Alpha/Beta The Outlook For Emerging Markets And How To Play Them With ETFs. Live Webinar February 24, p.m. EDT

Transcription

1 Alpha/Beta The Outlook For Emerging Markets And How To Play Them With ETFs Live Webinar February 24, p.m. EDT

2 Today s Webinar: Alpha/Beta Kim Arthur CEO and Portfolio Manager Main Management Matt Hougan President, ETF Analytics Global Head of Editorial IndexUniverse How To Evaluate Emerging Markets How To Evaluate Emerging Markets ETFs

3 Main Management: Who We Are Independent investment advisory firm founded in 2002 Seasoned team with average of over 30 years industry experience across many market cycles Investment approach based on the active management of passive indexes Primary focus on sector, sub-sector, style and size analysis Believers in reversion to the mean with a catalyst Implementation with exchange traded funds (ETFs) A pioneer in all-etf investing Availability though LPL, Folio Institutional, Wealthfront and TD Ameritrade 3

4 Global GDP growth map Since 1990 Emerging economies have grown faster than Advanced/ Developed economies. The GDP spread between Emerging and Developed economies has widened Source: IMF. Data as of 1/31/11 4

5 Weekly flows into Fund Groups since Q Developed Markets have had $50bn of inflows in 2011 Emerging markets have seen $20bn of outflows in 2011 Bond inflows have leveled off over the past three months Money market outflows in 2011 have been significant 5

6 Emerging Market historical fund flows Short term outflows from Emerging Markets into Developed Countries Historically similar trends can persist for months Outflows have occurred despite appealing EM valuations 6

7 Emerging Markets relative to Developed Markets Valuation Emerging Market Forward P/E is at a 14% discount to Developed Markets Historical EM/DM discount has been 11% 7

8 Comparison of Emerging Market Regional Indicies BRIC countries are reasonably valued relative to Emerging Markets as a whole EM Europe looks inexpensive relative to its peers MSCI Country Indices P/BV P/E P/CE Div. Yield ROE EPS ASIA APEX MC ASIA APEX SC Reasonable BRIC EFM (EMERGING + FRONTIER MARKETS) EFM AFRICA EFM AFRICA ex ZA EFM ASIA EFM CEEC ex RU EFM CENTRAL & EAST EUROPE + CIS (CEEC) EFM EMEA EFM EUROPE + CIS (E+C) EFM EUROPE + CIS (E+C) ex RU EFM FAR EAST EFM LATIN AMERICA & CARIBBEAN INDEX EM (EMERGING MARKETS) EM ASIA EM EASTERN EUROPE EM EASTERN EUROPE ex RUSSIA EM EMEA Inexpensive EM EUROPE EM EUROPE & MIDDLE EAST EM FAR EAST EM LATIN AMERICA EM ex ASIA JORDAN + EGYPT + MOROCCO Source: MSCI, Main Management. Monthly data as of 1/31/11 8

9 Digging deeper Emerging Market Country valuations India, a standout in , looks to have reverted above its mean Brazil, a relative laggard in 2010, looks favorable relative to its Lat. Am. peers Russia s valuations compare well with the entire EM group MSCI Country Indices PE/G P/BV P/E P/CE Div. Yield ROE/P/BV ROE EPS CHINA INDIA INDONESIA KOREA MALAYSIA PHILIPPINES TAIWAN THAILAND EM ASIA N/A EM FAR EAST N/A BRAZIL CHILE COLOMBIA MEXICO PERU EM LATIN AMERICA N/A CZECH REPUBLIC N/A HUNGARY N/A JORDAN N/A Inexpensive POLAND RUSSIA TURKEY EM EUROPE & MIDDLE EAST N/A EM EUROPE N/A EM EASTERN EUROPE N/A EGYPT MOROCCO N/A SOUTH AFRICA EM EMEA N/A EM (EMERGING MARKETS) AC WORLD INDEX AC WORLD INDEX ex USA N/A Source: MSCI, Main Management. Monthly data as of 1/31/11 9

10 Down to the EM Sector Level Expensive Source: MSCI. Monthly data as of 1/31/11 Country performance often driven by the underlying dominant sectors ETF choices now allow Managers to have granular exposure without owning single stocks 10

11 Evaluating India: Valuation matters Earnings Yield and Cash Yield pointed to an attractive buy in 2009 MSCI India Index rose as it reverted to its mean during Appreciation of Indian Rupee has boosted the total return With valuations looking rich Main sold much of its India position in Q Source: Ned Davis Research. Monthly data as of 1/31/11

12 Inflation may weigh on equities As the equity markets heat up, inflationary pressures have also emerged. The Reserve Bank of India has responded by raising rates since mid 2010 Higher borrowing costs are likely another negative for Indian equities Note: Monthly data as of 1/31/11 12

