Emerging Markets FOURTH Quarter 2003 Report
Emerging Markets ® 2003 Year End Report
Review · Emerging Markets outperformed the US and developed international indices · The Composite outperformed the benchmark for the quarter and year Table of · We trimmed exposure to China and added to cellular telecoms Contents Performance (for the Periods Ending December 31, 2003)
Review Last Since 1 2 Quarter 1 Year 3 Years 5 Years Inception Volatility Emerging Markets (gross) 18.1% 55.9% 14.9% 18.7% 18.1% 25.8% Performance and Emerging Markets (net) 17.8% 54.3% 14.2% 18.1% 17.6% 25.7% Attribution MSCI EMF 3 17.8% 56.3% 12.8% 10.6% 10.1% 23.3% 1Annualized Returns; 2Inception Date: 11/30/1998, annualized; 3The Benchmark Index Past performance is not indicative of future results. Outlook
Outlook Portfolio Activity · Domestic consumption themes—cellular and auto—are key
· India and Brazil are presenting fertile investment ground · Persistent outperformance of emerging equities, fundamental drivers of growth remain
Active Exposure
Emerging MSCI Over/Under the Benchmark % SECTOR Markets EM Free Cons Discretionary 19.1% 7.5% Consumer Staples 10.1% 6.0% Health Care 5.6% 2.5% Cash 1.6% 0.0% Telecom Services 12.7% 12.0% Materials 17.7% 17.4% Info Technology 14.7% 16.2% Utilities 0.0% 3.9% Industrials 2.1% 6.2% Energy 6.4% 11.6% Financials 10.1% 16.6%
-8 -6 -4 -2 0 2 4 6 8 Portfolio Activity
Purchases Sales Anadolu Efes Hyundai Mobis CNOOC Siam City Cement Anhui Conch Cement MTN Group China Mobile Soc. Quimica y Minera Bharti Tele-Ventures SABMiller ChinaTrust Financial Globe Telecom Siam Cement Malayan Banking Hankook Tire Tong Yang Industry Pliva
© 2004 Harding, Loevner All Portfolio holdings and sector allocations are subject to review and adjustment y and may vary in the future and are not recommendations to buy or sell any security. A complete list of holdings appears on page 9 of this report.
Review The Emerging Markets returned +17.8% in the fourth quarter (MSCI Emerging The Emerging Markets Free), closing out the year with a gain of +56.3%. These gains surpassed Markets index the substantial gains for the year in the global equity markets, reflecting the leveraged exposure of emerging economies to the improving global economic surpassed both the outlook, the more modest valuations with which emerging equity markets began US and broad the year, and a reversal of investors’ risk aversion following three years of troubled international indices markets. The weakness of the US dollar also helped boost US dollar-denominated in 2003. returns in international markets.
Gains in Emerging Markets in the fourth quarter were led by surges in China of +35%, India +31% and Brazil +38%. The effect of strong Chinese demand on the global economy is reflected in the performance of the Materials sector (+24%) and in the companies and countries that supply this demand, such as Aluminum Corp. of China (‘Chalco’) (+126%) and Brazilian iron ore producer CVRD (+41%).
Table 1. Market Performance (% Total Return) CY 2003 4Q 2003 Region/Country USD USD Latin America 73.2 23.7 Brazil 114.1 38.2 Mexico 32.5 9.8
Asia 50.3 16.7 China 88.2 34.5 India 78.9 31.8 Malaysia 26.9 9.3 South Korea 33.8 14.9 Taiwan 42.8 3.1 Middle East 57.0 9.4 Israel 57.1 9.3 Africa 46.1 20.3 South Africa 45.2 20.5 Eastern Europe 70.3 12.9
Russia 76.2 6.0 MSCI EMF Index 55.8 17.8 Emerging Market MSCI ACWF ex-US Index 40.8 17.1 MSCI US 29.1 12.3 economies are Source: Wilshire Atlas. Selected countries are the 10 largest, representing over 80% of the MSCI EMF Index benefitting from Past performance is not indicative of future results. strong FX reserves, low interest rates, Amidst this strong performance in the fourth quarter, the relative performance of consumer demand the Information Technology (‘IT’) sector (+6%) lagged, and weighed on returns of the markets where IT activity is concentrated, notably Taiwan (+3%). Over the full and a resurgence in year, however, IT sector (+45%), Korea (+34%) and Taiwan (+43%) all performed investment. more in line with the overall international market.
