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Alpha/Beta
The Outlook For Emerging Markets …
And How To Play Them With ETFs
Live Webinar
February 24, 2011 2-3 p.m. EDT
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
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
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
Weekly flows into Fund Groups since Q3 2010
• 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
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
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
Comparison of Emerging Market Regional Indicies
MSCI Country Indices
P/BV
P/E
P/CE
Div. Yield
ROE
EPS
ASIA APEX MC 50
1.81
14.20
11.21
1.77
12.72
87.06
ASIA APEX SC 200
1.82
17.50
11.96
2.13
10.39
89.07
1.97
13.28
8.68
2.11
14.86
25.94
BRIC
• BRIC countries are reasonably
valued relative to Emerging Markets
as a whole
• EM Europe looks
relative to its peers
inexpensive
Reasonable
EFM (EMERGING + FRONTIER MARKETS)
2.01
14.28
8.91
2.19
14.10
62.11
EFM AFRICA
2.39
17.56
11.44
2.54
13.61
52.63
EFM AFRICA ex ZA
2.14
14.91
8.08
3.77
14.37
39.84
EFM ASIA
2.15
14.92
9.14
2.02
14.44
59.84
EFM CEEC ex RU
1.60
12.90
6.46
3.02
12.38
51.44
EFM CENTRAL & EAST EUROPE + CIS (CEEC)
1.35
9.37
5.53
1.92
14.44
70.84
EFM EMEA
1.69
12.15
7.40
2.44
13.88
64.39
EFM EUROPE + CIS (E+C)
1.40
9.46
5.70
1.98
14.80
72.15
EFM EUROPE + CIS (E+C) ex RU
1.67
11.83
6.92
2.80
14.13
59.97
EFM FAR EAST
2.06
14.43
8.75
2.15
14.26
63.27
96.58
EFM LATIN AMERICA & CARIBBEAN INDEX
2.03
15.03
9.87
2.40
13.53
EM (EMERGING MARKETS)
2.02
14.24
8.92
2.13
14.21
78.58
EM ASIA
2.15
14.93
9.13
2.01
14.39
30.88
EM EASTERN EUROPE
1.35
9.29
5.47
1.86
14.54
26.60
EM EASTERN EUROPE ex RUSSIA
1.63
13.03
6.34
2.94
12.49
248.54
EM EMEA
1.69
11.66
7.27
2.17
14.51
32.06
1.40
9.39
5.65
1.92
14.90
57.50
EM EUROPE & MIDDLE EAST
1.40
9.39
5.65
1.92
14.90
48.88
EM FAR EAST
2.06
14.43
8.75
2.15
14.26
28.18
EM EUROPE
Inexpensive
EM LATIN AMERICA
2.04
15.12
9.94
2.40
13.47
291.27
EM ex ASIA
1.87
13.37
8.63
2.30
13.98
161.80
JORDAN + EGYPT + MOROCCO
2.08
Source: MSCI, Main Management. Monthly data as of 1/31/11
15.05
7.40
4.37
13.85
70.06
| 8
Digging deeper – Emerging Market Country valuations
MSCI Country Indices
• India, a standout in 2009-10, 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
CHINA
INDIA
INDONESIA
KOREA
MALAYSIA
PHILIPPINES
TAIWAN
THAILAND
EM ASIA
EM FAR EAST
BRAZIL
CHILE
COLOMBIA
MEXICO
PERU
EM LATIN AMERICA
CZECH REPUBLIC
HUNGARY
JORDAN
POLAND
Inexpensive
RUSSIA
TURKEY
EM EUROPE & MIDDLE EAST
EM EUROPE
EM EASTERN EUROPE
EGYPT
MOROCCO
SOUTH AFRICA
EM EMEA
EM (EMERGING MARKETS)
AC WORLD INDEX
AC WORLD INDEX ex USA
PE/G
P/BV
P/E
P/CE
1.50
2.50
2.50
3.00
3.60
3.50
3.30
2.80
N/A
N/A
3.20
4.30
4.90
5.90
3.20
N/A
N/A
N/A
N/A
3.20
2.10
2.50
N/A
N/A
N/A
2.10
N/A
4.00
N/A
2.40
3.50
N/A
2.30
3.17
3.99
1.58
2.40
2.60
2.22
2.21
2.15
2.06
1.81
2.72
2.00
2.82
