capturing emerging market equity exposure with index investing

CS ETFs Sales Strategy – Investment Themes

Capturing emerging market equity exposure with indexinvesting

Asset Management

Executive summary 12 key indices available for gaining exposure to Emerging Market (EM)

equities at global, regional and single country level are reviewed in this paper.

All the indices included in the analysis are designed, maintained and calculated

by MSCI Inc., formerly known as Morgan Stanley Capital International. As the

focus of this paper is to explore the different risk/return profiles an investor

can gain exposure to by selecting different betas, the additional factor of the

index provider’s approach is removed, and a uniform and consistent universe

of 12 MSCI indices has been selected.

The 12 indices analyzed include one global benchmark – the MSCI EM index,

three regional indices – MSCI EM EMEA, MSCI EM Latin America, MSCI EM

Asia, and eight single country indices – MSCI Russia, MSCI South Africa,

MSCI Brazil, MSCI Chile, MSCI Mexico (capped), MSCI India, MSCI Korea

and MSCI Taiwan.

As at 29.06.2012, the indices ranged from 21 constituents (MSCI Mexico) to

819 constituents (the broad index, MSCI EM) and covered a total market

cap of USD 3.37 trillion.

Looking at the risk/return profiles of these indices, the return potential of

emerging markets is very apparent, both in absolute and risk adjusted terms.

Previous editions of this research series are referred to for a comparison of

historical performances of developed market indices (e.g. US).

Based on historical analysis, emerging markets have proved able to add

strong diversification and show relatively low correlation across regions

(e.g. MSCI Latin America and MSCI Asia). This is particularly clear in the

single country analysis, and is one of the key findings of this study. The

MSCI regional and single country emerging market series can therefore be

useful tools for portfolio allocators and managers.

In terms of style analysis, the Barra Aegis risk factors of the indices are

considered, relative to the MSCI All Country World Index (ACWI). If the results

for the momentum factor are removed – due to the underperformance of

emerging markets vs. developed markets over the last two years – interesting

results are found, which point to MSCI South Africa and Chile as low volatility

markets (while MSCI Russia and Korea appear to be more volatile); a small

cap skew for MSCI Russia and Korea; positive liquidity skew for MSCI Latin

America, South Africa, Brazil and Mexico.

The European ETF market offers a range of funds to investors seeking

access to these indices. A total of USD 20,721m was invested in trackers

of these indices as at 29.06.2012, across 65 vehicles listed and domiciled

in Europe, with 68% of those assets being invested in the broad index

trackers only.

August 2012Index Solutions

For distribution to pre-qualified investors only. Not for redistribution.

A review of 12 key global,

regional and single country

emerging market indices, in

the context of European ETFs

By Ursula Marchioni and Nicholas Low1

1 Ursula Marchioni is Head of Credit Suisse ETF Sales Strategy. She joinedCredit Suisse in 2007, where prior to her current role she covered Italianinstitutional clients within the Investment Banking Securities team. MsMarchioni joined Credit Suisse from Société Générale, where she worked fortwo years in structured products sales, and was previously part of thesecurities and derivatives financial engineering team at KPMG. Ms Marchioniholds an MSc in Physics from Università degli Studi di Trento in Italy.

Nicholas Low is an Associate in the Credit Suisse ETF Sales Strategyteam. He joined Credit Suisse in 2010, where prior to his current role hewas an Investment Banking Associate within the CEEMEA Healthcaresector coverage team based in London. Nicholas started his career withSociété Générale Cowen as an Investment Banking Analyst in London.Nicholas holds an MSc in Investment Management from Cass BusinessSchool, City University London.

CS ETFs Sales Strategy – Investment Themes 1/25

Exhibit 1 – Overview of European listed and domiciled ETFstracking MSCI Emerging Market indices – AUM as of 29.06.2012,in USD, per benchmark

Source: CS ETF Sales Strategy, Bloomberg, 29.06.2012, in USD.

Nomenclature: capitalization weighted indicesA capitalization-weighted index is one whose components are weightedaccording to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue'soverall market value, which is calculated as the multiple of the share priceand the number of shares outstanding.Traditionally, capitalization-weighted indices tend to have a full weighting,meaning that all outstanding shares are included. In jurisdictions wherepartial government ownership of large companies is more common, orwhere ownership by families, founders or managers is frequent (such asemerging markets), float-weighted indexing has been the norm. A freefloat adjustment factor is then introduced to calculations, and the indexrepresents only the proportion of shares that can be freely traded.

Scope and methodology of indicesThe 12 MSCI indices analyzed here are free-float adjusted marketcapitalization weighted indices, from the MSCI Standard Indices series.

Developed vs. Emerging markets: country levelIt is worth first exploring the Market Classification Framework designed byMSCI. The classification of markets is a key input in the process of indexconstruction, as it drives the composition of the investment opportunity setsto be represented.

The approach used by MSCI aims to reflect the views and practices of theinternational investment community by striking a balance between a country’seconomic development and the accessibility of its market while preservingindex stability.

The MSCI Market Classification Framework consists of following threecriteria: economic development, size and liquidity as well as marketaccessibility.

In order to be classified in a given investment universe, a country mustmeet the requirements of all three criteria as described in the table below.

MSCI Mexico 0%

MSCI South Africa 1%MSCI Taiwan 2%

MSCI EM EMEA 1%

MSCI Russia 3%

MSCI Korea 4%MSCI Brazil 5%MSCI Latam 5%

MSCI EM Asia 6%MSCI EM 68%

MSCI India 5%MSCI Chile 0%


Exhibit 2 – MSCI Market Classification Framework criteria

Source: MSCI Global Investable Market Indices Methodology, May 2012.

The economic development criterion is only used in determining theclassification of developed markets. That distinction is not relevant whenassessing emerging markets, given the wide variety of development levelswithin this universe.

The size and liquidity requirements are based on the minimum investabilityrequirements for the MSCI Global Standard Indices; market accessibilityaims to reflect international investors’ experience in investing in a givenmarket and as a result, this criterion includes several sub-criteria.

