Emerging & Frontier Markets Expanding the Opportunity Set

Transcription

1 NORTHERN TRUST 2010 INSTITUTIONAL CLIENT CONFERENCE Reaching for the New Gold Standard of Investing Emerging & Frontier Markets Expanding the Opportunity Set Moderator: Julia Bristow Briggs Senior Investment Relationship Manager Presenters: Greg Behar Senior Investment Strategist Patrick Dwyer Senior Portfolio Manager 2010 Northern Trust Corporation northerntrust.com

2 NORTHERN TRUST 2010 INSTITUTIONAL CLIENT CONFERENCE Reaching for the New Gold Standard of Investing Welcome 2010 Northern Trust Corporation northerntrust.com

3 Client Perspective Have you increased your International equity exposure in the last 6-12 months? A. Yes B. In process C. No Institutional Client Conference

4 Client Perspective Have you changed your International strategies between active and passive? A. Increased Index exposure B. Increased Active exposure C. No change in my policy Institutional Client Conference

5 Client Perspective What is your current Emerging Markets allocation as a percentage of your overall equity exposure? A. 0-5% B. 5-10% C % D. > 15% Institutional Client Conference

6 Defining the Global Equity Opportunity Set Global Equity Opportunity Set U.S. Equity 43.2% International Equity 56.8% U.S. Large/Mid Cap 36.9% U.S. Small Cap 6.3% Canada Large/Mid Cap 3.9% EAFE Large/Mid Cap 34.6% International Developed Small Cap 5.1% Emerging Markets Large/Mid 11.5% Emerging Markets Small Cap 1.7% Frontier Markets 0.4% Expanded Universe Source: Global segmentation and market capitalizations are based on MSCI definitions from the All Country World Investable Market Index (ACW IMI) series. Frontier Markets is based on the MSCI definition and its weight is calculated relative to the free float market capitalization of the ACW IMI. All data is as of 8/31/10. For illustrative purposes only. The picture is not to scale Institutional Client Conference

7 Fund Flows Global Institutional Fund Flows 2008 through 2010 US$ Million US$ Million US$ Million 85, , , , , , US Equity EAFE Equity Emerging Mkts Equity ACWI ex US Equity , YTD YTD Active Equity Index Equity YTD Frontier Markets Source: evestment Alliance, EPFR Global, YTD as of 8/31/ Institutional Client Conference

8 SP 500 WxUS DISC EM EM SC FM S&P 500 World ex US DISC EM EM SC FM SP 500 Wld x US DISC EM EM SC FM Returns Global Equity Market Performance Review YTD 140% 20% 120% % % 80% % 14% % 40% 20% 0% -20% % 10% 8% 6% % -60% % 2% % Definitions: DISC = Developed International Small Cap EM = Emerging Markets EM SC = Emerging Markets Small Cap FM = Frontier Markets W x US = World ex US Institutional Client Conference Source: Factset,, MSCI, S&P, Northern Trust. Dat as of 9/30/2010 0%

9 Annualized Return Redefining the International Market Structure Risk Return Characteristics June June % 15.0% 10.0% Frontier Emerging Market Emerging Market Small Cap Developed Intl Small Cap 5.0% Russell % EAFE S&P % 14.0% 16.0% 18.0% 20.0% 22.0% 24.0% 26.0% 28.0% Annualized Risk Source: Factset, NTGI. Frontier is BMI Frontier, Developed Intl Small Cap is S&P World ex US Small Cap, EM Small Cap is S&P Emerging Markets Small Cap Institutional Client Conference

10 Diversification Benefits of the Global Opportunity Set The MSCI EAFE had a 54% correlation to the S&P 500 from Years ( ) S&P 500 S&P MSCI EAFE 0.88 Developed Int. Small Cap 0.83 MSCI Emerging Markets 0.81 Emerging Markets Small Cap 0.75 S&P BMI Frontier Years ( ) S&P 500 S&P MSCI EAFE 0.83 Developed Int. Small Cap 0.74 MSCI Emerging Markets 0.73 Emerging Markets Small Cap 0.62 S&P BMI Frontier 0.30 Source: Developed Intl Small Cap is S&P World ex US Small Cap, EM Small Cap is S&P Emerging Markets Small Cap data as of 6/30/ Institutional Client Conference

11 Global Market Capitalization Review 35, % (Emerging Markets) 30, , , , , % (Emerging Markets) 5, USA World ex USA Emerging Markets Source: MSCI, Northern Trust, data as of 8/31/ Institutional Client Conference

