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Home , Frontier markets

What’s Emerging in Emerging Markets The New Frontier

CFA Society of Dayton December 9, 2009 Lawrence Speidell, Founder, CEO & Portfolio Manager Frontier Market Asset Management It’s not about the money…

It’s about people It’s about people It’s about people It’s about people It’s about people It’s about people Peraliya, Frontier Market Opportunities

• One World… or Two • Convergence • Stock Opportunities • Inefficiencies • Reasons for Optimism One World… or Two Emerging/Frontier Countries: Under $10,000 GDP/capita Frontier Countries: Not in MSCI Emerging Markets Index

. Power Consumption

versus

Population

http://www.worldmapper.org/display.php?selected=117 One World… or Two One World… or Two One World… or Two

Cuyahoga River 1971 The Poor World: Human Capital and Financial Opportunity

.

World GDP 2007 Market Cap 2007 Population 2007 United States Frontier Frontier 5.0% Frontier 5.1% United Emerging 2.8% 18.1% States United EAFE Markets Emerging 26.2% States 10.0% 25.2% Markets 31.3% 25.0%

Emerging Markets 66.7% EAFE EAFE 43.8% 40.8% Economics: Growth

Source: IMF, November 2009 Convergence GDP per Capita (2000 $) 100,000

Japan USA Singapore S Korea 10,000

Bra zil $1791 Chin a Russia 1,000 Ph ilippines Sri Lanka $686

Bangladesh $192 In dia 100

ChinaGDPperCapita0901 10 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Convergence

The GUM Department Store 1991 Convergence

The GUM Department Store 1991… and 2002 China…the Country Pudong Night Life The Once and Future King(s)?

From Wall Street to the Great Wall – Burton Malkiel 2008 China, U.S., India #1,2,3 by 2050

Stock Market Capitalization 2006 Stock Market Capitalization 2050 Emerging Latin America, 1.50% Sub Saharan India, 0.40% Emerging Eastern Africa, 4.2 Indonesia, 2.4 Europe/Asia, 4.70% US, 16.6 China, 0.70%

India, 14.1 Developed Asia ex- Western Europe, Japan, 3.50% US, 46% 8.8 Japan, 2.6 Mid Income, 5.6 Eastern Europe, 3.4 Canada, 1.1 Canada, 3.50% Japan, 10.30% Latin Aus/NZ, 0.7 America/Carib, 10.6 Hi Inc non OECD, Western Europe, Low , 6.4 3.1 29.40% China, 20.3

Source: Siegel, Jeremy, Future for Investors (2005), Sunit Singhania, 2008 Emerging Exports China’s Banks China Stimulus

Stimulus package US$586 billion, over two years > 16% of China’s $3.5 trillion GDP. An equivalent package in United States would exceed US$2.25 trillion: (1) public housing; (2) rural development; (3) highways, rail, airports, power grid (4) health care and education; (5) the environment; (6) technological innovation; (7) Sichuan province post-quake reconstruction; (8) increasing agriculture subsidies and social security payments; (9) nationwide VAT reform; (10) abolishing the credit quota system and supporting credit growth for priority sectors. China’s Road Construction Urbanization = 10x Productivity

% Urban 2005 2030 China 40.5% 60.5% India 28.7% 41.4%

Source: GaveKal 0604 Middle Class In China

Middle Class Urban Households 400

350 over $25,000 Income $25,000 300 $12,500 250 $5,000 Umder $3100 households 200

urban 150

100 million

50

0 1985 1995 2005 2015 2025 Source: The Economist, McKinsey, 8/5/06 $2,000 to $12,000 is the sweet spot for consumption (Penetration of durable goods relative to annual income)

$2,000 = 15,000 RMB $12,000 = 90,000 RMB Middle Class In China Economics: Banking