MSCI regularly reviews the market classification of all countries included inthe MSCI indices to ensure that they remain reflective of the evolution ofthe different markets. In particular, changes in the assessments under theclassification framework serve as the basis for determining the marketsthat will be reviewed for potential market reclassification as part of theAnnual Market Classification Review. Each June, MSCI will communicateits conclusions from the discussions with the investment community on thelist of countries under review and announce the new list of countries, ifany, under review for potential market reclassification in the upcomingcycle.



Emerging Markets

Brazil

Chile

Colombia

Mexico

Peru

Czech Republic

Egypt

Hungary

Morocco

Poland

Russia

South Africa

Turkey

China

India

Indonesia

Korea

Malaysia

Philippines

Taiwan

Thailand

Americas AsiaEurope, Middle East & Africa

Criteria Frontier Emerging Developed

A. Economic developmentA. 1 Sustainability of economic development

No requirement No requirement Country GNI per capita25% above the World

Bank high incomethreshold* for 3

consecutive years

B. Size and liquidity requirementsB. 1 Number of companies meeting the following Standard Index criteria

Company size (full market cap)**Security size (float market cap)**Security liquidity

2USD 449 mmUSD 33 mm2.5% ATVR

3USD 898 mmUSD 449 mm15% ATVR

5USD 1796 mmUSD 898 mm20% ATVR

C. Market accessibility criteriaC. 1 Openness to foreign ownershipC. 2 Ease of capital inflows/outflowsC. 3 Efficiency of the operational frameworkC. 4 Stability of the institutional framework

At least someAt least partial

ModestModest

SignificantSignificant

Good and testedModest

Very highVery highVery highVery high

* High income threshold for 2010: GNI per capita of USD 12,276 (World Bank, Atlas method)** Minimum in use for the May 2012 Semi-Annual Index Review, updated on a semi-annual basis

Developed vs. emerging markets: security levelEach of the securities followed in the MSCI index universe is classified inonly one country.

The country classification of a security is generally determined by thecountry of incorporation of the issuing company and the primary listing ofthe security. This approach determines the country classification of thevast majority of securities. In the few cases where a company isincorporated in one country while its securities have a primary listing in adifferent country, additional factors are considered to determine thecountry classification.

Companies may choose to incorporate in a different country than thecountry of primary listing to benefit from tax, legal, and/or regulatoryadvantages. In some other cases, companies may seek to benefit fromtax, legal and/or regulatory advantages by incorporating in a differentcountry than their country of primary listing where such country ofincorporation is one of the countries in the MSCI All Country World Index(ACWI). In both of these cases of special benefit incorporations, MSCI willgenerally classify the company in the country of the primary listing of itssecurities.

Companies incorporated outside of the US which have their primary listingin the US may be included in the USA index universe, provided that theyfile a Form 10-K/10-Q and that in four of the following five variables theydo not point to another single country: operations, revenues, headquarters,management and shareholder base.

Companies incorporated in a European DM country (includingLuxembourg) which have their primary listing in a different European DMcountry are generally classified in the country of primary listing.

In the few remaining cases where the general framework proves to beinsufficient, additional analysis may be performed to determine thecompany’s country classification. In such circumstances, MSCI uses a setof rules, the most important of which are: The company's primary listing, secondary listings, if any, and the

geographic distribution of its shareholder base; The geographic distribution of its operations (in terms of assets and

production); The location of its headquarters; and The country in which investors consider the company to be most

appropriately classified.

The outcome of that analysis may lead to some companies not beingeligible for any MSCI country index if the country of classification resultingfrom the analysis remains different from the country of listing.

This may happen in particular, but not exclusively, for companiesincorporated in an EM country and having their only listing in a DM country.The MSCI Global Investable Market Indices Methodology handbook isreferred to for country specific cases.


Index construction and maintenanceEach index is constructed by first defining the equity universe, which isrepresented by listed equity securities of the reference market, includingReal Estate Investment Trusts (REITs). Mutual funds (other than BusinessDevelopment Companies), Exchange Traded Funds (ETFs), equityderivatives, limited partnerships, and most investment trusts are not eligiblefor inclusion.

Consequently, the Market Investable Equity Universe for the specificmarket is defined by applying investability screens to individual companiesand securities in the equity universe.

These involve, among others, minimum size requirements, minimum freefloat-adjusted market capitalization requirements, minimum liquidityrequirements, minimum liquidity requirements and minimum length oftrading requirements.

Exhibit 3 – The structure of the MSCI Global Investable MarketIndex family


The Market Investable Equity Universe is then segmented by size, so thatbased on free float adjusted market capitalization the standard indexcovers 85% ± 5%.

MSCI index maintenance involves semi-annual and quarterly index reviews. Semi-Annual Index Reviews occur in May and November and are aimed

at updating the indices on the basis of a fully refreshed equity universe Quarterly Index Reviews occur in February and August. These do not

involve a modification of the Market Investable Equity Universe, but afocus on the size-segment indices, with the aim of including significantnew eligible securities (such as IPOs that were not previously eligible forinclusion), allowing for significant moves of companies within the size-segment indices and reflecting the impact of significant market events.

In addition to this, ongoing event-related changes can also be made.Changes of this type are generally implemented in the indices as theyoccur. Significantly large IPOs are included in the indices after the closeof the company’s tenth day of trading.

More detailed information can be found in the MSCI Global InvestableMarket Indices Methodology handbook.

Market

Investable

Equity

Universe

Standard

IndexInvestable

Market

Index

Companiesnot meetingadditional

requirements

Small CapIndex

Mid CapIndex

Large Cap

Index

Equity

Universe


Section A: Global and Regional Indices

Constituents, sector and geographical analysis Four indices are reviewed as at 29.06.2012, with the following constituentsand market capitalisation as below:

Table 1 – General index statistics


Exhibit 4 – Sector exposure of indices, as at 29.06.2012

Source: CS ETF Sales Strategy, Credit Suisse Portfolio Management team, 29.06.2012.

In terms of sector exposure, the financial sector generally plays a prominentrole in all sector weightings of the indices in question with >20% ofallocation, while the healthcare sector is consistently down-played with<5% allocation across all the regional indices.

In terms of geographical exposure, the skew towards the largest countriesis strong for all regional indices, and particularly so for MSCI Latin America,where Brazilian names represents 59.4% of the index weight.

