK, NOK & NZD at 6% of turnover are basically in the same liquidity realm as KRW, MXN, PLN, TRY Source: Mark Farrington, Principal Global Investors

29 Emerging Markets Diversify Correlation rise is actually just due to a small number of huge global companies Biggest 50 stocks are half the market cap of the index; rest of index has lower correlation Gazprom (Russia) is the world s largest natural gas producer Samsung (Korea) is the world s largest DRAM producer Teva Pharmaceutical (Israel) is the world s largest generic drug manufacturer Source: Ronald Peyton, Callan Associates

30 Emerging Markets Growth and Reform 10% 8% 6% 4% 2% Emerging Developed Real GDP Growth 0% E Emerging markets have grown faster than the developed world and are expected to continue to do so Reform has been progressing corporate governance, transparency, and privatization are all driving forces Source: IMF World Economic Outlook, 2007

31 Improving Corporate Fundamentals Debt/Equity Historical Debt/Equity: Emerging H Markets vs World 1.4 World EMF Debt/Equity Historical ROE: Emerging H Markets vs World 25.0 World EMF The majority of emerging market companies have deceased leverage on the back of improving cash flow generation and lower interest rates Source: Ronald Peyton, Callan Associates

32 Active Risk Pays Off Excellent returns to active management over long time periods Source: Ronald Peyton, Callan Associates

33 Valuation Advantage EAFE S&P 500 EMF Sep-93 Sep-94 Sep-95 Sep-96 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Valuations are compelling Lower research coverage creates pricing inefficiencies, perhaps more so than for developed markets Source: Ronald Peyton, Callan Associates

34 Overview An Evolving Asset Class o Wide range of structural reforms o Expanding Number of Markets o Impending Graduations Index versus Active in Emerging Markets o Being There It s What Matters Most o Challenges for Active Managers o Why Use Index Strategies? Source: Steven A. Schoenfeld, Northern Trust

35 A Maturing Asset Class Since the late 1990s, there have been substantial micro and macroeconomic advances Structural reforms in emerging markets have provided a more stable investing environment Foreign exchange-denominated debt reduction from 90% of GDP to 10% (EM aggregate) Improved fiscal balances to a slight deficit of 0.3% of GDP last year for all emerging markets Greater transparency at both the government and corporate level as emerging market countries move to US GAAP or European IAC standards Big improvements in Big Emerging Markets Reduced systemic risk Sovereign ratings upgrades, e.g: Brazil, China, India Minimized contagion effect Diversification benefit of Emerging Markets remain, despite higher correlations with developed markets Source: Steven A. Schoenfeld, Northern Trust

36 Emerging Market Correlation with Developed Markets 100% 3 Year Rolling correlations 90% 80% 70% 60% 50% EM vs S&P 500 EM vs EAFE 40% EM vs R2000 S&P vs R % Jun- 96 Jun- 97 Jun- 98 Jun- 99 Jun- 00 Jun- 01 Jun- 02 Jun- 03 Jun- 04 Jun- 05 Jun- 06 Source: NTGI, Factset, June 2006

37 Relative P/E Emerging Markets P/E Relative to Developed World P/E MSCI EMF +12m PER / MSCI World +12m PER Jan- 95 Jan- 96 Jan- 97 Source: Credit Suisse, MSCI, June 2006 Jan- 98 Jan- 99 Jan- 00 Jan- 01 Jan- 02 Jan- 03 Jan- 04 Jan- 05 Jan- 06

38 A Maturing Asset Class but Diversification Benefit Remains 12% Historical Global Equilibrium Efficient Frontier: 12/29/2000 vs. 12/30/2005 Equilibrium Expected Return 10% 8% 6% 4% 2% 0% RF = 10-yr US Treasury LB Global Aggregate MSCI Emerging Markets Russell 2000 MSCI World ex-us S&P 500 0% 5% 10% 15% 20% 25% 30% Source: NTGI, June 2006