Bank Accounts per Adult

4.0 Austria Malaysia Belgium 3.5

3.0 Eatonia

2.5 US Mongolia 2.0 Acouts/Adult 1.5 Bank 1.0 India

0.5 Malaw i Uraguay Paraguay 0.0 $100 $1,000 $10,000 $100,000 GDP / Capita Source: Consultative Group to Assist the Poor, World Bank, 2009 Financial Opportunity – NO Sub-Prime Mortgages Middle Class = Resource Needs…Oil

Oil per capita rises rapidly in response to the GDP growth afforded by inexpensive labor, then levels off in a service economy at saturation. 33

30 U.S.A. 27

24 S. Korea

(barrels/year) 21

Japan 18 capita 15 per

12

9 Hong Kong consumption 6 P.R. China Oil 3 India

0 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 The two lo wer lines are EIA's Hig h Gro wth case fo r China and Ind ia. 20 0 6 -07E estimates fro m EIA.

Source: BP Statistical Review of World Energy, U.S. Census global population database, respective state statistics bureaus for GDP. Middle Class = Resource Needs…Oil

Comparison of Chinese and US Autos as Percent of Population

300,000,000 90%

80% Autos 250,000,000 70% Trucks

& 200,000,000 60%

50% Passenger

150,000,000 of Autos 40% Trucks &

100,000,000 30% Rate 20% 50,000,000 Passenger 10%

0 0% Penetration 1900 1905 1910 1920 1925 1930 1935 1945 1950 1955 1960 1965 1970 1975 1980 1985 1995 2000 1915 1940 1990 2005E

US Total # Passenger Cars and Trucks on July 1 Chinese Cars US Penetration Rate: Passenger Vehicles/Population Chinese Penetration Rate: Autos/Population

Source: Morgan Stanley; FactSet As of 31-Dec-05 Middle Class = Resource Needs…Oil

Comparison of the Pace of Chinese and US Passenger Vehicle Penetration 1900 1902 1903 1905 1908 1910 1911 1913 1915 1917 1920 1921 1907 1909 1912 1914 1916 1918 1923 161,60,0000,,0000

141,40,0000,,0000

121,20,0000,,0000

101,0,0000,,0000

8,08,000,,00000 US Passenger Vehicles Chinese Cars 6,06,000,,00000

4,04,000,,00000

2,02,000,,00000

00 1984 1993 1997 1998 1985 1986 1987 1988 1989 1990 1991 1992 1994 1995 1996 1999 2000 2001 2002 2003 2004 2005E

Source: Morgan Stanley; FactSet As of 31-Dec-05 Wages

C o m p e t it iv e a d v a n t a g e A v e r a g e m o n t h ly w a g e s *, $ 2 5 0

2 0 0

1 5 0

1 0 0

5 0

0 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6

Th a ila n d C h in a V ie tn a m S o u rc e : E IU, * e x c lu d in g s o c i a l s e c u rity

Source: Lockheed Corporation Wages Demographics

Italy Population Demographics . 20 Japan Germany Developed Markets 18 Greece Emerging Markets Frontier Markets 16 Africa

64 14 > Poland US 12 Age Ireland 10 Singapore 8 Population China Sri Lanka of 6 % Vietnam Peru 4 Pakistan Uganda 2 UAE 0 Source: World Development Indicators, 2007 0 10 20 30 40 50 60 % of Population Age < 15 FrontierCountries0903 A Virtuous Circle of Frontier/ Trade

China needs… Africa has to sell Potential suppliers

90.0%

75.0%

60.0%

45.0% Zambia Angola DRC Cameroon Mauritania E. Guinea 30.0% South South Africa Africa South Nigeria E. 15.0% Zimbabwe Africa Guinea DRC

0.0% Copper Non Ferrous Oil Iron Zinc Ore & Aluminium Metals (Total) Concentrate Oxide

Source: , 7 December 2006 Education Strathmore University, Nairobi Work Ethic Technology

Source: Human Security Centre, UBC Entrepreneurship China in the Frontier Middle Class - Bangladesh