At index level, the broad-based MSCI EM index is generally wellrepresented by all industries, except the utilities sector (4%) and thehealthcare sector (1%).

In terms of geographical exposure, China (represented by Hong Kong H-shares) has the highest representation (17.7%), followed by Korea, Brazil andTaiwan with weights in the 11.0% to 15.2% range. South Africa, India, Russiaand Mexico follow next (8.0% to 5.0% range).

By virtue of the inherent skew towards Russia (27.7%), MSCI EM EMEA isweighted towards the energy sector with 25% of exposure, while industrieswith <5% of exposure are industrials (3%), utilities (3%) and informationtechnology (0%).

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MSCI EM MSCI EM AsiaMSCI EM EMEA MSCI Latam

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Regional indices overview, as at 29.06.2012

MSCI EM MSCI EMAsia

MSCI EMEMEA

MSCI LatAm

Market capitalisation (USD m) 3,367,946 2,016,548 608,251 743,147

Number of constituents 819 542 140 137

Number of countries 22 9 8 5


Conversely, MSCI EM Asia is skewed towards the information technologysector with 22% of allocation while underweighting the utilities sector (3%).Geographically, the index is skewed toward China (represented by HongKong H-shares), Korea and Taiwan – which in aggregate represent 73.3%of the index.

Finally, MSCI Latin America is primarily composed of Brazilian constituents(59.4%), weighted towards the materials sector with 21% exposure as wellas the consumer staples sector, with 16% exposure. The informationtechnology sector is not prominent in the Latin American index, with only2% of allocation.

Geographic snapshotExhibit 5.1 – Emerging Markets and EM AsiaIndices geographical breakdown, as at 29.06.2012

Source: CS ETF Sales Strategy, Credit Suisse Portfolio Management team, 29.06.2012

Exhibit 5.2 – EM Asia Indices geographical breakdown, as at 29.06.2012


China/Hong Kong 17.7%Korea 15.2%Brazil 13.1%Taiwan 11.0%South Africa 8.0%India 6.5%Russia 5.0%Mexico 5.0%Malaysia 3.6%Indonesia 2.7%Thailand 2.2%Chile 2.0%ADR/GDR 1.6%Turkey 1.7%Poland 1.4%Colombia 1.3%Philippines 0.9%Egypt 0.3%Czech Republic 0.3%Hungary 0.3%China 0.2%Morocco 0.1%Peru 0.1%

China 0.3%

Philippines 1.6%

Thailand 3.6%

Indonesia 4.5% Hong Kong 29.5%

Korea 25.4%

Taiwan 18.4%India 10.8%

Malaysia 5.9%


Exhibit 5.3 – EMEAIndices geographical breakdown, as at 29.06.2012


Exhibit 5.4 – Latin AmericaIndices geographical breakdown, as at 29.06.2012


Index evolution over time (Jan 2001 – Jun 2012)Compared to January 2001, the broad-based MSCI EM index now includesEgypt and Morocco, along with an increase in portfolio weighting of Koreafrom 8.8% to 15.2%. Mexico and China were deemphasized, with adecrease in index weighting of 4.1% and 6.0% respectively. At the sectorlevel, the energy stocks played a more prominent role in 2012, with anincrease of 7%, while the telecommunication services sector was reducedfrom a 16% to an 8% allocation.

The energy and telecommunication services sectors in MSCI EM Asia movedin the same direction with a 7% increase and 8% reduction in weighting,respectively. The financials sector also played a less prominent role with a7% decrease in weighting. In terms of geographical exposure, Korea andChina displayed significant changes with a 10.8% expansion and 10.0%contraction in weighting respectively compared to 2001.

MSCI EM EMEA is currently skewed towards Russia with a 16.4%increase and away from South Africa and Turkey with decreases of 10.8%and 6.8% allocation respectively. In terms of sector exposure, the energysector also played a more significant role (11% increase) in contrast to2001, where the information technology and materials sectors are nowless prominent (6% decrease).

Finally, MSCI Latin America is currently weighted towards the financialssector and the material sector with an increase of 8% and 7% respectively.The telecommunication sector is not as prominent, with a 16% decrease inallocation from 2001 to 2012. Geographically, the index has a significantlower weighting of Mexico (17.4% decrease), where Brazil played a muchprominent role with a 15.0% increase in exposure.


Morocco 0.5%

Hungary 1.6%

Czech Republic 1.7%

Russia 22.7% South Africa 44.1%

Egypt 1.9%

Poland 7.9%

ADR/GDR 5.3% Turkey 9.3%

Peru 0.3%

ADR/GDR 2.8%

Colombia 5.8%

Chile 9.0% Brazil 59.4%

Mexico 22.6%

Returns analysisThe risk/return profiles of the four indices are reviewed over the period Jan 2001 – Jun 2012.

Table 2 – Analysis of index performances for 02.01.2001 – 29.06.2012: risks and returns


Historical performance indications and financial market scenarios are no guarantee for current or future performance.

From the period of January 2001 to June 2012, the best performing index was MSCI EM Latin America, with the highest returns andCAGR in both relative and risk-adjusted terms (though also having the highest volatility). This index has consistently outperformed theothers reviewed here since 2005; and this observation is also reflected in the monthly absolute performance where the index, onaverage, has a higher value against its peers during bull periods but also a lower value during bear periods (i.e. the height of the2007/2008 financial boom and subsequent bust). MSCI EM, EM Asia and EM EMEA had relatively similar performance statistics inthe observed periods, with a CAGR range of 10.93%–12.07%, volatility range of 24.46% – 26.43% and risk-adjusted Sharpe ratiorange of 0.33 – 0.41. In the earlier years, (2001 – mid 2004), on average, the EM Asia index led while EM EMEA lagged in terms ofindex performance. The roles were reversed in the years leading up to the peak of 2007, with EM EMEA leading and EM Asia lagging.From then on, YTD, the broad-based MSCI EM index, on average, has consistently led, followed by EM Asia and lastly EM EMEA.

Exhibit 6 – Analysis of index performances for 02.01.2001 – 29.06.2012: indices level and monthly performances



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Monthly performance Monthly performanceMonthly performance Monthly performanceMSCI EM MSCI EM AsiaMSCI EM EMEA MSCI EM Latam

30%


Jan 2001 – Jun 2012, USDAverage risk free rate of the period: 2.11%

MSCI EM MSCI EM Asia MSCI EM EMEA MSCI EM LatAm MSCI AC World MSCI WorldReturns analysis

Cumulative Index Return 270.46% 242.03% 229.67% 450.02% 36.15% 27.70%

Compounded Annual Return 12.07% 11.29% 10.93% 15.99% 2.72% 2.15%

Average Annual Return 19.00% 17.51% 18.97% 25.30% 6.46% 5.64%

Max Annual Return 91.63% 86.42% 92.11% 105.92% 58.11% 54.30%

Min Annual Return -56.56% -58.97% -59.37% -54.98% -48.20% -47.12%

% of positive Annual Return 75% 76% 76% 71% 64% 64%

Risk measures

Volatility 24.46% 24.66% 26.43% 28.48% 17.47% 16.99%

Sharpe ratio 0.41 0.37 0.33 0.49 0.03 0.00

Volatility and correlation analysisThe rolling 12 month volatilities and correlations of the various MSCI EMregional indices over the period January 2001 – April 2012 were compared.On average, the MSCI EM Latin America index consistently shows thehighest volatility against the other benchmarks.

The broad MSCI EM index showed a relatively strong positive correlationwith EM Asia (consistently >0.80 over the analysed period), unsurprisinggiven that Asia constitutes approximately 40% of the MSCI EM index.

From a portfolio diversification standpoint, it is worth noting that during bullperiods, the correlation between the different regional pairs (Asia/EMEA,Asia/Latin America and EMEA/Latin America) shows significantdiversification potential with correlations of approximately <0.40 observedduring the lead-up to the peak of the 2007 financial boom and evenmagnitudes of <0.10 observed in 2002.

Table 4 – Analysis of index performances for 02.01.2001 –29.06.2012: Correlation matrix

Source: CS ETF Sales Strategy, Bloomberg, 29.06.2012, in USD




Monthly correlation matrix from 02 Jan 2001 – 29 Jun 2012

MSCI EM MSCI EMAsia

MSCI EMEMEA

MSCILatAm

MSCI ACWorld

MSCIWorld

MSCI EM 1.000 0.968 0.933 0.922 0.913 0.890

MSCI EM Asia 0.968 1.000 0.839 0.823 0.860 0.834

MSCI EM EMEA 0.933 0.839 1.000 0.869 0.882 0.864

MSCI LatAm 0.922 0.823 0.869 1.000 0.869 0.850

MSCI AC World 0.913 0.860 0.882 0.869 1.000 0.998

MSCI World 0.890 0.834 0.864 0.850 0.998 1.000

Exhibit 7 – Analysis of index performances for 02.01.2001 – 29.06.2012: 12 months rolling volatilities


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MSCI EM MSCI EM AsiaMSCI EM EMEA MSCI EM Latam

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 101

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Jan 2001 – Jun 2012, USD

MSCI EM MSCI EM Asia MSCI EM EMEA MSCI EM LatAm MSCI AC World MSCI WorldCumulative Index Return 270.46% 242.03% 229.67% 450.02% 36.15% 27.70%

Volatility 24.46% 24.66% 26.43% 28.48% 17.47% 16.99%

Exhibit 8 – Analysis of index performances for 02.01.2001 – 29.06.2012: 12 month rolling correlations


Section B: Country Specific Indices

Constituents and sector analysis

We review the eight country specific indices as at 29.06.2012, with constituents and market capitalisation as below:

Table 5 – General index statistics


Exhibit 9 – Indices sector exposure, as at 29.06.2012

Source: CS ETF Sales Strategy, Credit Suisse Portfolio Management team, 29.06.2012

This is an indicative asset allocation, which may change over time.

Overview of country specific indices, as at 29.06.2012

MSCI Brazil

MSCI Russia

MSCI India

MSCI Chile

MSCI Mexico

MSCI S.Africa

MSCI S.Korea

MSCI Taiwan

Market capitalisation (USD m) 441,354 200,762 217,669 66,978 168,283 267,964 511,233 370,446

Number of constituents 78 26 73 20 21 50 105 114

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Reviewing the MSCI country specific indices information above, theconsumer discretionary sector has reasonable allocations in Korea (18%)and South Africa (16%), while the rest of the remaining country indiceshave <10% of allocation.

The consumer staples sector sees sizable allocations in Mexico (31%),Brazil (13%) and Chile (11%), while Russia and Taiwan have <5% ofallocation.

The Russian index is dominated by the energy sector, making up 58% ofweighting allocation. Brazil also has a sizable 18% of weighting assigned,while Chile, Mexico, Korea and Taiwan have <5% of allocation.

The financial sector is generally well represented across all country indices,except for Mexico (9%).

Understandably, given the nature of emerging nations, the healthcaresector is generally underweighted with <6% of allocation across all thecountry indices.

The relatively smaller industrials sector sees allocations in Chile of 20%and Korea of 13%, while the rest of the remaining country indices have<6% allocation.

The Asian indices comprised of Korea, Taiwan and India are led by theinformation technology sector, with 33%, 55% and 16% weightingallocated respectively.

The materials sector is present across all the country indices, ranging from thelowest allocation of 9% in India to the highest of 21% in Brazil and SouthAfrica.

The Mexican index has substantial weighting of 30% in the telecommunicationservices sector followed by South Africa (12%) and Russia (8%), while therest of the remaining country indices have allocations of <6%.

The utilities sector is only prominent in the Chilean index at 25%, with<8% of allocation across the rest of the remaining country indices.

Index evolution over time (Jan 2001 – Jun 2012)Compared to the sector composition of the country-specific indices in January2001, the financials sector in MSCI Brazil increased by 12% in weighting,where telecommunication services had 18% reduction in allocation. Variationacross the other sectors were minimal (<5% change) over time.

MSCI Russia had a significant increase in financial and material sectorweightings with a 15% and 7% allocation increase respectively, where theenergy (73% to 58%) and utility (19% to 4%) sectors were not asprominent in 2012.

The MSCI India index is currently weighted towards the financial sectorwith a 19% increase as well as the energy sector with 9% increase; whilethe consumer staples and information technology sectors were down-played with 13% and 11% decrease respectively.

The material and industrial sectors in the MSCI Chile index both increasedin allocation by 7% and 6% respectively, while the consumer staples andtelecommunication services sectors appeared to be less significant with a7% and 13% weighting decline.


MSCI Mexico increased its allocation on consumer staples by 15% as wellas the material sector by 6%, while the consumer discretionary sectorweighting decreased 11%.

MSCI South Africa increased its weighting towards the consumerdiscretionary and telecommunication services sectors with a 12% and 7%increase in allocation respectively. The information technology and materialsectors were not as prominent in the index with an 11% and 10%reduction, respectively.

The consumer discretionary and industrial sectors increased in weighting in theMSCI Korea index by 12% and 9% respectively, while the telecommunicationservices and utilities sectors diminished in allocation by 22% and 11%.

The telecommunication services sector emerged in the MSCI Taiwan indexwith a significant weighting of 6% in the index (there were zero allocationto this sector in 2001). Changes in the other sectors remain insignificant.

Returns analysisThe risk/return profile of the eight single country emerging market indicesare reviewed over the period Jan 2001 – Jun 2012.

From the period of January 2001 to June 2012, the top three bestperforming indices were (in order of highest cumulative index return): MSCIRussia, MSCI Mexico and MSCI Korea. From a risk-adjusted perspective,the three best performing indices were (in order of highest Sharpe ratio):MSCI Mexico, MSCI Chile and MSCI South Africa. In the years leading upto the peak of 2007, on average, index performance was clearly led by theMSCI Russia and MSCI Korea indices. Post 2008 financial crisis YTD,MSCI Brazil and Russia emerged on top. Overall, the Taiwan index hasalmost consistently underperformed its peers as well as the peer averageon an absolute, relative and risk-adjusted basis in the analysed timeframe.




Jan 2001 - Jun 2012, USD

Average risk free rate of the period: 2.11%

MSCI Brazil

MSCIRussia

MSCI India

MSCI Korea

MSCI S.Africa

MSCI Chile

MSCIMexico

MSCITaiwan

Average

Returns analysis

Cumulative Index Return 419.81% 476.40% 287.41% 434.74% 390.42% 406.00% 470.39% 62.62% 368.47%

Compounded Annual Return 15.42% 16.46% 12.50% 15.70% 14.83% 15.15% 16.35% 4.32% 13.84%

Average Annual Return 30.87% 27.04% 24.33% 22.20% 20.40% 21.41% 20.65% 9.32% 22.03%

Max Annual Return 129.38% 135.60% 121.64% 106.41% 82.33% 98.24% 102.75% 86.30% 107.83%

Min Annual Return -56.72% -74.50% -65.33% -63.25% -51.35% -42.52% -56.42% -51.27% -57.67%

% of positive Annual Return 69% 80% 71% 76% 75% 71% 72% 67% 73%

Risk measures

Volatility 37.23% 35.86% 31.76% 31.46% 27.61% 23.44% 24.79% 27.40% 29.94%

Sharpe ratio 0.36 0.40 0.33 0.43 0.46 0.56 0.57 0.08 0.40


Exhibit 10 – Analysis of index performances for 02.01.2001 – 29.06.2012: indices level and monthly performances



Volatility and correlation analysisThe rolling 12 month volatilities and correlations of the various MSCI EM country indices over the period January 2001 – April 2012were compared. The most volatile indices in the measured timeframe (in order of highest volatility) were Brazil, Russia, India andKorea. All four have volatilities exceeding the peer average of 29.94%.




From a portfolio diversification perspective, investing in different geographic countries would theoretically provide diversificationbenefits by virtue of macro and micro economic dynamics, political factors, etc. However, worth noting that country pairs with astrong positive correlation of >0.75 (and therefore provide limited diversification benefits) over the measured timeframe wereBrazil/Russia, Russia/Mexico, Russia/South Africa and Russia/Korea.

Table 8 – Analysis of index performances for 02.01.2001 – 29.06.2012: Correlation matrix



Jan

12

Jul 1

1

Jan

11

Jul 1

0

Jan

10

Jul 0

9

Jan

09

Jul 0

8

Jan

08

Jul 0

7

Jan

07

Jul 0

6

Jan

06

Jul 0

5

Jan

05

Jul 0

4

Jan

04

Jul 0

3

Jan

03

Jul 0

2

Jan

02

Jul 0

1

Jan

01

0

200

400

600

800

1000

1200

1400

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

MSCI Brazil Monthly performance MSCI Russia monthly performanceMSCI India monthly performance MSCI Korea monthly performanceMSCI South Africa Monthly performance MSCI Chile Monthly performanceMSCI Mexico Monthly performance MSCI Taiwan Monthly performanceMSCI Brazil MSCI RussiaMSCI Korea MSCI South AfricaMSCI Mexico MSCI TaiwanMSCI Chile MSCI India

Jan 2001 - Jun 2012, USD

MSCI Brazil

MSCIRussia

MSCI India

MSCI Korea

MSCI S. Africa

MSCI Chile

MSCIMexico

MSCITaiwan

Average

Cumulative Index Return 419.81% 476.40% 287.41% 434.74% 390.42% 406.00% 470.39% 62.62% 368.47%

Volatility 37.23% 35.86% 31.76% 31.46% 27.61% 23.44% 24.79% 27.40% 29.94%

Monthly Correlation matrix from 02 Jan 2001 - 29 Jun 2012

MSCI Brazil

MSCI Russia

MSCI India

MSCI Chile

MSCI Mexico

MSCI S. Africa

MSCI Korea

MSCI Taiwan

MSCI Brazil 1.000 0.882 0.656 0.677 0.711 0.689 0.625 0.618

MSCI Russia 0.882 1.000 0.645 0.727 0.845 0.795 0.812 0.649

MSCI India 0.656 0.645 1.000 0.619 0.625 0.692 0.675 0.602

MSCI Chile 0.677 0.727 0.619 1.000 0.680 0.608 0.599 0.584

MSCI Mexico 0.711 0.845 0.625 0.680 1.000 0.712 0.731 0.634

MSCI S. Africa 0.689 0.795 0.692 0.608 0.712 1.000 0.687 0.558

MSCI S. Korea 0.625 0.812 0.675 0.599 0.731 0.687 1.000 0.739

MSCI Taiwan 0.618 0.649 0.602 0.584 0.634 0.558 0.739 1.000


Exhibit 11 – Analysis of index performances for 02.01.2001 – 29.06.2012: 12 months rolling volatilities


Exhibit 12 – Analysis of index performances for 02.01.2001 – 29.06.2012: 12 month rolling correlations


1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 101

105

109

113

117

121

125

80%

70%

60%

50%

40%

30%

20%

10%

0%

MSCI Brazil MSCI Russia MSCI India MSCI Korea MSCI South Africa MSCI Chile MSCI Mexico MSCI Taiwan

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Correlation 12mth BRAvsRUS Correlation 12mth BRAvsIND Correlation 12mth BRAvsKOR Correlation 12mth BRAvsZAR Correlation 12mth BRAvsCHIL Correlation 12mth BRAvsMEX Correlation 12mth BRAvsTW Correlation 12mth RUSvsIND Correlation 12mth INDvsKOR Correlation 12mth INDvsZAR Correlation 12mth INDvsCHIL Correlation 12mth INDvsMEXCorrelation 12mth INDvsTW Correlation 12mth KORvsZAR Correlation 12mth KORvsCHIL Correlation 12mth KORvsMEX Correlation 12mth KORvsTW Correlation 12mth RUSvsKOR Correlation 12mth RUSvsZAR Correlation 12mth RUSvsCHIL Correlation 12mth RUSvsMEX Correlation 12mth RUSvsTW Correlation 12mth ZARvsCHIL Correlation 12mth ZARvsMEXCorrelation 12mth ZARvsTW Correlation 12mth CHILvsMEX Correlation 12mth CHILvsTW Correlation 12mth MEXvsTW

12512111711310910510197938985817773696561575349454137332925211713951


Style analysisThe 12 indices were reviewed with Barra GEM2 model, which applies riskfactor models to the analysis of global equity portfolio risk.

We selected the MSCI All Country World Standard Index (ACWI) as ourestimation universe2. This index includes, under the MSCI GlobalInvestable Market Indices definitions, large and mid cap for the globalMSCI universe, covering both developed and emerging markets.

Our factors measure any bias or tilt the analyzed indices have with respectto such universe, as at the end of June 2012.

As at such date, the MSCI ACWI included 2,445 constituents – of which1,776 belonging to developed markets and 669 to emerging markets.

The total market cap of the index was of USD 26.93 trn.

The weights of developed market names vs emerging market names in theACWI at the same date was of 89.90% vs. 10.10%.

The model analyzes eight style factors but for the sake of simplicity theNon-Linear Size (NLS) effect is excluded from this analysis, and focus isgiven to the remaining seven factors3:

1. Volatility: Captures relative volatility using measures of both long-termhistorical volatility (such as historical residual standard deviation) andnear-term historical volatility (such as high-low price ratio, daily standarddeviation, cumulative range over the last 12 months)

2. Momentum: Captures sustained relative performance and its effect on risk3. Size: Captures systematic return and risk differences between large-cap

and small-cap stocks4. Value: Distinguishes between value stocks and growth stocks, capturing

the extent to which a stock is priced inexpensively in the market5. Growth: Characterizes a firm’s growth in a number of aspects,

particularly earnings based on payout ratio, capital structure, etc.6. Liquidity: Describes return differences of stocks based on their relative

trading activity7. Financial Leverage: Measures the firm’s financial leverage

Reference is made to the MSCI Barra Aegis methodology book for adetailed explanation of the underlying models and of the metrics.

For the scope of this paper it is sufficient to consider that factors areexpressed in standard deviation terms.

For each factor, the relative metric of each index component (stock I, s_i)is measured (ms_i). As an example, for the size factor, the logarithm ofmarket capitalization of each stock included in the index is considered, asat the date of the analysis.

Then, the difference between ms_i and the average metric for theestimation universe (mavg_universe) is calculated, and divided by thestandard deviation of the metric distribution across the estimation universe.

The weighted sum4 of the resulting single stocks score over the index isthen calculated – resulting in the index score showed in exhibits 13, 14.

A score of 0.2 or more in magnitude can be considered as a significantactive style bet, compared to the chosen estimation universe.

2 As defined in the MSCI Barra Aegis methodologybook.

3 Source: MSCI Barra.4 Based on the weights each index component

is assigned in the index.


Global and regional exposuresThe global index, as per its nature as the parent set of the whole EMuniverse, ranks below the score threshold of 0.2 for all seven factors.

The MSCI EM EMEA is negatively exposed to momentum, ranking at thelowest among the four indices in this respect.

Several of the indices analyzed here rank negatively in terms of this factor,although with different magnitudes; this resonates with the widespreadunderperformance of emerging markets vs. developed markets over thelast two years, where – as a proxy – the MSCI EM index underperformedthe MSCI World index (developed markets only) by 11.46%5 and 3.29%6

in total return terms, in USD (the weights of developed market names vsemerging market names in the ACWI is of 89.90% vs. 10.10%).

The MSCI EM Latin America is positively exposed to liquidity – showing aninteresting angle for clients wishing to add return and diversification to theirallocation, with an eye on trading.

The MSCI EM Asia doesn’t show particular skews with respect to theuniverse of the ACWI.

Single country exposuresAt single country level, the analysis is more complex.

MSCI Russia appears to be more volatile than the reference universe; andskewed towards large cap – this being in our opinion a result of itsconcentration in terms of names (26, as at 29.06.2012). It ranks verynegatively in terms of momentum, as a result of its underperformance of19.84% vs. the ACWI in the period June 11–12 (total return, USD) terms).

MSCI South Africa appears to be more liquid than the universe, andsignificantly less volatile, therefore representing an appealing play forinvestors.

MSCI Brazil is equally positive in liquidity, as is MSCI Mexico.