13 Why Commodity Inflation really matters in Emerging Nations Food and Energy are significant contributors to Inflation As the prices of these staples rise, discretionary spending may be impacted Food is just 15% of the U.S. Consumer Price Index Note: Monthly data as of 1/31/11 13

14 India s long term outlook A younger population with increasing purchasing power Long term demographics look positive for continued growth Will likely seek another entry point in future Source: U.S. Census Bureau. Data as of 1/31/11 14

15 Russia currently looks more promising Interest Rates are currently close to the lowest levels in five years Russian equities are still more than 10% below their 2008 peaks Equity fundamentals look appealing Note: Monthly data as of 1/31/11 15

16 Russian Debt less of a concern Absolute amount of Russia s debt down since 2008 Debt as a percentage of GDP remains within a steady range Combined with other metrics, Russia looks favorable Source: Ned Davis Research. Monthly data as of 1/31/11 16

17 Emerging Market Research Sources Leuthold Weeden Capital Manageme nt Ned Davis Research MSCI Global Index Monitor Investment Banking Research Research Sources CIA World Fact Book Internation al Monetary Fund EPFR Global ETF Content Providers Source: Main Management LLC. Data as of 1/31/11 17

18 Emerging Market ETFs to Consider Jan Perf 2010 Perf Market Cap % Below 10 ($Mil) Inception 10 Year High 10 Year Low Year Peak % Above 10 Jan 31, 2011 Year Low Price ishares MSCI Brazil Index Fund (EWZ) /11/ ishares MSCI Chile Index Fund (ECH) /16/ ishares MSCI Malaysia (EWM) /12/ ishares MSCI Mexico Index Fund (EWW) /12/ ishares MSCI South Africa Index Fund(EZA) /7/ ishares MSCI Taiwan Index Fund (EWT) /21/ ishares MSCI Turkey Index Fund (TUR) /28/ Market Vectors Russia (RSX) /30/ PowerShares USX China (PGJ) /9/ SPDR S&P China (GXC) /23/ SPDR Emerging Middle East & Africa (GAF) /23/ Vanguard Emerging Markets (VWO) /10/ Guggenheim China Real Estate (TAO) /18/ Global Emerging Shares INDX China (CHXX) 0.92 N/A 7 2/17/ WisdomTree India Earnings Fund (EPI) /22/ Market Vectors Indonesia (IDX) /15/ Index IQ South Korea Small Cap (SKOR) 8.87 N/A 9 4/14/ ishares MSCI Philippines Index Fund (EPHE) N/A 18 9/28/ ishares MSCI Poland Index Fund (EPOL) 1.31 N/A 105 5/25/ Market Vectors Egypt (EGPT) N/A 24 2/16/ SPDR S&P Emerging Markets Small Cap (EWX) /12/ Rydex MSCI Emerging Markets Equal Weight (EWEM) N/A 12 12/3/ ProShares Short MSCI Emerging Markets (EUM) /30/ First Trust BICK Index Fund (BICK) N/A 497 6/19/ ishares MSCI All Peru Capped Index Fund (EPU) /19/ ishares MSCI Thailand Index Fund (THD) /26/ Global X/InterBolsa FTSE Colombia 20 (GXG) /5/ Market Vectors Vietnam (VNM) /11/ PowerShares MENA Frontier Countries Portfolio (PMNA) /9/ Average Source: Main Management LLC. Monthly data as of 1/31/11 18

19 Disclosure Main Management, LLC ( Main Management, or the firm ) is an investment adviser registered under the Investment Advisers Act of The firm was founded in 2002 and provides investment management services primarily to high net worth, family groups, foundations/endowments, and serves as a sub-advisor to third-party investment advisors & broker-dealers. The information contained herein was prepared using sources that the firm believes are reliable, but the firm does not guarantee its accuracy. The information reflects subjective judgments, assumptions and the firm s opinion on the date made and may change without notice. The firm is not obligated to update this information. Nothing herein should be construed as investment advice or a recommendation to purchase or sell securities. The information is not intended as an offer to provide advisory services in any state or jurisdiction where such offer would not be permitted under applicable registration requirements. All equity investing entails risk of loss. The firm cannot assure any potential client that it will achieve the investment objectives discussed in these materials. In addition, potential clients should not assume that their returns, if any, will be comparable to returns that the firm earned in the past. In preparing this material, Main Management has not taken into account the investment objectives, financial situation or particular needs of any individual investor. Many securities transactions are risky and are not suitable for all investors. All securities investments carry risk, including a risk of loss of principal. Recommendations that the firm makes in the future may not equal the performance of the securities mentioned in this information, if any, or even be profitable at all. Securities mentioned herein do not represent all of the securities purchased, sold or recommended for the firm s clients. Upon request, Main Management will furnish a list of all securities purchased or sold on behalf of clients within the last year. The firm and its clients, affiliates and employees may, from time to time, have long or short positions in, and buy or sell, the securities or derivatives (including options) thereof, of the ETFs mentioned in these materials and may increase or decrease their positions. Main Management, LLC has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS ). Main Management will provide a complete list of composites and descriptions upon request. No part of this material may be copied in any form, by any means, or redistributed without the firm s prior written consent 19