The economies of the major Emerging Market countries have made enormous progress since the Asian crisis of 1997/98. Economic discipline is strong, foreign exchange reserves are at record levels and domestic interest rates are at historic lows. These economies are beginning to benefit from increased domestic consumer
1 Harding Loevner Emerging Markets Bold indicates companies held in the portfolio. The percentage of each position appears on page 9 of this report. Although these holdings, as well as others mentioned in this report were viewed favorably at the end of the reporting period, all portfolio holdings are subject to review and may vary in the future; and are not recommendations to buy or sell any security. demand and from a resurgence in investment, both industrial and in infrastructure. The improvement in the domestic markets is reflected in the Consumer Discretionary sector, notably the automotive and retail industries, which performed strongly in the fourth quarter, (+ 25%), and for the year (+72%), and in other industries including cellular telephony and financial services, discussed later in this report.
Table 2. Sector Performance (% Total Return) CY 2003 4Q 2003 Sector USD USD Consumer Discretionary 71.8 25.0 Consumer Staples 39.9 13.3 Energy 88.0 24.5 Financials 44.8 18.5 Health Care 61.9 7.9 Industrials 64.3 22.0 Information Technology 45.0 6.3 Materials 63.5 24.3 Telecommunication Services 42.2 17.7 Utilities 79.7 18.3 MSCI EMF 79.7 18.3 Source: Wilshire Atlas Past performance is not indicative of future results.
The Composite Performance and Attribution outperformed its benchmark for the The Composite gained 18.1% in the fourth quarter, +0.3% ahead of the benchmark MSCI Emerging Markets Free Index (+17.8%). Standardized performance details quarter, driven by are on the front and back covers of this report. good stock selection, as it was for the year. The themes of the fourth quarter held for the attribution of the year as a whole. Strong stock selection, notably in the Materials sector (Chalco, CVRD and Siam Cement), the Telecommunication Services sector (Bharti Telecom, Advanced Info Services and MTN Group) and in the automotive industry (Consumer Discretionary sector, and geographically in Asia (South Korea and China) provided the outperformance.
Graph 1. GICS Sector Value Added Relative to MSCI EMF Index 4Q 2003 2.0 Sector Selection Stock Selection 1.0 Active Contribution 0.0
-1.0
-2.0
Cash Utilities Energy InfoTech Materials Financials Industrials HealthCare ConsDiscret ConsStaples TelecomSvcs
Stock selection was weakest in Latin America and in the Financials sector, where Banco Santander Chile and Bancomer (Mexico) provided positive returns but
2 2003 Year End Report Sector allocations are subject to change and should not be considered a recommendation to buy or sell any security in that sector. GICS referes to the MSCI Global Industry Classification Standard Source of Graph 1 is Wilshire Atlas. Past performance is not indicative of future results. diluted relative performance. Embraer (Brazilian aircraft manufacturer) and Grupo TMM (Mexican transportation company) also disappointed.