Exhibit 13 – Factor analysis of MSCI EM, MSCI EM EMEA, MSCIEM Latin America and MSCI EM Asia when compared to the MSCIAll Country World Standard Index as at end of May 2012

Source: CS ETF Sales Strategy, MSCI Barra Aegis, 29.06.2012.

5 From 30.06.2011 to 30.06.20126 From 30.06.2010 to 30.06.2011

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

MSCI EM MSCI EM EMEAMSCI EM Lat Am MSCI EM Asia

VolatilityValueSizeMomentumLiquidityGrowthFinancialLeverage

0.3


Exhibit 14 – Factor analysis of S&P 500, MSCI USA, DJ IndustrialAverage, Nasdaq 100, MSCI USA LC and MSCI USA SC whencompared to the MSCI USA IMI as at 29.06.2012

Source: CS ETF Sales Strategy, MSCI Barra Aegis, 29.06.2012.

MSCI Chile is much less volatile than the universe (at levels similar to thoseshown for South Africa) and appears to be skewed towards smaller capnames with respect to the ACWI.

MSCI India is the index that ranks at the lowest in terms of momentum, asa result of its underperformance of 13.51% vs. the ACWI in the periodJune 11–12 (total return, USD) terms).

Finally, MSCI Korea is more volatile than the universe while the MSCITaiwan also shows a negative exposure to Momentum.

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

MSCI Russia MSCI South AfricaMSCI Brazil MSCI ChileMSCI Mexico MSCI IndiaMSCI Korea MSCI Taiwan

VolatilityValueSizeMomentumLiquidityGrowthFinancialLeverage

0.6


Global and Regional Indices

European listed and domiciled ETFs availableETFs domiciled and listed in Europe provide several instruments to accessthe four indices analyzed here.

As at 29.06.2012, we counted a total of 30 European listed and domiciledETFs tracking MSCI regional EM indices, 16 of which replicate the broadMSCI EM index, four of which tracks the MSCI EM Asia index, three onthe MSCI EM EMEA index and seven on the MSCI EM Latin Americaindex. The total assets under management, as at the same date,amounted to USD 16,423m.

Exhibit 15 – Overview of European listed and domiciled ETFstracking MSCI Regional EM indices – AUM as at 29.06.2012, inUSD, per benchmark


The majority of the total regional assets were invested in the 16 MSCI EMtrackers, representing a total of USD 14,040m, out of which the top 5MSCI EM trackers alone made up 87% of the AUM and are all >USD500m in size.

CS ETF (IE) on MSCI Emerging Markets is the third largest physicallyoptimised ETF on this benchmark with assets of USD 1,357m.

The second most popular benchmark by AUM is the MSCI EM Asia index,attracting a total of USD 1,4261m; of which a single tracker made up86% of the AUM alone.

CS ETF (IE) on MSCI EM Asia is the third largest physically optimised ETFmanaging assets of USD 61m and the fund does not currently engage insecurities lending activities.

MSCI EM Latin America trackers garnered a total AUM of USD 1,004m,where the top three funds made up 93% of the total AUM.

CS ETF (IE) on MSCI EM Latin America is the fifth largest physicallyoptimised ETF managing assets of USD 20m and the fund does notcurrently engage in securities lending activities.

The MSCI EM EMEA benchmark space is relatively small, with total AUM ofUSD 118m; of which the largest tracker made up 81% of the AUM alone.

CS ETF (IE) on MSCI EM EMEA is the third largest swap-based ETFmanaging assets of USD12m and the fund does not currently engage insecurities lending activities.

MSCI EM Latin America6%

MSCI EM Asia8%

MSCI EM EMEA1%

MSCI EM85%


Country Specific Indices

European listed and domiciled ETFs availableETFs domiciled and listed in Europe offer several instruments to accessthe eight indices analyzed here.

As at 29.06.2012, we counted a total of 35 European listed and domiciledETFs tracking MSCI country EM indices, 16 of which replicate the broadMSCI EM index, six of which track the MSCI Brazil index, five on the MSCIRussia index, five on the MSCI India index, five on the MSCI Korea index, sixon the MSCI Taiwan index, three on the MSCI Mexico index, three on theMSCI S. Africa index and two on the MSCI Chile index. The total assets undermanagement, as at the same date, amounted to USD 4,297m.

Exhibit 16 – Overview of European listed and domiciled ETFstracking MSCI Country specific EM indices – AUM as at29.06.2012, in USD, per benchmark


The two largest country specific EM indices by AUM are MSCI India withUSD 1,145m, of which a single ETF made up 89% of the total alone; andMSCI Brazil with total AUM of USD 1,059m.

CS ETF (IE) on MSCI India is the third largest swap-based fund managingassets of USD 41m; while CS ETF (IE) on MSCI Brazil is the third largestfull physically replicated fund, with AUM of USD79m. Neither fundcurrently engages in securities lending activities.

MSCI Russia trackers garnered a total AUM of USD 558m, with the toptwo funds making up 88% of the total AUM.

CS ETF (IE) on MSCI Russia ADR/GDR is the second largest fullphysically replicated fund, with total assets of USD 179m, and does notcurrently engage in securities lending activities.

The AUM of Asian benchmarks based on the MSCI Korea and MSCITaiwan indices totaled a sizable USD 1,244m.

CS ETF (IE) on MSCI Korea is a full replication physical fund with a totalAUM of USD 30m; while CS ETF (IE) on MSCI Taiwan is a swap-basedfund managing assets of USD 19m. Neither tracker currently engages insecurities lending activities.

Trackers based on the indices of MSCI South Africa, Mexico and Chilemanaged relatively low AUM, totaling USD 292m; a predictable finding giventhat the space is still relatively young with a smaller number of available funds.

MSCI Russia13%

MSCI Korea18%

MSCI Mexico3%

MSCI Chile1%

MSCI India27%

MSCI Brazil25%

MSCI Taiwan11%

MSCI South Africa3%


CS ETF (IE) on MSCI South Africa is the largest full physical replicationfund with total AUM of USD 63m; CS ETF (IE) on MSCI Mexico Cappedand CS ETF (IE) on MSCI Chile are the largest full replication funds withtotal assets of USD 70m and USD 47m, respectively. None of these fundscurrently engage in securities lending activities.