Bashundara City Mall, Dhaka, Bangladesh Vietnam

versus

India Middle Class Stock Opportunities

PE ROE Yield Growth

Cargo Handler 5.2x 53% 15.3% 15% Finance 3.0x 20% 10.0% 20% Cement 5.1x 16% 3.8% 20% Petroleum Dist 3.2x 41% 9.2% 30% Shoe Manufacture 10.3x 53% 6.8% 25% Pharmaceutical 3.9x 25% 0% 20% Bata Shoe, Bangladesh

• Founded 1894 in Czechoslovakia by Bata siblings • Survived nationalization during Communism • Operations in Bangladesh since 1962 • World’s largest shoe manufacturer in over 50 countries • 2009e: PE 10.3x, ROE 53%, Yield 6.7%, Earn. Growth 25% • Auditor KPMG Checklist: Bata Shoe - Bangladesh Swissport,

•China–Tanzania Relationship •Sidecar Investment •2009e: PE 5.2x, ROE 53%, Yield 15.3%, Earn. Growth 15% •Auditor PWC BRD Groupe Societe Generale, Romania

• Leader in underpenetrated market: loans/GDP 40% • Prudent banking during boom • Profitability and market share gains • 2009e: PE 10.3x, ROE 18%, Yield 2.4%, Earn. growth 20% • Auditor: Ernst and Young Botswana Stock Exchange Inefficiencies

– Few Chartered Financial Analysts – Locals more Important than Foreign Investors

• Bangladesh: 3% in 2008 versus 6% in 2007 per Equity Partners Limited • : 10% per Kestrel Capital • Malawi: 40% per Trust Securities • Vietnam: 40% per Ho Chi Minh Stock Exchange • Uzbekistan: 75% foreign per Eastkom Securities Inefficiencies - Local Behavior in Bangladesh

• Our retail investors are just trying to follow the others, keen to know what the so called ‘gamblers’ are going to buy: – “I heard this share's price will jump, because some gambler is going to buy it“ • In our market, we have some stocks like Apex foods, Apex tannery, Apex footwear, Apex Spinning, Apex weaving etc. These companies are doing different kinds of business. Some are involved in textiles, some in foods and some in footwear. – If there is a good news for say… Apex footwear- that is involved in footwear business, all companies that name begin with Apex will start rising. • They are acting as a group even though the business is different and the owners are different for some companies. One World… or Two

S&P 500

1000 MSCI EAFE

MSCI EMF

Frontier

S&P + EAFE Index (7/82 = 100) Source: MSCI, S&P 9/09

10 Jan-79 Jan-80 Jan-81 Jan-82 Jan-83 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 One World… or Two

Index Changes (Cumulative 7/19/07 to 12/4/09) 120

100

EM 80 Frontier S&P EAFE 60

Source: Bloomberg, MSCI, Frontier Market Asset Management, December 2009 40 14-Jul-07 14-Jul-08 14-Jul-09 14-Jan-08 14-Jan-09 14-Nov-07 14-Mar-08 14-Nov-08 14-Mar-09 14-Nov-09 14-Sep-07 14-May-08 14-Sep-08 14-May-09 14-Sep-09 One World… or Two

Frontier Regions (Cumulative 7/19/07 to 12/4/09) 140

Mid East 120

100

Asia

80 Africa

S&P 60

E Europe

40

Source: Bloomberg, MSCI, Frontier Market Asset Management December 2009 20 14-Jul-07 14-Jul-08 14-Jul-09 14-Jan-08 14-Jan-09 14-Mar-08 14-Mar-09 14-Nov-07 14-Nov-08 14-Nov-09 14-Sep-07 14-May-08 14-Sep-08 14-May-09 14-Sep-09 Volatility is lower than Emerging Markets

35 Standard Deviation of Returns (36 mos annualized) EM

30 Frontier

25 EAFE

20 S&P

15

10

5

SOURCE: MSCI, S&P September 2009 0 Jan-79 Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Risk: Volatility is low

Standard Deviation of Returns Annualized - 150 days, based on 30 50% Non-overlapping 5 Day Periods 45%

40%

35%

30%

25%

20% EM 15% EAFE S&P 10% Frontier 5%

Source: Bloomberg, MSCI, Frontier Market Asset Mgmt, December 2009 0% Apr-07 Apr-08 Apr-09 Jun-06 Jun-07 Jun-08 Jun-09 Oct-06 Oct-07 Oct-08 Oct-09 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Dec-06 Dec-07 Dec-08 Correlations are low among frontier countries

Correlations with: Bangladesh Botswana Bangladesh 1.00 0.19 Botswana 0.19 1.00 Bulgaria 0.28 0.41 The average correlation of 20 Cote d'Ivoire 0.50 0.29 Frontier Markets with Bangladesh 0.30 0.48 (0.38) 0.06 is 0.29. 0.35 0.34 Ghana 0.14 0.18 The average correlation of 20 0.13 0.19 Frontier Markets with Botswana Kenya 0.46 0.18 0.35 0.35 is 0.35 0.35 0.15 0.36 0.41 0.36 0.46 0.13 0.40 Romania 0.24 0.41 Slovak Repub 0.20 0.55 Slovenia 0.42 0.50 Trin. & Tobago 0.00 0.03 0.24 0.32 Ukraine 0.48 0.38 Average (ex 1.00) 0.29 0.35 Source: S&P/IFC 36 mos June 2009 Correlation is low

Correlations with S&P 500 - 150 days, based on 30 Non-overlapping 5 Day Periods 1.00

EAFE

0.80

EM

0.60

0.40 Frontier

0.20

0.00

(0.20)

Source: Bloomberg, MSCI, Frontier Market Asset Mgmt, December 2009 (0.40) Apr-06 Jun-06 Oct-06 Apr-07 Jun-07 Oct-07 Apr-08 Jun-08 Oct-08 Apr-09 Jun-09 Oct-09 Aug-06 Dec-06 Feb-07 Aug-07 Dec-07 Feb-08 Aug-08 Dec-08 Feb-09 Aug-09 Liquidity

10/3/08 3/6/09 12/4/09 % chg Oct-Mar % chg Mar-Dec 6/12/09 Africa $9.6 $5.4 $12.9 -44% 140% $10.7 Asia $44.5 $35.4 $138.9 -20% 292% $104.5 E Europe $13.5 $6.5 $14.3 -52% 119% $14.6 Latin America $17.2 $11.3 $15.6 -35% 38% $19.4 Total $84.8 $58.5 $181.6 -31% 210% $149.2 Top Quartile $45.4 Firm Capacity $454*

Trading Volume ($ daily) $250,000,000 Latin America E Europe $200,000,000 Asia Africa $150,000,000

$100,000,000

$50,000,000

$0 Jul-08 Jul-09 Jun-08 Jun-08 Oct-08 Oct-08 Jan-09 Jun-09 Jun-09 Oct-09 Oct-09 Feb-08 Mar-08 Apr-08 Apr-08 Feb-09 Feb-09 Mar-09 Apr-09 Apr-09 Sep-08 Nov-08 Dec-08 Dec-08 Sep-09 Nov-09 Nov-09 May-08 Aug-08 Aug-08 May-09 Aug-09 Aug-09 Source: Bloomberg, Frontier Market Asset Management, December 2009 * Firm Capacity estimate based on holding 10 days volume Valuations: Frontier Markets are Attractive

Price/Earnings Ratios 45

US 25.3x, EAFE 26.2x, Emerging 19.0x, Frontier ex-GCC 10.0x 40

35

30 EAFE 25 US

20 EM

15

10 Frontier

5

Source: MSCI, S&P Sept 2009 0 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Valuations: Frontier Markets are Attractive Price/Book 6.0 US 2.1x, EAFE 1.6x, Emerging 2.0x, Frontier ex-GCC 1.5x

5.0

4.0

3.0

U.S. 2.0 MSCI EM EAFE Frontier 1.0

Source: MSCI , S&P Sept 2009 0.0 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Valuations: Frontier Markets are Attractive

Return on Equity 25%

US 8.3%, EAFE 6.0%, EM 10.8%, Frontier ex-GCC 14.6% 20% Frontier U.S. 15% EM

10% U.S. EAFE

5%

Source: MSCI. S&P Sept 2009 0% Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Numbers… MSCI Emerging Frontier S&P 500 EAFE Markets Markets 10 year return to 6/09 -20.2% 17.1% 137.1% 268.7% Correlation to S&P 1.00 0.87 0.79 0.50 Standard Deviation 16.1% 17.8% 21.4% 17.8%

Risk and Return 10 years (6/99-6/09) 15% S&P Frontier Markets

10% MSCI Emerging Markets Return 5%

EAFE Annualized 0%

S&P

Source: MSCI, S&P June 2009 -5% 0% 5% 10% 15% 20% 25% Annual Standard Deviation Optimism

Emerging and Frontier Market Capitalization Benefits to being Early Mover

4,000,000

3,500,000

3,000,000

2,500,000

Millions 2,000,000

US$ 1,500,000 $111 billion* – Frontier Markets 1,000,000

500,000 Emerging Markets - 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

* Represents free float market capitalization as of June 1st 2009. Source: MSCI, BGI. Source: MSCI, BGI 74 Optimism versus the “Tyranny of the Media”

Source: Human Security Centre, UBC Optimism: Fewer Conflicts

Source: Human Security Centre, UBC 0 30 60 90 0 30 60 90 Economic Freedom 2009 Score Panama Gabon 0 30 60 90 Bulgaria Peru Moldova Hong Kong Malaysia Singapore S audi A rabia Australia Tajikistan South Africa India Ireland A lbania New Zealand Rwanda Uganda United States Suriname France Canada Tonga Denmark Romania Mauritania Switzerland Thailand Niger United Kingdom Slovenia Malawi Chile Mongolia Bolivia Netherlands Namibia Indonesia Estonia Colombia China Iceland Madagascar Nepal Luxembourg K yrgyz Republic Bahrain Turkey Ethiopia Finland Italy Cameroon Mauritius Macedonia Ecuador Japan P araguay Argentina Belgium Fiji Syria Macau Greece Eq. Guinea Barbados Poland Maldives Austria Guinea Nicaragua Vietnam Germany B urkina Faso Russia Sweden Guatemala Haiti Bahamas Uzbekistan Dominican Republic Laos Norway S waziland Spain Lesotho K enya Ukraine Lithuania Honduras Armenia Burundi Tanzania Georgia El Salvador Montenegro Guyana Botswana Lebanon Ctrl African Rep Taiwan Ghana Liberia Slovak Republic Sierra Leone Czech Republic Tunisia Seychelles Uruguay A zerbaijan Bangladesh Saint Lucia B hutan Chad Korea, Republic of Angola P akistan Guinea-Bissau Israel Yemen Congo Philippines Belarus Hungary B razil Iran Latvia C ambodia Turkmenistan Costa Rica Algeria Libya Zambia Venezuela S erbia Eritrea Mexico Burma Sri Lanka Cuba Mozambique Zimbabwe Jamaica Korea, North Portugal C roatia (Frontier Countries in Blue) United Arab Nigeria Source: The Heritage Foundation, 2008 Optimism – Pew Survey

Life Satisfaction versus Income . 80 Series1 70 Developed USA 60 Emerging

7-10 Frontier 50 Log. (Series1) 40

30

Satisfaction 20 % 10 Source: Pew Opinion Survey 2007, Ondine Frontier Countries0706 0 $100 $1,000 $10,000 $100,000 GDP/Capita USD Optimism – Pew Survey