Graph 2. Region Value Added Relative to MSCI EMF Index (%) 4Q 2003
4.0 Region Selection Stock Selection 2.0 Active Contribution
0.0
-2.0
Asia Cash Africa Europe
Despite the MiddleEast NonEmerging LatinAmerica controversy, we are sticking with Yukos. Perhaps the most controversial stock in the portfolio this quarter is Yukos. We began buying shares of this company in 2002 because it had huge, low-cost oil reserves and was delivering production volume growth in the mid-teens, where other oil majors were struggling mightily just to keep oil production volumes flat. We have found no evidence that management has done anything disadvantageous to its minority shareholders other than provoke the ire of Putin and his government. Our view is and remains that the government of Russia is not interested in nationalizing state assets or poisoning the direct investment climate in Russia. We elected not to sell when the former Chairman Khodorkovsky was imprisoned, nor when the massive merger with Sibneft was cancelled nor when the tax authorities assessed a $3.3 billon retroactive tax charge. After that, we felt that a large part of the bad news was out—yet the oil remained in the ground. A solid senior management, including a number of Americans, is still at the helm of Yukos, running the oil company under best practices as we expected them to. The stock price has fallen 40% from its high, providing the largest erosion of value to the portfolio in the fourth quarter (–0.7%). We elected to add to our position at recent
prices, which seemed to reflect a lot of bad news and fear. We may be wrong, but the fact it feels so wrong may prove, as is often found in emerging markets, that it Our style of picking is the right thing to do. strong growth companies has been When the tide of the economic outlook turned in March 2003, the global equity markets witnessed a surge in the stocks of companies whose survival was out of favor, but good considered most in doubt. The low-quality rally is reflected to some extent in the stock selection differential between the Growth (+49.61%) and Value (+62.87%) components of enables us to add the Emerging Markets Index for the year. The portfolio suffered an erosion of value. approximately 500 basis points against the benchmark in the second quarter, but through strong stock selection, has succeeded in outperforming the index by +0.52% for the year, returning +56.34%. Our style, characterized by the selection of strong growth companies, has been out of favor this year, but robust selection has enabled the portfolio to provide positive value added to returns in a year where the asset class moved ahead sharply.
3 Harding Loevner Emerging Markets Growth stocks typically are more volatile than value stocks; however, value stocks have a lower expected growth rate in earnings and sales. Source of Graph 2 is Wilshire Altlas. Past performance is not indicative of future results. Outlook
Our outlook is driven from our fundamental approach to company analysis and bottom-up approach to portfolio construction. We look for companies that can Themes found in the grow at a higher rate enabled by robust business models. The growth projected by portfolio’s holdings individual companies is viewed within the macro trends, and this is the primary include domestic way in which macro considerations are integrated into our outlook. Macro trends consumption and are also considered in the overall risk control of the portfolio, including geographic, political risk and industry perspectives. outsourcing, as well as export trends. The key components of our outlook include the increasingly viable domestic economies of the key Emerging Market countries, the strong growth of the Chinese economy and yet a careful watch on China valuations, and the leadership role of Emerging Market companies in global industries integrating well-rehearsed export and outsourcing trends. These themes play out throughout the portfolio, and in the cellular telephone and auto industries in particular.
The weight of cellular By far the most material change in the portfolio this year has been our purchases of cellular telecom stocks. Portfolio weighting has risen from approximately 1% about telecom stocks has a year ago to over 13%. Our change of view was the product of a series of meetings increased markedly. with cellular telecom companies all over the emerging world, from Indonesia to South Africa to Russia to Brazil. Developments include the reduction of competition as consolidation saw the exit of weaker players, a sharp fall in the cost of network equipment and the arrival of new suppliers of cellular handsets (Samsung, LG, Chinese startups) that helped drop the entry cost for new subscribers. We saw that costs were finally falling faster than pricing and lower entry costs meant cellular penetration levels could rise further. Meanwhile, the stocks were discounting very little growth. We bought leading companies in markets where these positive variables existed and where the penetration rate had room to grow, and our holdings now include VimpelCom (Russia), America Movil (Mexico & Brazil), Advanced Info Services (Thailand) and PT Telkom (Indonesia), and we added Bharti Telecom (India), MTN Group (S. Africa & W. Africa) and Globe Telecom (Philippines) in the fourth quarter. Perhaps, surprisingly, the one cellular stock we did sell was China Mobile (China), as we saw that competition from other cellular operators and some fixed-line players Prospects for the presented rising competition that would effectively reduce the company’s rate of auto industry in Asia growth to single digits. are attractive. The prospects for the auto industry in Asia, especially in China, are also attractive. We are positive on both the growth in consumer auto sales in Asia, and on Asia’s rise as an auto production and export base for the global markets. We have found several companies that we feel are very well suited to participate in this secular growth. Current holdings include Denway Motors, a producer of Honda autos in Southern China, Hyundai Motor in Korea, and Bajaj Auto, a leading producer of three-wheeled vehicles and motorcycles in India. Bajaj is increasing exports of its mid-range motorcycles to global markets. In the fourth quarter we added Tong Yang, a Taiwan-listed producer of after-market auto parts with operations also in China and Thailand; Hankook Tire, Korea’s leading auto tire manufacturer; and Hyundai Mobis, a leading Korean auto components supplier.