Global and Regional Indices

Exhibit 17 – Overview of European listed and domiciled ETFstracking MSCI EM as at 29.06.2012, in USD


Exhibit 18 – Overview of European listed and domiciled ETFstracking MSCI EM Latin America as at 29.06.2012, in USD


Start Date 30.12.2011

End Date 29.06.2012

AUM as of EndDate (USD, mn)

In/Out flows of the period (USD, mn)

Total 14,040 820

ISHARES MSCI Emerging Mkts 5,299 314

DB X-TRACKERS Emerg Market 3,483 -207

CS ETF ON MSCI Emerging Mrkt 1,357 224

LYXOR ETF MSCI Emer Mkts-A 1,113 20

UBS MSCI Emg Mkt TRN $ A-ACC 964 -150

AMUNDI ETF MSCI Emerging Mkt 260 131

AMUNDI ETF MSCI Emerging M-A 260 131

MSCI Emerg Market Source ETF 258 82

HSBC MSCI Emerging Markets E 294 154

ISHARES MSCI Emer Mkts ACC 209 89

UBS MSCI Emg Mkt TRN $ I-ACC 143 -11

COMSTAGE ETF MSCI Enr Mkts 139 –

UBS MSCI Emerging Market I 135 14

UBS-ETF MSCI Emer Markets A 72 24

LYXOR ETF MSCI Emerging Mrkt 28 0

SPDR MSCI Emerging Markets 26 4


End Date 29.06.2012

AUM as of End Date (USD, mn)

In/Out flows of theperiod (USD, mn)

Total 1,004 166

DB X-TRACKERS MSCI EM Latin 423 54

ISHARES MSCI EM Lat America 361 80

LYXOR ETF MSCI EM Lat Amer-C 152 35

AMUNDI ETF MSCI EM Latam 29 –

CSETF ON MSCI EM Lat. America 20 -3

HSBC MSCI EM Latin America 16 –

LYXOR ETF MSCI EM LAT AM 3 –


Exhibit 19 – Overview of European listed and domiciled ETFstracking MSCI EM Asia as at 29.06.2012, in USD


Exhibit 20 – Overview of European listed and domiciled ETFstracking MSCI EM EMEA as at 29.06.2012, in USD


Country Specific Indices

Exhibit 21 – Overview of European listed and domiciled ETFstracking MSCI Brazil as at 29.06.2012, in USD



End Date 29.06.2012



Total 1,261 -129

DB X-TRACKERS MSCI EM Asia 1,079 -177

SPDR MSCI EM Asia ETF 94 69

CS ETF on MSCI EM Asia 61 -16

AMUNDI ETF MSCI EM Asia 26 -5


End Date 29.06.2012



Total 118 -22

DB X-TRACKERS MSCI EM EMEA 95 -25

SPDR MSCI EM Europe ETF 11 4

CS ETF on MSCI EM EMEA 12 –


End Date 29.06.2012



Total 1,059 69

ISHARES MSCI Brazil 681 46

DB X-TRACKERS MSCI Brazil 233 21

CS ETF on MSCI Brazil 79 51

AMUNDI ETF MSCI BR 42 -41

MSCI Brazil Source ETF 13 -7

HSBC MSCI Brazil ETF 12 –


Exhibit 22 – Overview of European listed and domiciled ETFstracking MSCI Russia as at 29.06.2012, in USD


Exhibit 23 – Overview of European listed and domiciled ETFstracking MSCI India as at 29.06.2012, in USD


Exhibit 24 – Overview of European listed and domiciled ETFstracking MSCI Chile as at 29.06.2012, in USD


Exhibit 25 – Overview of European listed and domiciled ETFstracking MSCI Korea as at 29.06.2012, in USD



End Date 29.06.2012



Total 558 118

DB X-TRACKERS MSCI Rus CPD 315 25

CS ETF on MSCI Rus ADR/GDR 179 87

ISHARES MSCI Russia Capped 24 -1

HSBC MSCI Russia Capped ETF 23 8

ComStage ETF MSCI Russ 30-1 18 –


End Date 29.06.2012



Total 1,145 -20

LYXOR ETF MSCI India 1,020 -13

AMUNDI ETF MSCI India 69 –

CS ETF on MSCI India 41 4

DB X-TRACKERS MSCI India 14 1

MSCI India Source ETF 1 -11


End Date 29.06.2012



Total 47 1

CS ETF on MSCI Chile 42 1

DB X-TR MSCI Chile TRN Index 5 –


End Date 29.06.2012



Total 781 -130

ISHARES MSCI Korea 490 -71

DB X-TRACKERS MSCI Korea TRN 142 -40

LYXOR ETF Korea 117 -31

CS ETF on MSCI Korea 30 11

HSBC MSCI Korea ETF 3 –


Exhibit 26 – Overview of European listed and domiciled ETFstracking MSCI Mexico as at 29.06.2012, in USD


Exhibit 27 – Overview of European listed and domiciled ETFstracking MSCI South Africa as at 29.06.2012, in USD


Exhibit 28 – Overview of European listed and domiciled ETFstracking MSCI Taiwan as at 29.06.2012, in USD


For more information, please contact your local CS ETFs team, or visitwww.csetf.com. Further information is also found on the CS ETFBloomberg page: CXTF <GO>


End Date 29.06.2012



Total 112 21

CS ETF on MSCI Mexico Capped 70 10

DB X-TRACKERS MSCI Mexico 33 9

HSBC MSCI Mexico Capped ETF 9 2


End Date 29.06.2012



Total 133 51

CS ETF on MSCI South Africa 63 43

ISHARES MSCI South Africa 61 6

HSBC MSCI South Africa ETF 8 3


End Date 29.06.2012



Total 463 -60

ISHARES MSCI Brazil 298 -9

DB X-TRACKERS MSCI Brazil 58 -39

CS ETF on MSCI Brazil 43 2

AMUNDI ETF MSCI BR 36 –

MSCI Brazil Source ETF 19 -14

HSBC MSCI Brazil ETF 10 –


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