39 Why Emerging Markets? Long-Term Performance The Emerging Markets index (MSCI) has greatly outperformed: Developed International markets (as measured by MSCI EAFE Index) US equities (as measured by the S&P 500) From December 2001 to December 2006, Emerging Markets rose by 225% S&P 500 rose 35% EAFE rose 101% 1500% 1200% 900% S&P 500 MSCI EAFE MSCI Emerging Markets Monthly Cumulative Returns 600% 300% 0% Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Source: NTGI, MSCI, Standard & Poor s, January 2007 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

40 Dynamic Country Weights within EM Benchmark MSCI Emerging Markets Index Country Malaysia Brazil Thailand Mexico India Chile Indonesia Argentina Korea Philippines Turkey Portugal Greece Colombia Pakistan Peru Venezuela Jordan Sri Lanka Weight (%) Source: NTGI, February 28, 2007 MSCI Emerging Markets Index Country Weight (%) Korea Mexico Taiwan South Africa Brazil 9.94 India 8.41 Greece 6.47 Israel 4.13 Turkey 4.05 Chile 3.51 Thailand 3.02 Russia 2.46 Argentina 2.08 Indonesia 1.74 Poland 1.26 Philippines 1.24 Hungary 1.21 Peru 0.67 Czech Republic 0.64 Venezuela 0.58 China 0.44 Colombia 0.35 Pakistan 0.35 Jordan 0.12 Sri Lanka 0.05 MSCI Emerging Markets Index Country Weight (%) Korea Taiwan South Africa Brazil 9.58 China 7.72 Mexico 6.44 India 5.70 Malaysia 3.93 Israel 3.66 Russia 3.56 Thailand 2.48 Poland 1.96 Chile 1.94 Indonesia 1.86 Turkey 1.82 Hungary 1.58 Czech Republic 0.83 Argentina 0.54 Philippines 0.48 Peru 0.45 Egypt 0.44 Morocco 0.32 Jordan 0.18 Colombia 0.17 Pakistan 0.16 Venezuela 0.15 MSCI Emerging Markets Index - Present Country Weight (%) Korea Taiwan China Brazil Russia South Africa 8.56 India 6.22 Mexico 6.17 Malaysia 2.95 Israel 2.49 Poland 1.68 Chile 1.61 Turkey 1.60 Thailand 1.56 Indonesia 1.53 Hungary 0.99 Egypt 0.87 Argentina 0.79 Czech Republic 0.78 Peru 0.56 Philippines 0.53 Colombia 0.30 Morocco 0.28 Pakistan 0.24 Jordan 0.17

41 Impending Emerging Markets Graduation Pro-Forma outlook incorporating the potential graduation of Advanced Emerging Markets (by 2009?) MSCI Emerging Markets Index - Present Country Market Cap Weight (%) # Co's Emerging Markets 2,359, % 853 Korea 367, % 93 Taiwan 297, % 103 China 270, % 85 Brazil 247, % 54 Russia 236, % 23 South Africa 202, % 50 India 146, % 69 Mexico 145, % 25 Malaysia -EM 69, % 59 Israel 58, % 33 Poland 39, % 22 Chile 37, % 27 Turkey 37, % 33 Thailand 36, % 42 Indonesia 36, % 24 Hungary 23, % 4 Egypt 20, % 21 Argentina 18, % 12 Czech Republic 18, % 7 Peru 13, % 5 Philippines 12, % 16 Colombia 7, % 6 Morocco 6, % 11 Pakistan 5, % 15 Jordan 3, % 14 Source: NTGI, February 28, 2007 Pro-Forma MSCI Emerging Markets Index Country Market Cap Weight (%) # Co's Emerging Markets 1,635, % 624 China 270, % 85 Brazil 247, % 54 Russia 236, % 23 South Africa 202, % 50 India 146, % 69 Mexico 145, % 25 Malaysia -EM 69, % 59 Poland 39, % 22 Chile 37, % 27 Turkey 37, % 33 Thailand 36, % 42 Indonesia 36, % 24 Hungary 23, % 4 Egypt 20, % 21 Argentina 18, % 12 Czech Republic 18, % 7 Peru 13, % 5 Philippines 12, % 16 Colombia 7, % 6 Morocco 6, % 11 Pakistan 5, % 15 Jordan 3, % 14