4 2003 Year End Report We look for ways to participate in the growth of the Chinese economy through companies that we believe will benefit even if the anticipated growth does not play out in accordance with market expectations. We are also conscious that the attention of many investment managers is focused on China, and we are prepared to Due to stock price trim or eliminate positions where the opportunity for gain has been reduced by run-ups, we have stock price run-ups. These considerations led us to trim positions in Chalco and trimmed our weight in Denway in the fourth quarter, both of which contributed good performance in 2003, China. and to sell outright China Mobile and CNOOC. We bought Anhui Conch Cement, a cement maker with a marked competitive advantage on China’s eastern seaboard. We hold a number of companies with businesses positioned to benefit from expansion of Chinese manufacturing, including POSCO, LG Chemical, Tong Yang, and Hyundai Mobis. We are no longer overweight China despite the We are overweight continuing attention of the investment industry; our direct positions now account India. for 4% of the portfolio compared to its weight in the benchmark of 8%.
We are overweight India based on bottom-up identification of attractive companies, and we bought our first stock in Turkey, Anadolu Efes, the country’s leading brewer. Conditions are favorable in Brazil, with falling interest rates and rising commodity prices (e.g., iron ore, alumina, steel and pulp). These are countries that Emerging equities we believe will provide opportunities in the next stage of the global business cycle continue to trade at into 2004. valuation below developed markets. The price of emerging markets equities now stands at a ratio of 15 times trailing earnings, compared to 22 times for the US and 24 times for the developed international markets. Many of the major Emerging Market economies have never been in better shape. The better performance of the emerging equity markets relative to the developed markets in 2003 (and indeed for four of the past five years) has begun to reduce the differential and the emerging market risk premium that it implies, but we believe that there is still further to go. The fundamental drivers of earnings growth in the Emerging Markets, including demographic trends, rising domestic demand from an expanding middle class, increasing sophistication of the managerial class, and the continued globalization of trade in goods and (increasingly, through outsourcing arrangements) services, remain firmly in place.
Portfolio Activity
New investments include Bharti Telecom, the leading GSM cellular carrier in India with 35% market share. Cellular penetration in India is rising rapidly from a paltry 2% now, so we are confident Bharti has many years of strong growth ahead. We also added MTN Group, a leading cellular operator in South Africa. This company is the number two player with a 40% share in the home market. While growth is slowing in South Africa, it is still positive. More appealing is MTN’s leading market positions in other key African markets such as Nigeria (120m people), Cameroon and Botswana. In the Philippines, we bought Globe Telecom, a member of the distinguished Ayala Group. Globe is benefiting from the secular trends described in the Outlook section of this report, and has done a good job of building a good business based on short messaging (SMS) over its cellular network, a communications medium that appeals to Filipinos for its low price and high functionality.
5 Harding Loevner Emerging Markets We added three new stocks this quarter in the Asian auto industry. Tong Yang is a Taiwan-listed producer of auto parts with operations in Taiwan, China, Thailand, and small but rising presence in the US and Europe. The company focuses on crash parts, supplying molded bumpers, hoods, grills and such to auto body repair shops. We bought the auto The company boasts one of the largest catalogs of replacement parts, covering a parts industry vast range of makes, from BMW to Ford. Their replacement parts are of equivalent to a comparable quality to those of the original equipment makers (‘OEM’), but are generic drug maker. priced one third to one half less. For this reason, we think of Tong Yang as the auto parts industry’s equivalent of the generic drug maker. Under pressure to restrain repair costs, insurers in the US and Europe increasingly approve the use of third- party crash parts. In Asia, the story is different but equally exciting. Tong Yang is following its OEM customers into China and Thailand, establishing auto parts production bases near their rapidly expanding auto assembly plants. Much of the auto assembly in China is still done with imported kits, but as the scale expands, assemblers are moving towards more integrated production. Tong Yang is supplying parts for new-builds from eight factories in China and experiencing sales growth of 30% per annum. A long visit with management this fall helped us gain insight into the competitive advantages of this company and build confidence in its business model.