20 Understanding Emerging Markets

21 Emerging Market ETF History November 2002: PowerShares launches first emerging markets ETF (ADRE) April 2003: ishares launches first emerging markets ETF without ADRs (EEM)

22 Emerging Market ETF Assets /1/ /1/ /1/ /1/ /1/ /1/2010

23 Emerging Market Countries Brazil Chile China Colombia Egypt India Indonesia Korea? Malaysia Mexico Peru Philippines Poland Russia South Africa Taiwan Thailand Turkey Vietnam

24 Efficiency Tradability Fit

25 Efficiency: 1 Emerging Markets ETFs Are Pricey Frequency Basis Points

26 Efficiency 2: Tracking Difference In Emerging Markets 14% 12% 10% 8% 6% 4% EEM VWO 2% 0%

27 Tradability 1: On-Screen Liquidity Bloomberg Chart of AFK Level 2

28 Tradability 2: Hedgability

29 Tradability 3: Premium/Discount GXC vs. inav

30 Tradability 4: Premiums/Discounts INP and Capital Controls 1/3/2007 2/3/2007 3/3/2007 4/3/2007 5/3/2007 6/3/2007 7/3/2007 8/3/2007 9/3/ /3/ /3/ /3/2007 1/3/2008 2/3/2008 3/3/2008 4/3/2008 5/3/2008 6/3/2008 7/3/2008 8/3/2008 9/3/ /3/ /3/ /3/2008

31 Tradability 5: Emerging Market Risk - Egypt Insert CHART since Jan 28-Current EGPT ORSDF.PK TGA CELTF.PK

32 Fit 1: Country Classifications Where Does South Korea Belong? Top Holdings Country EEM GMM China 17.18% 18.95% Brazil 15.95% 16.81% Korea 13.94% 0.00% Taiwan 11.33% 11.60% South Africa 8.02% 10.03% Russia 6.67% 9.19% India 6.50% 9.68% Mexico 4.60% 5.71% Malaysia 2.94% 3.10%

33 Fit 2: BRIC Country Weights Fund Ticker China Brazil India Russia ishares MSCI BRIC SPDR S&P BRIC 40 Guggenheim BRIC BKF 37.09% 34.38% 15.12% 12.68% BIK 43.48% 25.85% 8.31% 22.35% EEB 29.79% 54.82% 12.65% 2.74%

34 Fit 3: Weighting Matters VWO EWEM PXH Market Cap Equal Fundamental China 17.7% 19.9% 30.0% Brazil 15.8% 11.2% 13.9% Taiwan 11.9% 17.5% 13.3% Russia 6.9% 3.4% 9.9% South Africa 7.1% 6.4% 7.7% Mexico 4.5% 3.1% 6.5% India 7.2% 7.6% 4.9% Korea 14.6% 13.8% 2.7% Malaysia 3.0% 2.9% 2.6% Indonesia 2.2% 2.9% 1.8%

35 Fit 4: Finding Low Correlations ishares Emerging Markets EEM 1 Ticker EEM EWX FRN VTI VNM SPDRs S&P Emerging Markets Small Cap EWX Guggenheim Frontier Markets FRN Vanguard Total Market VTI Market Vector Vietnam VNM

36 Fit 6: Finding Low Correlations Largevs. Small Cap Top 10: Which Do You Recognize? EEM GMM Samsung 2.34% Empresas La Polar 0.62% Petrobras 1.93% Kulim Malaysia 0.59% Gazprom 1.73% BEC World 0.59% Taiwan Semi 1.62% Lewis Group 0.56% Vale 1.58% Anhanguera Educacion 0.55% Petrobras ADR 1.58% Sp Setia 0.54% China Mobile 1.56% Shanghai Electric 0.48% America Movil 1.47% JSE Limited 0.48% Banco Itau 1.25% Tv Azteca 0.48% ICBC 1.20% Thanachart Capital 0.47%

37 Any Questions? Kim Arthur CEO and Portfolio Manager Main Management Matt Hougan President, ETF Analytics Global Head of Editorial IndexUniverse

38 Thank You For more information: