S&P/EMDB INDEX FAMILY: A REFERENCE GUIDE

S&P/EMDB INDICES | A REFERENCE GUIDE

TABLE OF CONTENTS

INDEX OVERVIEW...... 3

INDEX EVOLUTION ...... 3

FREQUENTLY ASKED QUESTIONS ...... 6

CURRENCY SOURCES AND NOTES ...... 8

CURRENCY CHANGES ...... 10

APPENDIX A: SUMMARY OF HISTORICAL INDEX RULE CHANGES ...... 14

APPENDIX B: HISTORICAL COUNTRY INCLUSION/REMOVAL GUIDE...... 17

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INDEX OVERVIEW

The International Finance Corporation (IFC) began producing its own standardized stock indices, known as the EMDB (Emerging Markets Database) Indices, for emerging market countries in mid- 1981. The initiative was taken in response to the need for a better means of evaluating the performance of emerging stock markets. Before the inception of the EMDB Indices, only local stock price indices were available, and each index was calculated in a unique way using its own set of stock selection criteria. The EMDB indices provided common data structures and a standard methodology, which allowed the indices to be easily combined to form composite, regional, and industry indices. These indices were better equipped to measure return and diversification benefits from broad-based emerging market investments.

INDEX EVOLUTION

. The original EMDB Indices were calculated just once a year, used month-end prices and were based on the ten to 20 most active stocks in each of the ten emerging markets. The indices were also equally weighted and available on a "price only" and total return basis. Nine of the ten markets had a history dating back to December 1975; one (Jordan) had a base in January 1978 when the Amman Financial Market first opened. In addition to individual market indices, a composite index was prepared. Gradually, calculation periods increased to once a quarter using month-end prices.

. In late 1985, in response to growing interest in emerging markets among the international fund management community, the IFC decided to switch from an equal weighting methodology to one using market capitalization weighting, improve the timeliness of its month-end index calculations by moving from a quarterly lag to a one-month lag, expand the number of stocks covered and increase the number of markets covered from 10 to 17. Regional indices for Latin America and Asia were also added to supplement the existing all-market composite index.

. The new indices launched in January 1987 proved very popular with the investment community. Portugal and Turkey were added to the coverage in 1989 and Indonesia was added in 1990. In response to user demand, the IFC again improved the timeliness of index calculation from month- end (with a considerable lag) to week-end (with a one-week lag), beginning in 1988.

. From 1988 until 1992, efforts were devoted to expanding the number of stocks covered in the indices and adding to the number of data variables available for each stock. In mid-1991, industry indices were also released, which sorted the stocks of the composite index into their respective sector and industry categories.

. By 1992, there was a greater need for more sophisticated indices to be used for institutional investment in emerging markets. The IFC responded to this demand by tightening features of its basic index methodology and by introducing a new set of indices in March 1993. These indices, called the IFC Investable (IFCI) Indices, were designed specifically to be benchmarks for international portfolio managers by taking into account the impact of foreign investment restrictions on the weighting of index constituents. Likewise, they had more stringent inclusion thresholds, which were designed to enhance investability. The original series of indices was

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renamed the IFC Global (IFCG) to distinguish it from the new series. In the fall of 1995, the IFCG and IFCI Index series began calculating on a daily basis.

. In January 1996, adjustments for cross-holding of shares in the indices began. The adjustments eliminated distortions caused by double-counting of share capitalization and thereby reduced the weights of several index stocks and markets where cross-holding is prevalent.

. At the same time, the IFC began excluding government holdings that accounted for more than 10% of an index constituent’s total market capitalization. A year later, this threshold was changed to exclude all government holdings from the index market capitalization.

. In September 1996, the IFC began calculating monthly indices for 14 frontier markets — Bangladesh, Botswana, Bulgaria, Cote d’Ivoire, Ecuador, Ghana, Jamaica, Kenya, Lithuania, Mauritius, Slovakia, Slovenia, Trinidad & Tobago and Tunisia. Simultaneously, the IFC introduced a global frontier composite index, which was calculated on a monthly basis, with data going back to December 31, 1995.

. When the IFCI and IFCG indices were acquired by Standard & Poor’s (now S&P Indices) in 2000, the index calculation methodology remained largely unchanged. However, the index names were changed to S&P/IFCI and S&P/IFCG, respectively.

. In November 2000, Standard & Poor’s began adjusting market capitalization for strategic holdings to better reflect float available for trading. This process was completed in November 2003 when all strategic holdings greater than 10% were excluded from index market capitalization. Taken together, adjustments for cross-holdings, strategic ownership and government ownership helped Standard & Poor’s to more accurately approximate free float.

. In February 2003, Standard & Poor’s adopted the Global Industry Classification Standard (GICS®), replacing the Standard Industry Classification (SIC). GICS sector and industry-level indices are calculated on a monthly basis with a history dating back to January 2000.

. In 2008, Standard & Poor’s – as part of its efforts to streamline its global index offerings – switched from using the chained Paasche method to calculate the S&P/EMDB Indices to the divisor-based methodology used in most S&P indices. This change was implemented on August 1, 2008 for all S&P Frontier Market Indices and on November 1, 2008 for all S&P/IFCI Indices. The S&P/IFCG indices were discontinued effective November 2008. The S&P/IFCI became a subset of the S&P Global BMI (Broad Market Index).

. Both the chained Paasche and S&P divisor index methodologies adjust for changes in the market capitalization of index constituents; the issuance of new shares, rights issues and stock splits all necessitate adjustments. Because both index methodologies are market capitalization weighted, respective index levels calculated using the two methodologies are nearly identical. The slight difference between the respective outcomes of the two methodologies (if calculated concurrently) would be related to the treatment of rights issues. The divisor methodology assumes no new cash inflows for the exercise of rights issues (rights purchases are supported by a reallocation of the portfolio), while the original chained Paasche methodology assumes that rights issues are exercised through new cash investments. In addition, the two methodologies record the timing of new issues

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and rights issues in slightly different manners. In general, the chained Paasche methodology shows these corporate events one day in advance of the day that they would appear using the S&P divisor methodology. In order to best represent the index calculation under the divisor methodology, some historical index data has been revised; the date of some corporate actions have been shifted to when they impact the index rather than the date they were originally reported when calculated using the chained Paasche methodology.

Criteria for inclusion in the IFCI and IFCG Indices, likewise, have evolved throughout the years. For full details on historical changes of index rules and inclusion criteria, please see Appendix A.

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FREQUENTLY ASKED QUESTIONS

1. A number of stocks were written down to a price of .001 on October 28, 1999. Why? At the November 1, 1999 annual index rebalancing, stocks that were suspended from trading and scheduled for removal from index coverage had their price written down to 1/1000 (0.001) of the national currency unit. The price write-down took place on October 28, 1999. Stocks removed from index coverage during other periods were also written down to 1/100 (0.010) or 1/1000 (0.001) if they were suspended from trading at the time of removal. Adjustments were designed to minimize tracking error.

2. Are historical SEDOLs for IFCI and IFCG index constituents available back to 1988 and 1975, respectively? Historical SEDOLs for index constituents have been included in the files on a best efforts basis. In addition, unique identifiers are available in the IFC ID files for each index constituent back to the date of their inclusion in an IFCG or IFCI index. These unique identifiers can be mapped to the current SEDOL identifiers.

3. When does the net total return index series history begin for the IFCI and IFCG indices? Although price and gross total return index data are available as far back as 1988 (IFCI) and 1975 (IFCG), the net total return index data for the IFCI series begins in December 2000. A net total return series is not available for the IFCG indices.

4. For China, what currency is considered the local currency in the data files? Historically, the EMDB database was maintained in one local currency for each country. For China, the local currency was the renminbi (RMB) and stocks quoted in Hong Kong dollars and U.S. dollars were converted to RMB. Stock identification data for Chinese stocks does not include the name of the listing exchange or the currency quoted on that exchange. Since 2008, S&P Indices maintains all prices in U.S. dollars.

5. For China, which classes of shares were included in the IFCG and IFCI indices in the first years of coverage? On November 2, 1998, EMDB added Hong Kong “red chips” to its investable and global index series for China. “Red chips” were defined as those stocks listed on the Stock Exchange of Hong Kong and incorporated in the Hong Kong Special Administrative Region (HAKSAR), but owned (directly or indirectly) in significant proportions by the Chinese government or a Chinese state-owned enterprise. Prior to November 1998, EMDB indices included three classes of Chinese shares – the A-, B- and H- classes, of which only the B-shares and H-shares were included in the IFCI index. H-shares are listed on the Hong Kong Stock Exchange, but are incorporated in the mainland and approved for listing by the Chinese authorities.