Our Korean tire maker Hankook Tire is the leading auto tire maker in Korea. The company operates has teamed up with world-scale tire plants that confer low-cost producer status. Hankook’s growth is to the one of the best. that of the expanding Korean auto industry, notably Hyundai Motor and its affiliate, Kia Motors. Its domestic Korean aftermarket business is also growing as auto ownership there is rising. Hankook also operates factories in China and is well positioned to tap the new-build market as well as the more profitable aftermarket that will develop over the next few years. Hankook is family owned, and is not a part of any chaebol (conglomerate). Michelin of France took a 2.5% stake in the company this year, and pledged to buy up to 10%. Hankook will supply a line of mid-range tires for Michelin to market globally under a Michelin brand, an arrangement that speaks to the quality of Hankook’s products. Hankook will also use Michelin’s distribution network in Europe to sell under its own brand. We find it wise to stay We also added shares in Korea’s Hyundai Mobis. Mobis is a leading producer of as close as possible auto components and a key supplier to both Hyundai Motor and Kia Motors. to the controlling Mobis’s business model revolves around the concept of modular auto parts family’s own money. systems, an approach that is proving to be more efficient for the automakers and the parts companies alike. By producing large modular units such as dashboards or drive-train/chassis, Mobis helps its automaker customers reduce the number of parts they must assemble. This allows the auto maker to focus more on branding, sales and marketing and less on manufacturing costs. Mobis is following the Korean automakers overseas and plans to supply modules to other customers as well. We like the fact that the chairman of the Hyundai Group owns more stock in Mobis than in Hyundai Motor or Kia Motors. We have found that in the Emerging
Markets it is wise to stay close as close as possible to the controlling family’s own money.
In Thailand we sold a long-time holding in Siam City Cement and replaced it with the more diversified Siam Cement. Siam Cement is the largest cement maker in
6 2003 Year End Report Thailand and has a diverse portfolio of upstream petrochemical plants and pulp and paper assets. The company has cut costs dramatically and reduced its financial leverage and cost of debt, which should enhance earnings leverage to the broad- based economic (and pricing) upturn. The company has reinstated and raised the dividend to pre-crisis (1998) levels. Siam Cement allows us to gain exposure to a broad range of cyclical businesses at a stock price that does not adequately value the earnings growth we believe can be realized.
We purchased shares in Anhui Conch Cement, one of the largest cement makers on China’s eastern seaboard. We were attracted to the company’s business model in We have some an otherwise unexciting commodity business. Anhui boasts a large capacity base of concerns about some 25 million tons of cement annually and is by far the largest producer in Anhui Province, located near Shanghai and adjacent regions that are expected to show China’s present rate high rates of industrial and commercial growth. The company also controls much of breakneck growth. of the region’s limestone supply, the key raw material in cement. Finally, due to the location of its cement plants, it is able to use low-cost water transport on nearby rivers to deliver its cement, a key cost advantage over road transport. Anhui’s cement is produced in modern kilns that have better environmental controls and produce superior quality cement. While we are concerned about the sustainability of China’s present breakneck rate of growth, if the demand for cement does slow, we expect Anhui to continue to take share from the second tier players.
We had numerous meetings with Turkish companies this year. We are encouraged that, after many failed attempts, Turkey is finally taking steps to reduce its excessive government debt burden and break the vicious cycle of debt and inflation. While these conditions persisted, we had no investments in the country. The present Turkish government, which is composed of a single political party, not We made our first the fractious coalition of parties that has characterized past governments, has foray into Turkey, earned a mandate to take strong corrective measures. We were slow to recognize encouraged by lower the significance of the transition, but the benefits of sharply reduced inflation and inflation and steady dramatically lower borrowing costs should continue for some time. We bought interest rates. Anadolu Efes, the leading beer brewer (70% share) and Coca-Cola bottler in the country. Efes not only has a dominant position in Turkey—a country of nearly 80m people, one third of whom are under the age of 30—but has also extended its beverage and brewing activities into Russia and other countries of the former Soviet Union.