12 Dubai and Shanghai Infrastructure Growth Shanghai Dubai Source: (Shanghai images): Business Insider, 6/7/2010 Source: (Dubai images): Dubai-information-site.com Institutional Client Conference

13 Developing Markets Have a High Economic Growth Potential Institutional Client Conference

14 Less Mature Capital Markets Leave Room for Growth Despite strong growth, frontier market economies remain very small compared to developed and more advanced emerging market countries, leaving room for steady equitization of their economies. Median Stock Market Capitalization as % of GDP Frontier Emerging Developed Source: World Bank, Developed Markets are defined as MSCI EAFE+Canada+U.S., Emerging Markets are defined as MSCI EM, Frontier Markets include those countries included in the MSCI Frontier Index, the S&P Frontier Index and the S&P Extended Frontier 150 Index Institutional Client Conference

15 NORTHERN TRUST 2010 INSTITUTIONAL CLIENT CONFERENCE Reaching for the New Gold Standard of Investing Emerging & Frontier Markets Defining These Markets 2010 Northern Trust Corporation northerntrust.com

16 Defining Emerging Small Cap and Frontier Markets Market Cap Data listed in USD Millions Median Market Cap Market Cap Range # of Securities MSCI Emerging Markets $4,848 $ , MSCI Emerging Markets Small Cap $411 $51-3,718 1,879 S&P Frontier Extended 150 $1,868 $93-83, Source: S&P, MSCI, Northern Trust, data represents full market capitalization. Data as of 9/30/ Institutional Client Conference

17 Country Comparison Emerging Markets vs. EM Small Cap Country Weight in MSCI EM Country Weight in MSCI EM Small Cap Turkey Thailand Taiwan South Af rica Russia Poland Philippines Peru Morocco Mexico Malaysia Korea Indonesia India Hungary Egypt Czech Republic Colombia China Chile Brazil 0% 5% 10% 15% 20% Source: Northern Trust, MSCI. Data as of 6/30/ Institutional Client Conference

18 Client Perspective Emerging Markets Small Cap is underweight relative to Emerging Markets Large Cap in what sector? A. Consumer discretionary B. Industrials C. Energy D. All of the above Institutional Client Conference

19 Sector Comparison Emerging Markets vs. EM Small Cap Utilities Telecommunication Services Materials Information Technology Industrials Health Care Financials Energy Consumer Staples Consumer Discretionary 0% 5% 10% 15% 20% 25% 30% MSCI EM MSCI EM Small Cap Source: Northern Trust, MSCI. Data as of 6/30/ Institutional Client Conference

20 Emerging Markets Increasing Share of Consumer Spending CONSUMER SPENDING - % OF GLOBAL TOTAL EMERGING MARKETS UNITED STATES Source: JP Morgan, United Nations report. Data through 2009; 2010 estimate Institutional Client Conference

21 Next Frontier of Capital Investing The Frontier Countries Defined By S&P and MSCI Europe Africa Middle East Asia Americas Bulgaria Botswana Bahrain Bangladesh Argentina Croatia Ghana Jordan Cambodia Colombia Cyprus Ivory Coast Kuwait Pakistan Ecuador Estonia Kenya Lebanon Kazakhstan Jamaica Georgia Mauritius Oman Sri Lanka Panama Latvia Namibia Qatar Vietnam Trinidad and Tobago Lithuania Nigeria UAE Romania Tunisia Slovak Republic Zambia Slovenia Ukraine Includes those countries included in the MSCI Frontier Index, the S&P Frontier Index, the S&P Select Frontier Index and the S&P Extended Frontier 150 Index Institutional Client Conference

22 Frontier Markets Regional Weight Comparison Not all Frontier Market benchmarks are created equal Diversification Investability Liquidity Frontier Markets Regional Breakdown S&P BMI Frontier: S&P Broad Market Index Frontier MSCI Frontier S&P Extended Frontier 150 S&P BMI Asia 12.90% 18.10% 13.80% Middle East 60.60% 42.10% 43.40% Europe 9.00% 9.30% 7.10% Africa 12.40% 11.90% 13.70% Latin America 5.10% 18.70% 22.10% Number of Securities Source: Northern Trust, MSCI, S&P, As of 8/31/ Institutional Client Conference

23 Client Perspective Which sector has the largest weight in Frontier Markets? A. Energy B. Financials C. Telecommunications D. Materials Institutional Client Conference

24 Middle East Equities Are Not Highly Correlated to Commodities Gulf Country 5 Year Correlation to S&P GSCI Commodity Index Index S&P GSCI Index Qatar (DSM 20 Index) 16.40% UAE (ADX General Index) 27.30% Kuwait (Kuwait SE Weighted Index) 17.60% S&P % Source: Northern Trust, Bloomberg June 2005 to June 2010 Frontier Market Index 5 Year Correlation to Commodity Index Index S&P Extended Frontier 150 S&P GSCI 46.00% S&P GSCI Crude Oil 38.10% S&P % Source: Northern Trust, Bloomberg June 2005 to June Institutional Client Conference

25 Sector Comparison Frontier Markets vs. Emerging Markets Economic development theme overweight Financials and Telecoms Not dominated by commodity stocks underweight Energy and Materials Utilities Telecommunication Services Materials Information Technology Industrials Health Care Financials Energy Consumer Staples Consumer Discretionary 0% 10% 20% 30% 40% 50% 60% MSCI EM S&P Extended Frontier 150* Source: Northern Trust, S&P, MSCI. Data as of December 2009 *S&P Extended Frontier 150 excludes Colombia Institutional Client Conference

26 Masai Warriors Source: photographersdirect.com, telegraph.co.uk, rajatgupta.wordpress.com Institutional Client Conference

27 NORTHERN TRUST 2010 INSTITUTIONAL CLIENT CONFERENCE Reaching for the New Gold Standard of Investing Emerging & Frontier Markets Complexities of Investing 2010 Northern Trust Corporation northerntrust.com

28 Complexities of Developing Market Investing Critical areas of focus Operational risks Regulatory / market risks Economic and trade sanction screening Transaction Costs Institutional Client Conference

29 Developing Markets Operational and Regulatory Risks Operational risks Clearing and settlement Safekeeping Local custody and account set-up and maintenance Regulatory / market risks High regulatory barriers to entry and exit Currency restrictions Foreign ownership limits Institutional Client Conference

30 Economic and Trade Sanction Screening Treasury s Office of Foreign Asset Controls (OFAC) Enforces economic and trade sanctions based on U.S. foreign policy and national security goals The Specially Designed Nationals (SDN) list contains 10,000 entries Individuals Companies Terrorist groups Narcotic trafficking groups OFAC prohibits any transactions involving the entries on the list Civil penalties Criminal penalties Institutional Client Conference

31 Example of Broad-Based and List-Based Sanctions Broad-based sanctions Burma (Myanmar) Cuba Iran North Korea Sudan List-based sanction example Côte d Ivoire (Ivory Coast) Prohibits U.S. individuals from engaging in any transactions with any person, entity or organization found to Constitute a threat to the peace and reconciliation process in Côte d Ivoire Be in serious violation of international law in Côte d Ivoire Have directly or indirectly supplied, sold or transferred to Côte d Ivoire arms or assistance, advice or training related to military activities To have publicly incited violence and hatred Institutional Client Conference

32 Emerging and Frontier Markets Transaction Costs Transaction costs must be an integral component in the management of frontier markets strategies. Frontier Markets Transaction Costs Higher commissions, fees, and taxes Wider spreads Lower liquidity Higher turnover Institutional Client Conference

33 NORTHERN TRUST 2010 INSTITUTIONAL CLIENT CONFERENCE Reaching for the New Gold Standard of Investing Emerging & Frontier Markets Gaining exposure 2010 Northern Trust Corporation northerntrust.com

34 Gaining Frontier and Emerging Markets Small Cap Exposure Active Emerging managers that dip down into frontier and small cap markets Some active frontier regional and broader index mandates Some dedicated Emerging Small Cap and frontier markets managers Index Single country and regional ETFs SWAPS / P-Notes Institutional index strategies Institutional Client Conference

35 Important Information NOT A SOLICITATION. No information provided herein shall constitute, or be construed as, an offer to sell or a solicitation of an offer to acquire any security, investment product or service, nor shall any such security, product or service be offered or sold in any jurisdiction where such offer or solicitation is prohibited by law or regulation. This material is provided for informational purposes only and does not constitute a recommendation of any investment strategy or product described herein. Opinions expressed are those of the presenter(s) and subject to change without notice Institutional Client Conference

36 NORTHERN TRUST 2010 INSTITUTIONAL CLIENT CONFERENCE Reaching for the New Gold Standard of Investing Thank you. Moderator: Julia Bristow Briggs Senior Investment Relationship Manager Presenters: Greg Behar Senior Investment Strategist Patrick Dwyer Senior Portfolio Manager 2010 Northern Trust Corporation northerntrust.com