6. For China, why are there no valuation ratios provided for constituent stocks in 1994 and 1995? Valuation ratios were not prepared for China in 1994 and 1995 due to difficulties in interpreting company accounting data.

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7. When were constituents of the IFCI and IFCG indices first adjusted to remove cross-holdings and government holdings? Prior to 1996, the market capitalizations of index constituents were not adjusted to reflect free float. The total market capitalizations of constituents, including cross-holdings or government holdings, were included in constituent weights. Beginning in January 1996, the market capitalizations of index constituents were adjusted to eliminate cross-holdings between constituents. In November 1996, government holdings in excess of 10% of total capital were also removed from the market capitalizations of IFCG and IFCI index constituents.

8. It is sometimes impossible to replicate the price-to-earnings and price-to-book values provided in the monthly history using solely the market capitalization, earnings and book value numbers shown. Would you explain the valuation methodology? P/E and P/BV calculations reflect the entire market capitalization of a company, not just the market capitalization of the share class tracked by the index. To calculate the relevant valuation ratio, “12-month earnings” or "book value" figures must be divided by the "total common shares outstanding" value to obtain the earnings or book value per share figures for the valuation ratios. In general, the P/BV is calculated by determining the book value per share (book value / total common shares outstanding) such that (Price * shares outstanding) / (book value per share * shares outstanding) = P/BV (or simply, price/bv per share). In cases where the ratios are unusually large (positive or negative), there may be some rounding errors when replicating. In the early years of EMDB, earnings, book value and total shares outstanding were not collected. The only data collected were P/E and P/BV values, which were supplied by correspondents, such as local brokerage firms, that were engaged by the IFC as data vendors. During hyperinflationary periods, earnings and book value figures were also adjusted on a monthly basis (e.g. Brazil).

9. During the period from June 26, 2008 to July 31, 2008, there appear to be some pricing discrepancies. What is the cause? Up until that transition period, prices were reported in the domestic currency of the stock’s country regardless of the currency in which the stock actually traded. Since the transition period, these stocks have been quoted in the appropriate currency. There are also some cases where minor pricing differences arise due to rounding at the time of conversion. These rounding differences are small and do not impact the index in a material way.

10. Why do the Close Market Cap and Close Count columns contain no data in the Index Level Files (SPL) prior to July 31, 2008? These values have been deliberately excluded for all periods prior to the transition to the S&P Indices’ divisor-based calculation methodology in order to avoid any confusion when trying to reconcile this data. This was necessary because of differences in the timing of corporate actions as dictated by the Paasche method.

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CURRENCY SOURCES AND NOTES

Since October 1994, U.S. dollar-based indices and related market statistics for EMDB have been calculated using closing spot rates available through the WM/Reuters exchange rate service. From time to time, other exchange rates were substituted for WM/Reuters rates when WM/Reuters rates were not available or were not reflective of market circumstances. Prior to October 1994, the following exchange rates were used for converting EMDB data and indices to U.S. dollars:

Argentina Central Bank selling rate at close

Brazil Commercial Banks’ Selling Rate posted by Gazeta Mercantil

Chile Observado rate posted by the Bolsa de Comercio de Santiago

China Shanghai Swap Center mid-rate for renminbi to U.S. dollars; Shenzhen Swap Center mid-rates for Hong Kong dollars to renminbi

Colombia Bank of America’s World Value of the Dollar (Wall Street Journal)

Greece Wall Street Journal Foreign Exchange Table

Hungary National Bank of Hungary official buying rate for dollars at close of business

India Wall Street Journal Foreign Exchange Table

Indonesia Wall Street Journal Foreign Exchange Table

Jordan Wall Street Journal Foreign Exchange Table

Korea Bank of America’s World Value of the Dollar (Wall Street Journal)

Malaysia Wall Street Journal Foreign Exchange Table

Mexico Diario Official rate (average mid-rate posted by exchange houses)

Nigeria Central Bank mid-rate

Pakistan Wall Street Journal Foreign Exchange Table

Peru Closing mid-rate posted by the Bolsa de Valores de Lima

Philippines Wall Street Journal Foreign Exchange Table

Portugal Wall Street Journal Foreign Exchange Table

Poland Bank Rozwoju Eksportu Spolka Akcyjna buying rate for dollars at close of business

South Africa Mid-rates for the financial rand (before 1992, rates are for the commercial rand)

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Sri Lanka Central Bank spot rate (mid-point) for dealings with commercial banks

Taiwan Wall Street Journal Foreign Exchange Table

Thailand Wall Street Journal Foreign Exchange Table

Turkey Wall Street Journal Foreign Exchange Table

Venezuela Wall Street Journal Foreign Exchange Table

Zimbabwe Open market rate at close of business

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CURRENCY CHANGES

ARGENTINA

June 1, 1983: The peso Argentino replaced the peso at a rate of 1 peso Argentino for 10,000 pesos.

June 14, 1985: The austral replaced the peso Argentino at a rate of 1 austral for 1,000 pesos Argentino.

January 1, 1992: The peso Argentine replaced the austral at a rate of 1 peso Argentine for 10,000 australes.

January 6-10, 2002: The currency peg that established a 1:1 parity between the nuevo peso Argentino and the U.S. dollar was lifted. The peso is allowed to devalue through the adoption of a managed float system.

BRAZIL

February 28, 1986: The cruzado replaced the cruziero at a rate of 1 cruzado for 1,000 cruzieros.

January 15, 1989: The new cruzado replaced the cruzado at a rate of 1 new cruzado for 1,000 cruzados.

March 16, 1990: The cruzeiro replaced the new cruzado at a rate of 1 cruzeiro for each new cruzado.

August 1, 1993: The cruzeiro real replaced the cruziero at a rate of 1 cruzeiro real for 1,000 cruzieros.

July 1, 1994: The real replaced the cruziero real at a rate of 1 real for 2,750 cruzieror real.

BULGARIA

July 1999: The Bulgarian lev was revalued with one new lev equal to 1,000 old levs. The currency name did not change.

CHINA

July 21, 2005: The Chinese renminbi (yuan) was revalued to 8.11 yuan per U.S. dollar. The exchange rate regime was changed from the yuan-U.S .dollar peg to a managed float system. The yuan is allowed to fluctuate within a band of 0.3% around the central parity rate of a basket of currencies.

ECUADOR

September 11, 2000: The U.S. dollar replaced the sucre at an exchange rate of 1 U.S. dollar for 25,000 sucres.

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EURO

January 1, 1999: The conversion to the euro began with the merging of the German deutsche mark, Belgian franc, Luxembourg franc, Spanish peseta, French franc, Irish punt, Italian lira, Dutch guilder, Austrian schilling, Portuguese escudos and Finnish markka. The currencies of these 11 countries were fixed based on currency rates established in May 1998. The Greek drachma was included on January 1, 2001, with a currency locking date of June 19, 2000. The euro currency was put into circulation on January 1, 2002. The Slovenian tolar was included on January 1, 2007 and Cyprus and Malta were included on January 1, 2008. The Tallinn Stock Exchange (OMX Tallinn) adopted the euro as the trading currency in February 2002.

GHANA

July 1, 2007: The Ghana cedi was revalued at a rate of 1 new cedi for every 10,000 old ceti. The currency name did not change.

MALAYSIA

Jul 22, 2005: The Malaysian ringgit peg to the U.S. dollar was abandoned and the ringgit was allowed to fluctuate within a managed float regime.

MEXICO

January 1, 1993: The new peso replaced the peso at an exchange rate of 1 new peso for 1,000 pesos.

NIGERIA

January 1994: The Nigerian government banned the formerly legal parallel market for the naira (N44/US$1 at the time) and limited foreign exchange transactions to the official rate of N22/US$1. The switch to the official rate resulted in a one-time increase in the US$ index of nearly 100%.

March 1995: EMDB switched from using the official government exchange rate to the autonomous rate for index calculation purposes.

PERU

February 1, 1985: The inti replaced the sol at an exchange rate of 1 inti for 1,000 sol.

July 1, 1991: The sol nuevo replaced the inti at an exchange rate of 1 sol nuevo for 1,000,000 inti.

POLAND

January 1, 1995: The new zloty replaced the old zloty at a rate of 1 new zloty for each 10,000 old zloty. The currency retained the same name.