Optimism versus Income 100 Mali 90 Senegal Bangladesh India 80 Kenya 70 South Africa 60 USA 50 Pakistan Optimistic 40 % 30

20

10 Source: Pew Opinion Survey 2007 0 $100 $1,000 $10,000 $100,000 GDP / Capita Optimism – Pew Survey

"Next Generation Better Off" versus Income . 100

90 China Bangladesh 80

70

60

50

Optimistic 40

% USA 30

20 Series1 Developed Emerging Frontier Italy Japan 10 Log. (Series1) Source: Pew Opinion Survey 2007 0 $100 $1,000 $10,000 $100,000 GDP / Capita Optimism: Determination Optimism: Determination Optimism: Determination Optimism: Determination Optimism: Determination Optimism: Determination It’s about people Conclusion: Reasons for optimism Our Investment Process: Bottom-up Driven

Discipline Inputs Objective

Country Analysis Country Visits Limit universe to investable markets Economics – Growth, Inflation, Currency, Population Politics – Stability, Regulation, Taxation, Trade Market – Liquidity, Transparency, Governance Security Analysis Company Visits Earnings Modeling Conference Calls PB-ROE Modeling Analyst Contacts PEG Ratios Financial Statements Quarterly Comparisons & Projections Company and Industry Reports Company Checklists Database Analysis Buy/Sell Ideas Portfolio Construction Stocks we like include: Buy: 40-50 stocks in 20 countries - Sidecars (a strong strategic partner) Sell: When fundamentals deteriorate or a better idea is found - Franchises (profitable niches) Limit: Stocks to 10% at cost, cut back at - Monopolies 15%, Country limit 25% Trade: Patiently Horizon: Long (turnover target < 33%) Risk: Control Through Diversification

40-50 stocks in up to 30 countries Limit stocks to 10% and countries to 25%* Portfolio PEG Ratios 40 Source: Frontier Market Asset Management, 6/09 35 Portfolio Characteristics (Weighted Averages) 30 Price / Earnings Ratio: 8.3x 25 Price / Book Ratio: 2.0x Ratio Return on Equity: 26% 20 Earnings Estimated Growth Rate: 24% 15

PEG Ratio P/E to Growth: 0.35 Price 10 Average Dividend Yield: 5.5% 5

0 0% 5% 10% 15% 20% 25% 30% 35% 40% Estimated Earnings Growth Rate

*At time of initial investment Risk: Control Through Diversification 47 Stocks in 23 Countries Country % of Portfolio Region % of Portfolio Africa Botswana 3.6% Africa 52.3% Africa Cote d'Ivoire 9.0% Asia 26.4% Africa Eritrea 0.0% Eastern Europe 10.6% Africa Ghana 5.5% Lat Am 0.7% Africa Kenya 4.1% Mid East 6.4% Africa Malawi 8.8% 96.4% Africa Mauritius 3.9% Sector Africa Namibia 2.5% Cons Staple 19.5% Africa Nigeria 1.7% Health 4.1% Africa Senegal 5.0% Finance 44.1% Africa Tanzania 1.6% Property 0.0% Africa Uganda 0.0% Construction 3.6% Africa Zambia 6.5% Materials 2.2% Asia Bangladesh 8.3% Transportation 3.2% Asia Kazakhstan 5.8% Energy 4.4% Asia Mongolia 1.2% Telecom 8.2% Asia Pakistan 3.6% Utility 1.6% Asia Sri Lanka 7.4% Conglomerate 5.5% Eastern EuropeRomania 8.8% 96.4% Eastern EuropeSlovenia 1.9% Lat Am Costa Rica 0.7% Mid East Dubai 2.0% Mid East Qatar 4.4% 96.4% Cash 3.6% As of: 10/6/2009 Performance