4.62
2.04
2.03
1.38
1.74
1.63
1.27
1.84
1.40
1.40
1.35
1.64
6.49
2.43
1.69
2.02
1.90
1.69
14.60
19.95
17.20
12.15
18.06
15.87
16.60
13.82
14.93
14.43
13.27
19.57
21.87
22.47
18.35
15.12
10.20
13.02
20.85
13.87
8.42
10.14
9.39
9.39
9.29
13.83
17.79
17.98
11.66
14.24
16.13
15.58
9.40
13.34
11.81
7.84
12.15
10.24
8.45
8.75
9.13
8.75
9.13
12.94
14.48
11.03
17.60
9.94
6.03
5.76
13.89
6.61
5.28
8.42
5.65
5.65
5.47
6.76
9.76
11.89
7.27
8.92
9.24
8.41
Div. Yield ROE/P/BV
2.21
1.01
2.40
1.15
2.39
2.68
3.06
2.70
2.01
2.15
2.78
1.32
2.17
1.67
1.21
2.40
6.41
1.46
2.50
2.55
1.47
2.38
1.92
1.92
1.86
4.58
4.26
2.38
2.17
2.13
2.31
2.68
6.86
5.02
5.81
8.21
5.53
6.31
6.01
7.24
6.69
6.92
7.52
5.11
4.58
4.45
5.45
6.60
9.83
7.70
4.80
7.20
11.90
9.88
10.64
10.64
10.77
7.23
5.62
5.55
8.59
7.03
6.20
6.42
ROE
EPS
15.78
15.90
23.18
12.97
13.27
16.40
13.35
16.00
14.39
14.26
13.62
13.89
9.16
12.56
25.19
13.47
19.95
10.62
8.35
11.74
15.11
18.18
14.90
14.90
14.54
11.85
36.50
13.49
14.51
14.21
11.78
10.85
4.52
24.37
43.60
34.46
25.28
19.77
19.42
22.46
30.88
28.18
271.12
134.83
49.79
279.89
87.12
291.27
53.92
56.82
6.25
74.35
115.10
55.55
48.88
57.50
26.60
49.08
26.86
29.82
32.06
78.58
20.81
17.06
Source: MSCI, Main Management. Monthly data as of 1/31/11
| 9
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
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 20092010
• Appreciation of Indian Rupee has
boosted the total return
• With valuations looking rich Main
sold much of its India position in Q4
2010
| 11
Source: Ned Davis Research. Monthly data as of 1/31/11
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
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
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
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
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
Emerging Market Research Sources
Leuthold
Weeden
Capital
Manageme
nt
Investment
Banking
Research
Ned Davis
Research
MSCI
Global
Index
Monitor
Research
Sources
Internation
al
Monetary
Fund
CIA World
Fact Book
ETF
Content
Providers
EPFR
Global
Source: Main Management LLC. Data as of 1/31/11
| 17
Emerging Market ETFs to Consider
Jan Perf
iShares MSCI Brazil Index Fund (EWZ)
iShares MSCI Chile Index Fund (ECH)
iShares MSCI Malaysia (EWM)
iShares MSCI Mexico Index Fund (EWW)
iShares MSCI South Africa Index Fund(EZA)
iShares MSCI Taiwan Index Fund (EWT)
iShares MSCI Turkey Index Fund (TUR)
Market Vectors Russia (RSX)
PowerShares USX China (PGJ)
SPDR S&P China (GXC)
SPDR Emerging Middle East & Africa (GAF)
Vanguard Emerging Markets (VWO)
Guggenheim China Real Estate (TAO)
Global Emerging Shares INDX China (CHXX)
WisdomTree India Earnings Fund (EPI)
Market Vectors Indonesia (IDX)
Index IQ South Korea Small Cap (SKOR)
iShares MSCI Philippines Index Fund (EPHE)
iShares MSCI Poland Index Fund (EPOL)
Market Vectors Egypt (EGPT)
SPDR S&P Emerging Markets Small Cap (EWX)
Rydex MSCI Emerging Markets Equal Weight (EWEM)
ProShares Short MSCI Emerging Markets (EUM)
First Trust BICK Index Fund (BICK)
iShares MSCI All Peru Capped Index Fund (EPU)
iShares MSCI Thailand Index Fund (THD)
Global X/InterBolsa FTSE Colombia 20 (GXG)
Market Vectors Vietnam (VNM)
PowerShares MENA Frontier Countries Portfolio (PMNA)
Average
2010 Perf
Market Cap
($Mil)
Inception
% Below 10 % Above 10 Jan 31, 2011
10 Year High 10 Year Low Year Peak Year Low
Price
-5.40
7.50
12572
7/11/2000
100.47
5.35
-27.10
1268.20
-10.40
46.30
906
11/16/2007
80.27
25.50
-11.10
179.80
73.20
71.36
-1.20
38.70
1006
3/12/1996
14.91
3.90
-4.70
264.40
14.21
60.76
-1.90
27.80
1555
3/12/1996
64.77
11.20
-6.20
442.50
-12.20
36.70
656
2/7/2003
76.65
17.97
-14.40
265.10
65.59
-0.30
22.70
3659
6/21/2000
18.19
6.42
-14.40
142.50
15.57
-9.40
25.20
717
3/28/2008
78.76
18.07
-23.80
232.00
59.99
3.10
22.10
1974
4/30/2007
58.65
10.52
-33.30
271.60
39.09
2.60
11.30
462
12/9/2004
38.72
11.00
-29.40
148.50
27.33
-0.10
7.40
754
3/23/2007
113.20
31.30
-32.70
143.30
76.16
-13.00
30.20
173
3/23/2007
79.59
33.62
-13.00
105.80
69.21
-3.40
19.40
44716
3/10/2005
58.64
18.60
-20.70
149.90
46.49
-12.91
10.68
50
12/18/2007
25.16
8.49
-20.75
134.86
19.94
0.92
N/A
7
2/17/2010
22.77
16.87
-5.45
27.62
21.53
-12.20
20.28
1400
2/22/2008
28.61
8.95
-19.01
158.88
23.17
-10.70
41.81
447
1/15/2009
30.87
7.04
-15.81
269.18
25.99
8.87
N/A
9
4/14/2010
31.99
20.41
-2.56
52.72
31.17
-10.43
N/A
18
9/28/2010
27.50
21.80
-18.80
2.43
22.33
1.31
N/A
105
5/25/2010
36.11
23.40
-5.76
45.43
34.03
-13.32
N/A
24
2/16/2010
22.16
16.22
-21.03
7.89
17.50
-5.96
24.95
1200
5/12/2008
58.67
19.54
-8.62
174.36
53.61
-4.76
N/A
12
12/3/2010
41.73
38.48
-5.61
2.36
39.39
3.75
-20.92
210
10/30/2007
137.49
30.43
-76.86
4.53
31.81
-3.65
N/A
497
6/19/2007
33.6
25.67
-5.77
23.33
31.66
-3.79
57.72
531
6/19/2009
50.90
24.02
-4.81
101.71
48.45
-9.30
56.75
574
3/26/2008
68.49
19.19
-14.44
205.37
58.60
-1.58
51.73
161
2/5/2009
47.69
14.13
-12.22
196.25
41.86
10.77
4.03
280
8/11/2009
31.4
22.23
-7.64
30.45
29.00
-4.89
8.16
23
7/9/2008
24.95
9.53
-47.74
36.83
13.04
-4.12
25.02
-18.06
175.44
Source: Main Management LLC. Monthly data as of 1/31/11
| 18
Disclosure
Main Management, LLC (“Main Management”, or the “firm”) is an investment adviser registered under the Investment Advisers Act of 1940. 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
Understanding Emerging
Markets
Emerging Market ETF History
• November 2002: PowerShares launches first emerging markets ETF (ADRE)
• April 2003: iShares launches first emerging markets ETF without ADRs (EEM)
Emerging Market ETF Assets
180
160
140
120
100
80
60
40
20
0
12/1/2005
12/1/2006
12/1/2007
12/1/2008
12/1/2009
12/1/2010
Emerging Market Countries
Brazil
Peru
Chile
Philippines
China
Poland
Colombia
Russia
Egypt
South Africa
India
Taiwan
Indonesia
Thailand
Korea?
Turkey
Malaysia
Vietnam
Mexico
Efficiency
Tradability
Fit
Efficiency: 1
Emerging Markets ETFs Are Pricey
40
35
Frequency
30
25
20
15
10
5
0
0-10
10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-100 100+
Basis Points
Efficiency 2:
Tracking Difference In Emerging Markets
14%
12%
10%
8%
6%
EEM
4%
VWO
2%
0%
Tradability 1: On-Screen Liquidity
Bloomberg Chart of AFK Level 2
Tradability 2: Hedgability
Tradability 3: Premium/Discount
GXC vs. iNAV
12/3/2008
11/3/2008
10/3/2008
9/3/2008
8/3/2008
7/3/2008
6/3/2008
5/3/2008
4/3/2008
3/3/2008
2/3/2008
1/3/2008
12/3/2007
11/3/2007
10/3/2007
9/3/2007
8/3/2007
7/3/2007
6/3/2007
5/3/2007
4/3/2007
3/3/2007
2/3/2007
1/3/2007
Tradability 4: Premiums/Discounts
INP and Capital Controls
25.00
20.00
15.00
10.00
5.00
0.00
-5.00
-10.00
Tradability 5:
Emerging Market Risk - Egypt
Insert CHART since Jan 28-Current
EGPT
ORSDF.PK
TGA
CELTF.PK
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%
Fit 2:
BRIC Country Weights
Fund
Ticker
China
Brazil
India
Russia
iShares
MSCI BRIC
BKF
37.09%
34.38%
15.12%
12.68%
SPDR S&P
BRIC 40
BIK
43.48%
25.85%
8.31%
22.35%
Guggenheim
BRIC
EEB
29.79%
54.82%
12.65%
2.74%
Fit 3:
Weighting Matters
China
Brazil
Taiwan
Russia
South Africa
Mexico
India
Korea
Malaysia
Indonesia
VWO
Market Cap
17.7%
15.8%
11.9%
6.9%
7.1%
4.5%
7.2%
14.6%
3.0%
2.2%
EWEM
Equal
19.9%
11.2%
17.5%
3.4%
6.4%
3.1%
7.6%
13.8%
2.9%
2.9%
PXH
Fundamental
30.0%
13.9%
13.3%
9.9%
7.7%
6.5%
4.9%
2.7%
2.6%
1.8%
Fit 4:
Finding Low Correlations
Ticker
iShares Emerging Markets EEM
SPDRs S&P Emerging
Markets Small Cap
Guggenheim Frontier
Markets
EEM
EWX
FRN
VTI
VNM
1
EWX
0.96
1
FRN
0.84
0.86
1
Vanguard Total Market
VTI
0.88
0.81
0.70
1
Market Vector Vietnam
VNM
0.20
0.05
-0.14
0.41
1
Fit 6:
Finding Low Correlations
Large vs. Small Cap Top 10: Which Do You Recognize?
EEM
Samsung
Petrobras
Gazprom
Taiwan Semi
Vale
Petrobras ADR
China Mobile
America Movil
Banco Itau
ICBC
2.34%
1.93%
1.73%
1.62%
1.58%
1.58%
1.56%
1.47%
1.25%
1.20%
GMM
Empresas La Polar
Kulim Malaysia
BEC World
Lewis Group
Anhanguera Educacion
Sp Setia
Shanghai Electric
JSE Limited
Tv Azteca
Thanachart Capital
0.62%
0.59%
0.59%
0.56%
0.55%
0.54%
0.48%
0.48%
0.48%
0.47%
Any Questions?
Kim Arthur
CEO and Portfolio Manager
Main Management
Matt Hougan
President, ETF Analytics
Global Head of Editorial
IndexUniverse
Thank You
For more information:
www.IndexUniverse.com
www.MainMgt.com