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RUSSIA

January 1, 1998: The ruble was revalued with one new ruble equal to 1,000 old rubles. The currency retained the same name.

ROMANIA

July 1, 2005: The Romanian leu was revalued at a rate of 1 new leu for each 10,000 old leu. The currency retained the same name.

VENEZUELA

June 1994: Venezuela fixed the exchange rate at Bs. 170 per U.S. dollar.

June 1995: Authorities permitted Venezuelan Brady bonds that traded abroad in U.S. dollars to also be quoted on the Caracas bolsa. The pricing differences between foreign markets and the bolsa for the bonds created an implied exchange rate.

November 1995: The implied rate was used for index calculation purposes.

April 22, 1996: Venezuela implemented a new foreign exchange system and index calculations were once again calculated using the central bank market rate.

November 28, 2003: WM / Reuters began to use the ratio of the local share price to the price of the country’s largest American depository receipt (ADR), Compania Anonima Nacional Telefonos de Venezuela (CANTV) “D” as a proxy for the real exchange rate. To reach the proxy rate, the local share price in bolivares is multiplied by the ADR ratio (1 ADR represents 7 local shares) and then divided by the ADR price. This caused a change of approximately 63% from the fixed exchange rate set by the Venezuelan government on February 6, 2003.

ZIMBABWE

March 7, 2003: The Zimbabwe government devalued the Zimbabwe dollar by almost 1400% due to the collapse of the Zimbabwe economy. The official exchange rate fell from 55.00 Zimbabwe dollars to 824.00 Zimbabwe dollars for 1 U.S. dollar.

May 20, 2005: The Zimbabwe government devalued the currency against the U.S. dollar with 1 U.S. dollar equal to 9,000 Zimbabwe dollars.

July 27, 2005: The currency was further devalued to 17,500 Zimbabwe dollars per 1 U.S. dollar.

October 24, 2005: The government allowed the exchange rate to fluctuate based on daily auctions between domestic banks.

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August 1, 2006: The Zimbabwe dollar was re-denominated by a factor of 1,000 and revalued by approximately 60%. The exchange rate changed from 1 U.S. dollar for every 101,195.54 Zimbabwe dollars to 1 U.S. dollar for every 250 Zimbabwe dollars.

March 30, 2007: S&P Indices replaced the official exchange rate for the Zimbabwe dollar with the “Old Mutual Implied Exchange Rate” (OMIR). The OMIR, provided by the WM Company, is based on the ratio of prices of Old Mutual as traded on the London and Zimbabwe Stock Exchanges.

August 1, 2008: The Zimbabwe dollar was re-denominated by a factor of 1:10,000,000,000. As a result, the exchange rate changed from 1 U.S. dollar per 69,484,070,300 Zimbabwe dollars to 1 U.S. dollar per 6.9484 Zimbabwe dollars.

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APPENDIX A: SUMMARY OF HISTORICAL INDEX RULE CHANGES

S&P/IFCG

Introduction

When it was initially developed by the IFC in 1981, the IFCG was constructed based on the largest and most actively traded ten to 20 stocks within each market. As a result of research and client consultations conducted in 1985 through 1986, stock coverage was expanded in January 1987. At this time, the index was constructed with the goal of covering 75% of the total market capitalization of each market.

Sample Broadening In order to strengthen the global series as a useful research tool, in October 2000, Standard & Poor’s increased the market capitalization coverage goal from the traditional 75% used previously by the IFC to a range of 80% to 90%. Stocks were selected in order of trading criteria until the coverage target of 80% to 90% of total market capitalization was met. In addition, for companies issuing multiple share classes, Standard & Poor’s began to add other liquid share classes to the global sample.

Strategic Holdings The S&P/EMDB series was the first emerging market index to take on the issue of float, and has been adjusting the market capitalizations of its constituents since 1996 for cross-holdings among constituents and government holdings.

In May 2000, Standard & Poor’s analyzed the strategic holdings of the top 80% of stocks in each investable market. While the data availability differed significantly across markets, analysis of the available data indicated that 30% of investable market capitalization was strategically held in the markets covered by S&P/IFCI indices. Strategic ownership was greater than 50% in ten of the thirty S&P/IFCI markets. Such large strategic holdings significantly reduce the float available for trading.