Cumulative Returns (Index = 100 September 2006)

170 Frontier Market Select Fund Net Return 150

130

EAFE MSCI Emerging 110 S&P Markets Frontier S&P 500 EAFE 90 S&P Frontier S&P 500 70

50 Jul-07 Jul-08 Jul-09 Jan-07 Jan-08 Jan-09 Nov-06 Mar-07 Nov-07 Mar-08 Nov-08 Mar-09 Sep-06 Sep-07 Sep-08 May-07 May-08 May-09 Source: MSCI, S&P Aug 2009

Inception Date: October 1, 2006. Net performance is calculated for a typical investor, individual returns may vary with contribution date and other factors. Past performance is not indicative of future returns. Performance is preliminary and un-audited, and subject to change. Education Strathmore University, Nairobi People

Role Prior Firms Degree Years in Business

Lawrence S. Speidell, CFA Chief Investment Laffer Associates, Nicholas Applegate M.B.A. Harvard, 27 Officer, Portfolio Capital Management, Batterymarch Manager, Chief Financial Management, Putnam B.E. Yale Executive Officer Management Co.

Theodora Maradjieva Jamison, Portfolio Manager Morgan Stanley, Nicholas Applegate M.B.A. Stanford, 10 CFA Capital Management, DLJ B.S. Menlo

Ning Ma Research Analyst J&S Law Firm MPIA UCSD, 1 BIL China University

Sunshine Alexis Stein Chief Operating Officer Style and Management, Co., Bailey B.A. Hamilton College 12 Gardiner, Inc., Marston + Marston, Inc.

C.R. Toby Westbrook, Jr. Fund Advisor Rice Hall, Callan Associates, Montgomery M.A. and B.A. University 37 Asset Management, Morgan Stanley of Southern California Review the fundamental basis of conviction in secular domestic growth in frontier markets. What are the risks identified and does this differ on time horizon per region?

• Demographics: The strong growth of frontier countries is underpinned by the young population. [Except in Eastern Europe] • Technology: The frontier countries have leapfrogged over generations of developed world technology (in wireless phones, for example). Submarine cable just arrived in Mombasa. [Rising protectionism could hurt] • Labor: Costs are low ($50/mo in Dhaka versus $250 in Shanghai), and education is improving (MBAs at Strathmore University in Nairobi) [Rising protectionism could hurt. Economic softness has cut remittances] • Natural Resources: Abundant in many frontier countries and largely unexplored in all of them. [Prolonged recession will postpone demand] • Politics and policies are improving: Peaceful transitions of power are becoming the norm, and advice from global institutions (World Bank & IMF) is improving. [Stress from the global financial crisis could cause regression] • Capital: Inflows of FDI, portfolio investment and aid have been strong, especially from China. [Recession has reduced flows, especially in E. Europe where foreign currency borrowing caused problems] Convergence

GDP per capita (constant 2000 US$) 10 Yr growth 1965 1977 1987 1997 2007 rate Japan $10,595 $21,543 $28,551 $36,792 $40,656 1.0% United States $16,417 $21,418 $26,518 $31,716 $38,338 1.9% Singapore $2,733 $7,207 $12,016 $20,990 $28,964 3.3% Korea, Rep. $1,296 $2,934 $5,291 $10,064 $14,540 3.7% Mauritius .. .. $2,152 $3,335 $4,700 3.5% Botswana $294 $945 $1,884 $2,939 $4,625 4.6% Brazil $1,567 $3,174 $3,606 $3,699 $4,212 1.3% Russia ...... $1,591 $2,868 6.1% Romania .. .. $2,167 $1,711 $2,594 4.3% China $100 $150 $341 $775 $1,791 8.7% Philippines $677 $917 $844 $974 $1,216 2.3% Sri Lanka $282 $393 $538 $760 $1,144 4.2% India $193 $229 $276 $402 $686 5.5% Vietnam .. .. $205 $349 $617 5.9% Bangladesh $260 $218 $252 $306 $439 3.7% Coping With Challenges Coping With Challenges Relative Economics