We made two investments this quarter that could be considered contrarian. The first is SABMiller, a South African brewer that we owned in the past and then sold when it acquired Miller Beer for some $5 billion. We, and many others, were skeptical of the Miller purchase, feeling SAB had gone outside its area of core competency. But the growth rate from the company’s extensive emerging market brewing interests is rising, and we are coming to regard SAB’s global plan on how to manage Miller and its flagship product, Miller Light. Fortuitously, our view changed following a period in which the stock had underperformed the Emerging Markets. Now, the market’s view of Miller, SAB and its management is brightening. SAB is a good example of what we seek in our emerging market companies: strong brands and franchises, extensive developing country
7 Harding Loevner Emerging Markets management experience, solid financial track record, global footprint, and sensible valuations. The second contrarian investment was to buy more shares of Yukos, as discussed earlier.
We sold two bank We sold our holding in China National Offshore Oil Company (‘CNOOC’) after stocks. the company reported that its production volumes in 2004 would be flat due to production problems related to heavy oil. This has been a good stock but our experience teaches that oil companies, including the Western majors, that cannot delivery volume growth are usually de-rated by the market.
We sold two banks this quarter. We sold Chinatrust Financial after meeting with management. While we like the bank’s impressive role in Taiwan’s banking industry, management feels they need to double its share of the market again, to
10%, in order to reach critical scale in the rapidly consolidating industry. The Taiwanese banking market looks promising, but the road to further consolidation may not be good for investors in high quality banks such as Chinatrust. We don’t want to be shareholders if Chintrust will be bidding, and likely over-bidding, for lower-quality assets to attain their strategic objectives. We sold Maybank, the leading commercial bank in Malaysia. While there is nothing specifically wrong with the bank, we were not overwhelmed in a recent meeting by management’s forecast of commercial loan growth, nor by their ability to control costs in an environment in which lending growth is lackluster. Malaysia remains underweight in the portfolio, largely due to a lack of appealing investment opportunities.
We sold the Croatian generic pharmaceutical company, Pliva. Pliva showed little progress in new product development. We began to question the company’s business model of a smaller product portfolio compared to larger generic manufacturers such as Teva, and to the up-and-coming Indian generics players, especially with respect to the European market. We maintain a large holding in Hungarian generics maker, Gedeon Richter, as our preferred Eastern European holding in this industry. In Chile we sold SQM, a producer of specialty chemical fertilizers. We sold the company largely on price grounds as its volume growth outlook is pedestrian and higher shipping costs may cut into margins. We reduced holdings in two Chinese stocks on price grounds: Denway, the maker of Honda automobiles, and Chalco.
We added to Korean holdings in Samsung Display (SDI) following a very encouraging meeting with management, and to smaller positions in LG Electronics and discount store operator Shinsegae.
8 2003 Year End Report
Emerging Markets Holdings as of December 31, 2003