42 2. Index versus Active in Emerging Markets

43 Why Use Index Funds in Less Efficient Asset Classes? Being There Ensure allocation consistent with strategic policy Being There - Efficient way to achieve asset and style diversification Allocation explains 95.6% of variability (Brinson, Beebower & Hood, 1995) Including style, allocation explains 95% of variability (Sharpe, 1988) Cost effective (at least 1% cheaper than active emerging markets strategies) Commissions Bid/ask spreads Management fees Custody costs Securities lending Difficult to consistently select outperforming managers Arithmetic of Active Management (Sharpe, 1991) Survivorship bias Managing change in dynamic asset classes Within Emerging Market Universe Within International Equity asset class Source: Steven A. Schoenfeld, Northern Trust

44 Risk Return Characteristics The benefit of EM Equity Beta 25% Risk Return Characterisitics Five Years ending 06/30/06 Median EM Active Manager Annualized Return 20% 15% 10% 5% S&P 500 MSCI EAFE MSCI EM Russell % Source: NTGI, Callan Associates 15% 17% 19% 21% 23% 25% 27% 29% Annualized Risk

45 Challenges for Active Emerging Market Managers Transaction costs and high turnover are deadweight costs for active managers to overcome Commissions Bid-ask spread Market impact Benchmark methodology improvement Fewer outlier opportunities outside the benchmark as indexes have evolved to reflect changes in asset class Growth of assets under management Propensity toward more benchmark sensitivity Capacity Constraints Managers protect existing performance by closing funds to additional investors Increasingly difficult and costly to invest new funds without market impact Improved data/information quality Information advantage has eroded Source: Steven A. Schoenfeld, Northern Trust

46 Active vs. Passive Management Expenses Active management fees are generally 2-4x higher than passive fees T-Costs Commission Bid/Offer Taxes Market impact Active Manager Turnover 3x passive Source: Steven A. Schoenfeld, Northern Trust

47 Higher Dispersion of Returns = Diminished Alpha Opportunity Dispersion of returns much higher than domestic equities and developed international large cap Survivorship bias Landscape and drivers of performance have changed significantly in the last ten years Many new managers in asset class, as well as global and developedinternational dabblers Precision with manager performance universes is warranted Institutional universes are Gross Returns (before fees) Mutual fund universes are Net Returns (after fees) Relevance of averages and median ranking versus asset-weighted universes Source: Steven A. Schoenfeld, Northern Trust

48 High Dispersion of Returns = More Active Risk within A Risky Asset Class 40.0 Returns for Periods Ended September 30, 2006 Group: CAI Emerging Markets Equity DB Returns for Periods Ended September 30, A (75) A (76) 20.0 A (67) 10.0 A (90) A (96) 0.0 Last Year Last 3 Years Last 5 Years Last 7 Years Last 10 Years 10th Percentile th Percentile Median th Percentile th Percentile Member Count MSCI Emer Markets A Source: Callan Associates, September 30, 2006

49 How is the Aggregate of Active EM Assets Performing? Average Emerging Market Performance (Asset Weighted) vs. Indexes S&P/IFCI Composite MSCI EM Emerging Markets Active Managers 4Q Year 3 Year 5 Year S&P/IFCI Composite MSCI EM Emerging Markets Active Managers Source: S&P Index Versus Active, MSCI; December 31, 2006

50 What Matters Most? Factors to consider when incorporating Emerging Markets into a global portfolio Efficient Beta How do you achieve it? Index vs. Active in Emerging Markets Is there a role for both? Do the management fees for active management erode the beta and alpha? Are you paying too much for beta exposure? Does the limited capacity of top managers diminish the value of historical peer universes? The importance of being there Allocation Source: Steven A. Schoenfeld, Northern Trust