Average Average GDP Population Growth Rate Growth Rate Developed Markets 3.40% 0.42% Emerging Markets 6.12% 0.96% Frontier Markets 6.70% 1.00%

Source: World Bank and CIA World Factbook, Frontier Markets include those countries included in the MSCI Frontier Index, the S&P Frontier Index and the S&P Extended Frontier 150 Index and excludes those countries also classified as Emerging Markets. 1. GNI per Capita is for 2007 except Bahrain (2005), Kuwait (2005), Oman (2004), and UAE (2005). Qatar is excluded from the GNI per Capita calculation. Population is for 2007 GDP Growth Rate is for 2007 except Bahrain (2005), Kuwait (2005), Oman (2005), Qatar (2005) and UAE (2005) Population Growth Rates are 2008 estimates 99 Emerging/Frontier Growth – IMF July 2009

Two Worlds? One World… or Two

Index Reutrns 1996 - 2008 80% S&P 500 Index MSCI EAFE MSCI Emerging Mkts S&P/IFC Frontier Composite

60%

40%

20%

0%

-20%

-40%

-60%

Source: S&P/IFC, FrontierMcapRtnsVol0812 -80% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Risk: Correlation is low

Correlations with S&P 500 - 150 days, based on 30 Non-overlapping 5 Day Periods

1.00

0.80 Eastern Europe 0.60 Africa 0.40 Mid East

0.20 Asia

0.00

(0.20)

(0.40)

(0.60)

Source: Bloomberg, MSCI, Frontier Market Asset Mgmt, July 2009 (0.80) Apr-06 Jun-06 Apr-07 Jun-07 Apr-08 Jun-08 Apr-09 Jun-09 Oct-06 Oct-07 Oct-08 Feb-07 Feb-08 Feb-09 Aug-06 Dec-06 Aug-07 Dec-07 Aug-08 Dec-08 Risk: Commodity Correlation is low

Correlations - 150 days, based on 30 Non-overlapping 5 Day Periods

0.80 Brent Fut

0.60 EM EM 0.40

Frontier 0.20

0.00

S&P S&P (0.20)

(0.40)

Source: Bloomberg, MSCI, Frontier Market Asset Mgmt, June 2009 (0.60) Apr-06 Jun-06 Oct-06 Apr-07 Jun-07 Oct-07 Apr-08 Jun-08 Oct-08 Apr-09 Aug-06 Dec-06 Feb-07 Aug-07 Dec-07 Feb-08 Aug-08 Dec-08 Feb-09 More Peacekeepers and Tribunals

Source: Human Security Centre, UBC One World… or Two

• Average 5 year historic and forecast GDP Growth

8% '03-'07 7% '08-'12E 6%

5%

4%

3%

2%

1%

0% US Developed ex-US Emerging Markets Frontier Markets 105 Source:IMF and BGI Emerging Exports China Exports =40% GDP, but Net Exports = only 10% Emerging Market Exports Our Philosophy

We are value investors in Frontier Stock Markets.

In these markets, there are few foreign investors and simply getting annual reports can be challenging, but the rewards for careful and patient analysis can be great.

We seek companies with good growth prospects offering quality products and services, solid management, and transparent accounting practices.

We look for companies that Graham and Dodd would like for their value and Warren Buffet would like for their growth. Research Trip: Bulgaria, Romania, Slovenia, Croatia, (July 2009) Takeaways

• Short term pain BUT Long term -- – Improving demographics and politics – Tax and employment policies – Low labor cost – Location as gateway to Old Europe Stock Opportunities

Great Businesses – Simple operations – Growth potential – Sidecars and monopolies

Strong Management – Experienced – English speaking – Trained abroad

Good Information – Annual Reports (Big 4 Audits) – Investor Relations & Websites