Sector Company Country Weight (%) Description Consumer Discretionary Bajaj Auto India 2.1 Manufacturer of motorcycles & 3-wheelers Consorcio Ara Mexico 1.3 Builder of low-income homes Denway Motors China 1.6 Honda distributor Hankook Tire S Korea 1.4 Tire manufacturer Hyundai Mobis S Korea 2.1 Automotive parts manufacturer Hyundai Motor S Korea 1.8 Auto manufacturer LG Electronics S Korea 1.4 Electronics manufacturer Premier Image Tech Taiwan 1.2 Manufacturer of digital cameras Resorts World Berhad Malaysia 1.0 Leisure and gaming activities operator Shinsegae Dept. Store S Korea 1.5 Discount store Steinhoff International S Africa 1.5 Wood-based furniture manufacturer Tong Yang Taiwan 1.4 Automotive parts manufacturer Yue Yuen Industrial Hong Kong 0.7 Athletic, leisure and casual footwear maker Consumer Staples Ambev Brazil 1.3 Brewer & beverage company Anadolu Efes Turkey 1.3 Brewer & beverage company Hite Brewery S Korea 1.7 Domestic beer maker Pao de Acucar (CBD) Brazil 1.1 Food retailer SABMiller S Africa 1.6 Brewer & beverage company Unilever Indonesia Indonesia 1.4 Branded consumer products company Wal-Mart de Mexico Mexico 1.7 Mexico's largest food & general merchandise retailer Energy Reliance Industries India 3.4 Business group focusing on petrochemicals Sasol S Africa 1.7 Refined petroleum products producer Yukos Russia 2.0 Integrated oil company Financials BBVA Bancomer Mexico 1.4 Commercial bank Banco Itau Brazil 1.4 Commercial bank Banco Santander Chile 1.3 Commercial bank Hansabank Estonia 1.2 Commercial bank HDFC India 2.1 Mortgage finance firm Sberbank Russia 1.3 Commercial bank Standard Bank S Africa 1.4 Commercial bank Health Care Gedeon Richter Hungary 2.6 Pharmaceutical manufacturer Taro Pharmaceuticals Israel 1.7 Pharmaceutical company Teva Pharmaceutical Israel 1.3 Generic and branded pharmaceuticals firm Industrials Bidvest Group S Africa 1.1 Logistic services S1 Corporation S Korea 1.0 Security service provider Information Technology Advantech Taiwan 1.0 Industrial computing products supplier Compal Electronics Taiwan 1.1 Maker of notebook computers Delta Electronics Taiwan 1.2 Switching power supply equipment maker Quanta Computer Taiwan 1.4 Laptop PC manufacturer Samsung Electronics S Korea 4.3 DRAM manufacturer Samsung SDI S Korea 2.6 Manufacturer of display devices Synnex Technology Taiwan 1.1 Electronics distribution and logistics company Taiwan Semiconductor Taiwan 1.9 Dedicated IC foundry Materials Aluminum Corp of China China 1.5 Alumina producer Anglo American S Africa 3.2 Global mining conglomerate Anhui Conch Cement China 1.1 Cement manufacturer Aracruz Celulose Brazil 2.0 Global producer of market pulp CVRD Brazil 2.5 Iron ore exporter Grupa Kety Poland 1.5 Downstream aluminum products producer Impala Platinum S Africa 2.5 Platinum group metals holding company POSCO S Korea 1.2 Steel maker Siam Cement Thailand 2.2 Cement company Telecom Services Advanced Info Service Thailand 1.8 Cellular service provider America Movil Mexico 2.1 Cellular service provider Bharti Tele-Ventures India 1.8 Cellular service provider Globe Telecom Philippines 1.5 Integrated telecommunications company MTN Group S Africa 1.6 Cellular service provider PT Telkom Indonesia 1.4 Integrated telecommunications company VimpelCom Russia 2.4 Cellular service provider
All Portfolio holdings and sector allocations are subject to review and may vary in the future and are not recommendations to buy or sell any security.
9 Harding, Loevner Emerging Markets Portfolio
Emerging Markets as of December 31, 2003
Ten Best Stocks by Absolute Return
HOLDING GICS SECTOR REGION RETURN END WEIGHT Aluminum Corp. of China Materials Asia 126.3% 1.5% Denway Motors Consumer Discretionary Asia 76.6% 1.6% Hyundai Mobis Consumer Discretionary Asia 54.1% 2.1% Hyundai Motor Consumer Discretionary Asia 47.3% 1.8% Bajaj Auto Consumer Discretionary Asia 44.3% 2.1% Siam Cement Materials Asia 42.9% 2.2% CVRD Materials Latin America 41.1% 2.5% Advanced Invo Service Materials Asia 40.0% 1.8% Samsung SDI Information Technology Asia 39.8% 2.6% Shinsegae Dept. Store Consumer Discretionary Asia 37.6% 1.6% All portfolio holdings and sector allocations are subject to review and adjustment and may vary in the future and are not recommendations to buy or sell any security.
