reaching for the new gold standard of investing · pdf file400 500 600 700 800 2008 2009 ytd...

© 2010 Northern Trust Corporation northerntrust.com

NORTHERN TRUST2010 INSTITUTIONAL CLIENT CONFERENCE

Reaching for the New Gold Standard of Investing

Emerging & Frontier MarketsExpanding the Opportunity Set

Greg Behar

Senior Investment Strategist

Patrick Dwyer

Senior Portfolio Manager

Julia Bristow Briggs

Senior Investment Relationship Manager

Moderator:

Presenters:

http://www.northerntrust.com/


Welcome




3 2010 Institutional Client Conference

Client Perspective…

A. Yes

B. In process

C. No

Have you increased your International

equity exposure in the last 6-12 months?



A. Increased Index exposure

B. Increased Active exposure

C. No change in my policy

Have you changed your International

strategies between active and passive?



A. 0-5%

B. 5-10%

C. 10-15%

D. > 15%

What is your current Emerging Markets’

allocation as a percentage of your

overall equity exposure?


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.

Frontier Markets

0.4%

U.S. Small Cap6.3%

EAFELarge/Mid Cap

34.6%

U.S.Large/Mid Cap

36.9%

International DevelopedSmall Cap

5.1%

EmergingMarkets

Small Cap1.7%

CanadaLarge/Mid

Cap3.9%

Global Equity Opportunity Set

EmergingMarkets

Large/Mid 11.5%

U.S. Equity 43.2% International Equity 56.8%

Expanded Universe

Defining the Global Equity Opportunity Set


Global Institutional Fund Flows 2008 through 2010

US$ Million US$ Million US$ Million

Source: eVestment Alliance, EPFR Global, YTD as of 8/31/10

-100

0

100

200

300

400

500

600

700

800

2008 2009 YTD

Frontier Markets

-215,000

-165,000

-115,000

-65,000

-15,000

35,000

85,000

2008 2009 YTD

Active Equity Index Equity

-160000

-140000

-120000

-100000

-80000

-60000

-40000

-20000

0

20000

40000

2008 2009 YTD

US Equity

EAFE Equity

Emerging Mkts Equity

ACWI ex US Equity

Fu

nd

Flo

ws


Global Equity Market Performance Review

2008 2009 YTD

Definitions: DISC = Developed International Small Cap

EM = Emerging Markets

EM SC = Emerging Markets Small Cap

FM = Frontier Markets

W x US = World ex USSource: Factset,, MSCI, S&P, Northern Trust. Dat as of 9/30/2010

S&P

50

0

Wld

x U

S

DIS

C

DIS

C

EM

EM

EM S

C

EM S

C

Wo

rld

ex

US

SP 5

00

FM

FM

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

-43.23

-55.44-52.47

-58.74

-36.98

-53.43

34.33

47.91

78.45

114.16

26.47

11.95

DIS

C

EM EM S

C

SP 5

00

FM

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

WxU

S

3.89

1.66

10.3310.75

17.84

14.60

Re

turn

s


Developed Intl Small Cap

EAFE

S&P 500

Russell 2000

EmergingMarket

Emerging MarketSmall Cap

Frontier

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

14.0% 16.0% 18.0% 20.0% 22.0% 24.0% 26.0% 28.0%

An

nu

ali

zed

Retu

rn

Annualized Risk

Risk Return CharacteristicsJune 2000 - June 2010

Redefining the International Market Structure

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


Diversification Benefits of the Global Opportunity Set

The MSCI EAFE had a 54% correlation to the S&P 500 from 1990-2000

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 6/30/2010

10 Years (2000-2010)

S&P 500

S&P 500 1.00

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 0.58

7 Years (2000-2007)

S&P 500

S&P 500 1.00

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


Global Market Capitalization Review

Source: MSCI, Northern Trust, data as of 8/31/10

0.0

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

30,000.0

35,000.0

USA World ex USA Emerging Markets

1% (Emerging Markets)

13% (Emerging Markets)


1990 2010

Dubai and Shanghai Infrastructure Growth

Source: (Shanghai images): Business Insider, 6/7/2010 Source: (Dubai images): Dubai-information-site.com

Shanghai

Dubai

1990 2003


Developing Markets Have a High Economic Growth Potential


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.

Less Mature Capital Markets Leave Room for Growth

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.

0

20

40

60

80

100

Frontier Emerging Developed

Median Stock Market Capitalization as % of GDP




Emerging & Frontier Markets

Defining These Markets



Defining Emerging Small Cap and Frontier Markets

Source: S&P, MSCI, Northern Trust, data represents full market capitalization . Data as of 9/30/10

Market Cap Data listed in USD Millions

Median Market

Cap

Market Cap

Range # of Securities

MSCI Emerging Markets $4,848 $558 - 205,319 754

MSCI Emerging Markets Small Cap $411 $51 - 3,718 1,879

S&P Frontier Extended 150 $1,868 $93 - 83,127 150


Country Comparison – Emerging Markets vs. EM Small Cap

Source: Northern Trust, MSCI. Data as of 6/30/10

0% 5% 10% 15% 20%

Brazil

Chile

China

Colombia

Czech Republic

Egypt

Hungary

India

Indonesia

Korea

Malaysia

Mexico

Morocco

Peru

Philippines

Poland

Russia

South Africa

Taiwan

Thailand

Turkey

Country Weight in MSCI EM Country Weight in MSCI EM Small Cap



A. Consumer discretionary

B. Industrials

C. Energy

D. All of the above

Emerging Markets Small Cap is underweight

relative to Emerging Markets Large Cap in

what sector?


Sector Comparison – Emerging Markets vs. EM Small Cap

Source: Northern Trust, MSCI. Data as of 6/30/10

0% 5% 10% 15% 20% 25% 30%

Consumer Discretionary

Consumer Staples

Energy

Financials

Health Care

Industrials

Information Technology

Materials

Telecommunication Services

Utilities

MSCI EM MSCI EM Small Cap


Emerging Markets Increasing Share of Consumer Spending

CONSUMER SPENDING - % OF GLOBAL TOTAL

20

24

28

32

36

40

1990 1994 1998 2002 2006 2010

EMERGING MARKETS

UNITED STATES

Source: JP Morgan, United Nations report. Data through 2009; 2010 estimate


Next Frontier of Capital Investing

Europe Africa Middle East Asia Americas

Bulgaria

Croatia

Cyprus

Estonia

Georgia

Latvia

Lithuania

Romania

Slovak Republic

Slovenia

Ukraine

Botswana

Ghana

Ivory Coast

Kenya

Mauritius

Namibia

Nigeria

Tunisia

Zambia

Bahrain

Jordan

Kuwait

Lebanon

Oman

Qatar

UAE

Bangladesh

Cambodia

Pakistan

Kazakhstan

Sri Lanka

Vietnam

Argentina

Colombia

Ecuador

Jamaica

Panama

Trinidad and Tobago

The “Frontier” Countries

Defined By S&P and MSCI

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


Frontier Markets Regional Weight Comparison

Diversification

Investability

Liquidity

Source: Northern Trust, MSCI, S&P, As of 8/31/10

S&P BMI Frontier: S&P Broad Market Index Frontier

Not all Frontier Market benchmarks are created equal

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 183 150 615

Frontier Markets Regional Breakdown



A. Energy

B. Financials

C. Telecommunications

D. Materials

Which sector has the largest weight in

Frontier Markets?


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 500 39.70%

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 500 69.63%

Source: Northern Trust, Bloomberg June 2005 to June 2010

Source: Northern Trust, Bloomberg June 2005 to June 2010


Sector Comparison – Frontier Markets vs. Emerging Markets

Economic development theme – overweight Financials and Telecoms

Not dominated by commodity stocks – underweight Energy and Materials

Source: Northern Trust, S&P, MSCI. Data as of December 2009

*S&P Extended Frontier 150 excludes Colombia

0% 10% 20% 30% 40% 50% 60%

Consumer Discretionary

Consumer Staples

Energy

Financials

Health Care

Industrials

Information Technology

Materials

Telecommunication Services

Utilities

MSCI EM S&P Extended Frontier 150*


Masai Warriors

Source: photographersdirect.com, telegraph.co.uk, rajatgupta.wordpress.com





Complexities of Investing



Complexities of Developing Market Investing

Critical areas of focus

Operational risks

Regulatory / market risks

Economic and trade sanction screening

Transaction Costs


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


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


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


Emerging and Frontier Markets – Transaction Costs

Frontier Markets Transaction Costs

Higher commissions, fees, and taxes

Wider spreads

Lower liquidity

Higher turnover

Transaction costs must be an integral component in the management of

frontier markets strategies.





Gaining exposure



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


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.




Thank you.

Greg Behar

Senior Investment Strategist

Patrick Dwyer

Senior Portfolio Manager

Julia Bristow Briggs

Senior Investment Relationship Manager

Moderator:

Presenters:


reaching for the new gold standard of investing · pdf file400 500 600 700 800 2008 2009 ytd...

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