51 Indexing Can Complement Other Emerging Market Strategies The overriding importance of being there EM Hedge Fund Regional Strategies Traditional active stock selection Long/short or market neutral Style Tilt (e.g.- Deep Value ) Core Emerging Market Index Strategy Private Equity Structured/ country selection Source: Steven A. Schoenfeld, Northern Trust

52 Topics for Discussion Emerging Markets remain a compelling asset class. Core exposure is warranted The index vs. active debate should be over even in emerging markets. Index-based exposure is efficient exposure Sophisticated investors can use a blend of index and higher-risk active strategies to custom tailor their risk exposure. Emerging Markets are evolving and will look very different in Use of a core broader and deeper international/global benchmark might solve both capacity and asset class evolution issues. Source: Steven A. Schoenfeld, Northern Trust

53 Real GDP Growth Africa recorded positive economic growth in the last five years with the highest growth of 5.7% recorded in In 2006, economic growth moderated from 5.6 percent to 4.8 percent. The impact of persistently high petroleum prices has been mitigated in many countries by rising export prices of non fuel commodities ( see Table 1 and Chart 1) The Zambian economy grew faster than other countries in Sub- Sahara Africa in 2006 Source: Dr. Caleb Fundanga, Bank of Zambia

54 Table 1: Real GDP Growth Year Africa Zambia Source: Dr. Caleb Fundanga, Bank of Zambia

55 Chart 1: Real GDP growth and Investment Real GDP Growth (%) Investment Real GDP growth Total Investment (% of GDP) Source: Dr. Caleb Fundanga, Bank of Zambia

56 Inflation Inflation in sub-saharan Africa, dropped from 12.5 percent in 2002 to 12.0 percent in In 2005, inflation increased to 10.8 percent from 9.6 percent in 2004 due to food scarcity and higher petroleum prices. Inflation in oil exporting countries has been above the SSA average reflecting the difficulties some of these countries, especially Angola and Nigeria, have had in sterilising inflows of oil revenues. Source: Dr. Caleb Fundanga, Bank of Zambia

57 Inflation The inflationary impact of high oil prices has been subdued by prudent macroeconomic policy. Over the last 10 years, SSA countries have substantially reduced dependence on bank financing with the overall fiscal balance improving from a deficit of 4.0 percent of GDP in the 1990s to a surplus of 1.0 percent of GDP in In 2006, Zambia recorded lower inflation than other countries in Sub Sahara Africa. Source: Dr. Caleb Fundanga, Bank of Zambia

58 Table 2: Inflation Africa Zambia Source: Dr. Caleb Fundanga, Bank of Zambia

59 Exports and Imports of Goods and Services SSA has continued to benefit from a favourable external environment as a result of increased Import demand from advanced economies. With the continued rise in oils and other commodity prices, exporters of both oil and non-fuel commodities experienced an improvement in the terms of trade (see Table 3). In Zambia, the terms of trade improved even more due to high copper prices. Exports and imports of goods and services as a fraction of GDP increased from 32.4 percent and 32.8 percent respectively in 2002 to 41.3 percent and 36.9 percent respectively in 2006 (see Table 4) Source: Dr. Caleb Fundanga, Bank of Zambia

60 Table 3:Terms of Trade Percentage Change Year Overall Oil Exporters Oil Importers Zambia Source: Dr. Caleb Fundanga, Bank of Zambia

61 Table 4: Exports of Goods and Services as a Percentage of GDP Year Exports Imports Source: Dr. Caleb Fundanga, Bank of Zambia

62 Current Account and Reserves As a result of the improved external sector environment, the current account balance improved from a deficit of 3.4 percent of GDP in 2002 to a surplus of 0.8 percent of GDP in 2006 External reserves improved from 4.4 months of imports in 2002 to 7.1 months of imports in 2006 ( see Table 5). Zambia s reserves position has improved with the improvement in the external sector. Source: Dr. Caleb Fundanga, Bank of Zambia

63 Table 5: Current Account (%of GDP) and Reserves in Months of Imports Year Current Account (% of GDP) Reserves (Africa, in months of imports) Reserves (Zambia, in months of imports) Source: Dr. Caleb Fundanga, Bank of Zambia