Active Regional Exposure
Emerging Over/Under the Benchmark (%) REGION Markets MSCI EMF Eastern Europe 12.3% 9.3% Cash 1.6% -- Non Emerging 0.6% -- Africa 14.6% 14.2% Middle East 3.0% 3.5% Asia 51.7% 53.8% Latin America 16.3% 19.2%
-6 -4 -2 0 2 4 6
Portfolio Characteristics
Characteristic HL Emerging Mrkts MSCI EMF Characteristic HL Emerging Mrkts MSCI EMF Avg Wtd Market Cap ($B) $7.6 $11.9 Alpha 0.80 0.00 Price/Earnings (Trailing) 20.1x 18.8x Beta 0.89 1.00 Price/Cash Flow 10.7x 7.2x R-Squared 0.89 1.00 Price/Book 3.0x 2.1x Sharpe Ratio 0.20 0.09 Dividend Yield 2.0% 2.5% Standard Deviation 6.51 6.88 Return on Equity 17.4% 14.7% Correlation 0.94 1.00 Number Holdings 59 649 Turnover (5-Year Average) 53.0% ---
Source: Wilshire Atlas Average Weighted Market Capitalization is the product of a security’s price and the number of shares outstanding. Price/Earnings is the ratio of a firm’s closing stock price and its trailing 12 months’ earnings per share. Price/Cash Flow is the ratio of a firm’s closing stock price and its fiscal year end cash flow per share. Price/Book is the ratio of a firm’s closing stock price and its fiscal year end book value per share. Dividend Yield is indicated dividend rate divided by current price, expressed as a percent. Return on Equity is the net income divided by total common equity outstanding, expressed as a percent.
Alpha is a measure of risk-adjusted return. Beta is a measure of the portfolio’s sensitivity to the market. R-Squared is a measure of how well a portfolio tracks the market. Sharpe Ratio is the return over the risk free rate per unit of risk. Standard Deviation is the statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution. Correlation is the statistical measure of the degree to which the movements of two variables are related. Turnover is the ratio calculated by dividing the lesser of purchases or sales by average capital, expressed as a percent.
10 2003 Year End Report Emerging Markets Performance Summary 2003 Year End Report
HL EM HL EM MSCI EM Internal Number of Composite Firm Assets % of Firm (Gross) (Net) Free1 Dispersion2 Accounts Assets ($M) ($M) Assets
2003 55.9 54.3 56.3 † † 33 1357 2.4 2002 -4.3 -4.7 -6.0 † † 17 1082 1.6 2001 1.8 1.3 -2.4 † † 10 1154 0.9 2000 -13.9 -14.1 -30.6 † † 9 1392 0.7 1999 80.1 80.0 66.4 † † 2 1423 0.1 1Benchmark Index; 2Asset-weighted standard deviation (gross of fees) †Five or fewer accounts
Emerging Markets Composite contains fully discretionary U.S. dollar-based emerging markets accounts and for comparison purposes is measured against the MSCI Emerging Markets Free Index. Returns include the effect of foreign currency exchange rates. The exchange rate source of the benchmark is Reuters. The exchange rate source of the Composite is Bloomberg; prior to January 1, 1997 it was Reuters. Information regarding the benchmark, including the percentage of the composite invested in countries or regions not included in the benchmark, is available upon request.
The MSCI Emerging Markets Free Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The Index consisted of 26 emerging market countries. You cannot invest directly in this Index.
Harding, Loevner Management, L.P. has prepared and presented this report in compliance with the Performance Presentation Standards of the Association for Investment Management and Research (AIMR-PPSÒ), the US and Canadian version of the Global Investment Performance Standards (GIPSÒ). AIMR has not been involved with the preparation or review of this report.
Harding, Loevner Management, L.P. is an independent registered investment advisor. The firm maintains a complete list and description of composites, which is available upon request. Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Non-fee-paying accounts are not included in this composite. Composite performance is presented gross of foreign withholding taxes. Past performance is not indicative of future results. The US dollar is the currency used to express performance. Returns are presented both gross and net of management fees and include the reinvestment of all income. Actual returns will be reduced by investment advisory fees and other expenses that may be incurred in the management of the account. A fee schedule is available upon request and is described in Part II of the firm’s ADV. Actual investment advisory fees incurred by clients may vary. The annual composite dispersion presented is an asset-weighted standard deviation calculated for the accounts in the composite the entire year. No balanced portfolio segments are included, nor is this composite a sub sector of a larger portfolio. Leverage is not used in this composite.
The Emerging Markets Composite was created on November 30, 1998.
HARDING, LOEVNER MANAGEMENT, L.P. 50 Division Street • Suite 401 Somerville, NJ 08876
Contact: Robin Norton, CFA Clarke Moody, CFA
Telephone: 908-218-7900 Fax: 908-218-1915 Website: www.hardingloevner.com