In November 2000, S&P Indices began adjusting market capitalization for strategic holdings to reflect float available for trading. To lessen the impact on liquidity and to ensure accuracy of information, Standard & Poor’s spread the strategic holdings adjustments over three stages.

For new additions:

. Standard & Poor’s removed all single holdings greater than 20%. This rule also applied to stocks added between rebalancing periods and to new issues being raised by existing constituents.

For existing constituents:

. One-half of all strategic holdings greater than 40% were removed effective May 2001. . All strategic holdings greater than 20% were removed effective November 2001.

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S&P/IFCI

Criteria for constituent inclusion in the S&P/IFCI index series has evolved in stages over time. When the IFCI index was first launched, each new index constituent was required to have an investable market capitalization of at least US$ 50 million, have traded at least US$ 20 million over the prior year, and, at a minimum, have traded on at least half of the local exchange’s trading days. In addition, for smaller, less liquid markets included in the IFCI, a “five stock rule” was implemented to ensure diverse country coverage. Under this rule, if a market does not have five stocks meeting the eligibility criteria, the largest and most liquid five stocks would be included in the index.

October 2000 Changes

Investability Screens Effective October 2000, investability screens for the IFCI series were amended as follows:

To join the series, a stock must have:

. An average investable market capitalization of at least US$ 125 million, have traded at least US$ 50 million over the past year and have traded at least one half of the days the exchange was open.

OR

. An average investable market capitalization of at least US$ 50 million, have traded at least US$ 250 million over the past year and have traded at least one half of the days the exchange was open.

Stocks that trade less than US$ 250 million in the previous year will be dropped if they meet one of the following criteria:

. An average investable market cap less than US$ 35 million . Have traded less than US$ 15 million over the past year . Have traded fewer than one half of the days the exchange was open

Smaller/Less Liquid Markets For those countries that were part of the investable series but did not have any stocks meeting the investable criteria, Standard & Poor’s continued to use the IFC’s “five stock rule” at the October 2000 rebalancing, wherein the five largest, most liquid stocks in the market become the index constituents.

However, markets that relied on this approach for investable index inclusion for the past three semi- annual rebalancing dates were placed on a “watch list” on November 1, 2000. Markets that still did not have at least five companies meeting the investable criteria at the fall 2001 rebalancing were dropped from the S&P/IFCI Composite and regional indices.

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Standard & Poor’s continued to calculate stand-alone investable indices for dropped markets for at least one subsequent year.

Markets that have been dropped from the series were eligible to re-join the S&P/IFCI Composite and regional indices if they demonstrated at least one year of eligible stocks.

In addition, markets that accounted for less than 30 basis points of the S&P/IFCI Composite index at the last three semi-annual rebalancing dates were placed on the “watch list” and were subject to the same drop rules. If a market dropped for this reason grew to an extent that its stand-alone market capitalization was greater than 50 basis points for at least one year, Standard & Poor’s would announce its eligibility and it would subsequently rejoin the composite and regional indices at the next rebalancing.

Rebalancing dates were the only times that markets rejoined or were dropped from the composite and regional series.

November 2005 Changes

Size and Liquidity Screens

Effective November 2005, new constituents were required to have an investable market capitalization of at least US$ 100 million, have traded at least US$ 25 million over the prior year and have traded on at least half of the local exchange’s trading days.

November 2007 Changes

The size classifications for the S&P/IFCI indices were amended so that the top 70% represented large- cap, the next 20% represented mid-cap and the bottom 10% represented small-cap.

November 2008 Changes

Effective November 2008, the thresholds for float-adjusted market capitalization and valued traded have been US$ 200 million and US$ 100 million, respectively. Moreover, the number of allowed no- trade days has been limited to four or less days per quarter over the previous year. At the time of reconstitution, existing S&P/IFCI constituents must have a float-adjusted market capitalization of at least US$ 150 million and have traded at least US$ 70 million over the previous 12 months to remain in the index. In addition, the size classifications were changed to conform to the S&P Global BMI rules where the top 70% represents large-cap, the next 15% represents mid-cap and the bottom 15% represents small-cap.

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APPENDIX B

A comprehensive list of dates for country addition/deletion from regional and composite indices is available at www.indices.standardandpoors.com.

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